HK currency intervention is a positive sign

Hong Kong’s Monetary Authority (HKMA) has stepped in for the first time since December 2012 to defend its currency from rising too much against the greenback.

Hong Kong
Source: Bloomberg

The move can be seen as an encouraging indicator on the recovery of the global economy, particularly China’s. The increased demand for the Hong Kong dollar partly reflects the investor flow into H-shares, which lifted the Hang Seng Index to close at its highest this year on Wednesday, at 23,549.62 points.

Demand has been fuelled by a recent round of encouraging data, such as China’s June PMI coming in at its highest so far this year, and an upgraded outlook for Chinese corporate earnings.

The city’s de facto central bank bought $2.1 billion within the past 24 hours at HK$7.75 per dollar; the upper limit of a convertibility range that triggers intervention. The HKMA pointed out that the increased demand was driven by “commercial activities, including merger and acquisition activities and dividend distribution”.

The upward pressure on the currency has also been building up over the past years, with the speculative capital inflow from the accommodative monetary policies by global central banks.

If investor sentiment - especially over the Chinese economy - continues to be lifted on the back of positive data, we are likely to see further currency intervention from the HKMA.

The next indicators coming up over the strength of the Chinese recovery will be released today, with Hong Kong’s retails sales figures for May and China’s June services PMI. The biggest concern undermining recovery hopes continues to be the property slump, which may have worsened based on prices dipping for the first time in May.

Ahead of the Singapore Open

The S&P 500 reached another record high, lifted by some pretty positive jobs data. The ADP non-farm employment came in at 281,000, significantly above market estimates of 207,000. This will be a positive guide to the round of US jobs data tonight, based on official non-farm payrolls.

This ADP data saw USD/JPY rally to high as 101.85, which could encourage investors to turn to the Nikkei and look at Japanese equities.

We saw some profit taking on the MSCI Singapore yesterday, and we are calling for it to open down by 0.25 points at 370.25.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.