Noble Apex eNewsletter Issue 803- Hong Kong’s De facto central bank is still not off the hook

2019-04-08 04:10
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8 April 2019 Issue 803

Global Market Commentary


  • US: The progress of the Sino-US trade negotiations are good. Besides, the US employment data is better than expected. Over the week, the Dow rose by 1.91% to 26,424.99. The S&P 500 index rose by 2.06% to 2,892.74. The Nasdaq rose by 2.71% to 7,938.69 points.
  • Europe: Both German and US economic data are better than expected, supporting European stock markets. Over the week, the UK’s FTSE 100 index rose by 2.30%, the German DAX index rose by 4.20%, and the French CAC40 index rose by 2.35%. The STOXX 600 index rose by 2.41% to 388.23 points.
  • Asia: The progress of the Sino-US trade negotiations are good. Moreover, China’s manufacturing PMI is better than expected. Over the week, the Nikkei 225 index rose by 2.84% to 21,807.50 points. MSCI Asia Pacific Index rose by 1.70% to 162.53 points


  • US: The progress of the Sino-US trade negotiations are good. Moreover, the British parliament passed the bill of extending the deadline of Brexit, which help UK to avoid Hard Brexit. Throughout the week, the US 10-year bond yield rose by 9 basis points to 2.499%.
  • Europe: The progress of the Sino-US trade negotiations are good. Moreover, China’s manufacturing data is better than expected, the market switching their investment from risk-averse bond markets to stock markets. For the whole week, the German 10-year bond yield rose by 8 basis points to 0.004%.


  • Oil: Market worries that the escalation of the Libyan conflict may tighten oil supplies. Over the week, New York oil futures rose by 4.89% to close at $63.08 a barrel.


  • US dollar: US non-agricultural employment increased by 196,000 in March, better than expected. For the entire week, the Dollar Index rose by 0.114% to 97.395.
  • China: The US employment figures are better than expected, making the US dollar strong. For the whole week, the yuan fell by 0.089% against the US dollar at 6.719.


Economic-related News

  • US: The White House chief economic adviser Kudlow said that China and US are closer to reach a trade agreement, and they will continue negotiations through lots of conference calls. Moreover, Trump is expected that the trade agreement can be announced in the coming four to six weeks.
  • U.S: Trump continues to put pressure on the Fed, calling for cutting interest rates and restart the quantitative easing.
  • U.S: David Marpas, a senior US Treasury official, was appointed to be the president of the World Bank. He has not only been critical of China, but has also called for a transformation of the global economic order.
  • Euro-zone: British Prime Minister Theresa May failed to break the deadlock of Brexit. The Labor Party said that Theresa May did not make a real change on her draft of Brexit. Besides, the British Chancellor of the Exchequer called for a second referendum.
  • Euro-zone: Deutsche Bank said that restructuring the US investment banking business is not part of the M&A negotiations with Commerzbank. Moreover, it is also reported that DWS Group, the asset management company of Deutsche Bank, laid off dozens of employees last week and will further reduce the number of employees in the future.
  • Euro-zone: According to IHS Markit data, the growth rate of German and Italian construction PMI accelerated, but the French PMI fell slightly. The Construction Purchasing Managers’ Index (PMI) of the Eurozone fell from 52.6 in February to 52.2 in March.
  • Japan: According to data from the Cabinet Office of Japan, after the seasonal adjustment, Japan’s Leading Index rose from 96.5 in January to 97.4 in February, slightly higher than market expectations of 97.3.
  • Japan: According to data from the Japanese Ministry of Finance, as of the end of March this year, Japan’s total foreign exchange reserves increased for the fifth month to $1.291813 trillion, an increase of $10.013 billion from the end of February at $1.2818 trillion.
  • Singapore: According to Nikkei/Markit data, Singapore’s Purchasing Managers’ Index (PMI) in February this year rose from 49.8 to 51.8.


China Market Commentary
Economic-related news
• In March, Caixin China General Services Business Activity Index (Services PMI) came in at 54.4, logging a new high since January 2018, remarkably rebounding 3.3% from February’s trough. The reading also higher than the market expectations of 52.3.
• US Secretary of State Pompeo warned that US will limit to share intelligence with the NATO allies who are using Huawei technology. According to the Frankfurter Allgemeine Zeitung, the US government has not issued a request for banning on Huawei when building a 5G network in Germany.

Hong Kong De facto central bank is still not off the hook

The HKMA has been defending the currency peg to USD seven times this year, and total bought 22.1 billion HKD (equivalent to 2.8 billion USD). The aggregate balance dropped to 54.2 billion HKD, and the local currency remains stuck at the wend end of this trading band. Market has a negative view on HKD for at least Q2.

What moves the HKD these days?

Usually when local interest rate does not follow with the US, the investors will sell local dollars and buy higher-yielding US dollars. Although Hong Kong try to follow Fed rate hike every time, there is little effect of interest difference between US and Hong Kong. It is useless because the base rate is the one at which the authority offers overnight funds to banks. The banking system has been trimming with cash for years.

Hong Kong, as a financial center, drew mass inflows as the central bank printed money. Meanwhile, mainland China investors diversify their portfolios by transferring RMB to HKD. As a result, Hong Kong banks are little pressure to raise interbank interest rates significantly. Given the shrinking aggregate balance, Hong Kong interest rate should rise gradually. However, the Fed remains unchanged of the rate, the yield spread will stay longer.

Lack of market liquidity matters

Extreme moves seen in recent years in different currencies is also in this case. After New York traders have gone and before Asia is fully open, it is difficult for market to handle the large sell orders. HKMA need to make an action to defend peg. So many interventions happened at the morning of Hong Kong local time. It exists difference between US and Hong Kong time zone investor type. While investors during US hours are mostly interested in shorting the Hong Kong dollar, local banks sometimes buy it during the Asian workday for use in the city.

Should we be worried about the outflow

Despite all its intervention, Hong Kong still over 430 billion foreign reserves. The money outflow comes from the carry trade, which means market appetite is positive. Compared to the intervention in august last year, local stock market do not face an outflow in March. Mainland investors bought average 892 million of Hong Kong stock a day via the stock connects in March, on trach for the biggest month of inflows in more than a year.


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