USD/SGD climbs as investors react to China’s 'controversial' security law

With China set to pass a new national security law to be implemented in Hong Kong, risk sentiments across Asian markets fell on Friday.

The USD/SGD forex pair is on the ascend again, after four consecutive days of decline.

China proposes national security law in response to Hong Kong protests

The US dollar rallied over 0.50% against the Singapore dollar on Friday 22 May 2020 morning, as Asian equity markets entered a sell-off mode triggered by China’s decision to pass a national security law that has been described as ‘controversial’ in relation to Hong Kong.

China’s rubber stamp parliament National People’s Congress (NPC) are in session on Friday to debate the proposed law, which the South China Morning Post reported could ban secession, foreign interference, "terrorism" and all seditious activities targeting the Chinese central government in Beijing.

Xinhua News Agency reported that the parliament will review a bill ‘on establishing and improving the legal system and enforcement mechanisms for the Hong Kong Special Administrative Region to safeguard national security’.

The bill is being viewed by opposition lawmakers and human rights activists as an infringement on Hong Kong’s already-limited liberties, and the end of the ‘one country, two systems’ framework that semi-autonomous territory was supposed to enjoy until 2047.

On Thursday, the US State Department also warned that ‘any effort to impose national security legislation that does not reflect the will of the people of Hong Kong" would be met with international condemnation’.

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Asian indexes and currencies react negatively

Following the news, the Hang Seng Index went down over 4.0%, as unrest concerns flared up again in the financial hub, after having endured seven months of protests in 2019.

This created a ripple effect across Asian equity markets, with all Asian indices in the red. Among the biggest losers were Singapore’s Straits Times Index (STI Index) and Shanghai Shenzhen CSI 300 index, which slid 1.98% and 1.59% respectively as at mid-day.

This latest move, said IG Asia market analyst Pan Jingyi, also ‘overshadowed’ China's fiscal stimulus from Friday's NPC, in which the government said it will issue one trillion yuan in special treasury bonds, capped at a quota of 3.75 trillion yuan (US$527 billion) – versus 2.15 trillion yuan in 2019.

Asian currencies, including the Singapore dollar, also slumped as risk sentiments worsened, as investors sought to ‘de-risk by selling Asian currencies against the USD’, Pan added.

The Malaysian Ringgit (MYR) quickly depreciated 0.36% against the USD on Friday morning, while the Korean Won retreated 0.53% as investors opted for alternatives.

US dollar rallies could continue into the weekend

For the most part of this week, the USD/SGD had been on a downward trajectory, thanks in large part to improved market sentiments on the back of positive early-stage trial results for a coronavirus vaccine emerging from US drugmaker Moderna’s laboratories.

But with China moving into decisive action against Hong Kong, and anticipation of further fallout with the US, the greenback could continue to rally against the Singdollar and other Asian currencies over the weekend.

As at 13:45 SGT on 22 May 2020, the USD to SGD exchange rate stands at US$1.00000 to S$1.42148, based on live IG data.

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