|The Hong Kong Dollar peg failure, is something in our view, that is going to come sooner than many people think, and there is a potential Asian FX crisis that may escalate from this.So far it’s only been the Japanese Yen that has moved substantially (23%) over the last 6 months. But other Asian currencies, however, may be forced to see major depreciation, such as the Korean Won, which we have spoken about many times before, all placing pressure on the USDHKD Peg.The chart below illustrates that when the HK33 (Hang Seng) sells off, it coincides with a rally in the USDHKD (Hong Kong Dollar weakness), which means when the Hong Kong equities are weak, the HKD is weak. This tells me money that exits the stock market also leaves the zone of Hong Kong. Many Chinese have investments in Hong Kong and vice versa. Western Bankers may also have worked/still working in Hong Kong and may/still have investments there.The drop in the HK33 being associated to rises in the USDHKD exchange rate, points to international ‘flight capital’, not only leaving the Hong Kong Equity market but also, ‘fleeing’ from the jurisdiction, offshore, possibly into the dollar itself, a common ‘safe haven’ currency in times of crisis or fear.In short Bearishness for the Hang Seng, is pressure on the Hong Kong Dollar.I illustrate this ‘Flight Capital’ point, technically in the Monthly chart below with the HK33 above the USDHKD.|
HK33 and USD/HKD 1M
|I also assert the sensitivity and reaction appears to have magnified more recently on the 10 hourly chart below.HK33 and USDHKD 10H|
|What is the position of Hong Kong at the moment?Whilst we are technical analysts we look at the fundamental facts.In the IPO market in Hong Kong it has done 10% of the revenue it typically does in the first half of 2022. That means it is 90% down in a financial sector which is one of the cornerstones of Hong Kong along with its super expensive real estate.China’s own domestic problems (real estate and banking system issues) and their draconian influence over Hong Kong is also a very bearish sign.Chinese Real Estate may face a devastating revaluation to the downside, this may bring an associated banking malaise similar to the Wests GFC 2008.As a result, this drop in financial revenue in Hong Kong, will undermine the Hong Kong Monetary Authority’s (HKMA) ability to protect the peg as the city’s position as a secure, capitalistic financial hub wanes, and with it revenues & tax receipts etc.As the Reuters image shows below, they have been spending an increasing amount of their Dollar-based reserves protecting the peg range.Bullard of the FED, re-iterated very hawkish intent August 3rd 2022, suggesting 3,75% – 4% year end rates, whilst Wall St seems to assume a Pivot is imminent – very Dollar Bullish. A Dollar upside move can surprise the Street, which appear to be bumping risk on assets up as if QE is already here.HKMA intervention|
A recent update from Reuters illustrates this ongoing cost.
|FED Policy & Bullard statements|
|The following 10 hourly chart of the HK33 illustrates the high quality inverted HVF with 16,400 downside target, with possible overperformance.HK33 Index Daily|
|We have established that there is likely, a further divestment from Hong Kong stocks about to continue taking place running that market down to the 16,400 target level, with the prospect of possible further overperformance to the downside.From this we expect the divestment from the region by ‘Flight Capital’ to escalate and even become disorderly, as we expect a highly impulsive sell off soon in the HK33.This will create an escalated burn rate of USD reserves, to maintain the range high of the peg. Will the HKMA make that commitment to a long term losing battle?We can also see technical validation for high pressure for a range break on the H10 timeframes, as seen from the chart below.USDHKD 10 hourly|
|Our technical take is the USDHKD is in an ascending HVF pushing against the Key Level of Significance of 7.85 which is the ceiling of the peg.It is clear the HKMA is intervening and seeking to purchase their currency to sustain its long term ‘unsustainable’ value to the US Dollar.We can expect further selling of the HK33, with the likely supposition this is ‘Flight Capital’, and that money is seeking “safety” in other parts of the world. This adds further pressure to the cap of 7.85 requiring far higher rate of expenditure for the HKMA, just to maintain the high end of the peg range.We have technical validation in the ascending HVF that the moment of the peg fail could be far closer than many expect.Finally, Friday is the release of the US Non-Farm Payrolls number. If it were to come in strong on Friday (and we’ve had three monthly overshoots of expectations in a row) strength could come back to the US Dollar.Recent statements from Bullard on August the 3rd 2022 are far from dovish in this ‘Not a Recession’. The expectation of further rate hikes could put a bottom under the pullback of the USDJPY and see re-assertion of the Dollar, especially on any potentially bullish NFP number.This pressure may see a rapid increase in HKMA USD reserve burning, that may subsequently, if smart, see a pre-emptive walk from the peg and trigger the peg failure.We’ve called peg fails before in the EURCHF at the 1.20 level and before at the unofficial defence level, of the SNB at the 1.50 level, prior to the Greek & PIIGS crisis of 2009 onwards.This is not a trade recommendation. In this case the probabilities, of calling the death of a 40 year long peg range is a very low probability event, however it is our assessment, whilst still small they are far higher than the markets are pricing in. This feels similar to our sentiment on the single digit oil we called twice in November 2019 & 14th February 2020.Watch our detailed YouTube Video on the Hong Kong Dollar:|
|This Friday could prove very exciting and a trigger for some big moves! Come and attend our Live Trading Day, Friday 5 August 2022, for two informative and entertaining sessions as we deep dive the traditional and crypto markets.Grow and defend your wealth during these Reset Times!|
|Join our Live Trading Day, this Friday to see how|
the HVF Method can work for you.
Our Live Trading Day consists of one traditional markets session (90 minutes) where we will analyse the incoming Non Farm Payroll numbers and one Crypto Markets session (90 minutes) where we will analyse the next Bitcoin movement and the current state of Altcoins.This Friday at 11:30 – 15:00 UTC+0All attendees will receive a recording of the eventClick here to reserve your spot:
Warm wishes, Francis & The Market Sniper Team