SinoInsight 1
After the Hong Kong Monetary Authority (HKMA) intervened in the market to support the Hong Kong dollar starting April 13, the currency rallied against the U.S. dollar, reaching a peak on April 19.
However, the gains from last week were lost when the HK dollar slumped on April 27. At its lowest, the exchange rate was HKD 7.8492 per U.S. dollar. The currency band has been kept at between HKD 7.75 to 7.85 since 2005.
OUR TAKE
The U.S. dollar is set to appreciate following the 10-year U.S. Treasury yield breaking the 3 percent level on April 24 and with the markets expecting the Federal Reserve to increase rates twice this year. This means that HIBOR-LIBOR spreads are set to widen, and the HK dollar would become more prone to shorting. Going forward, the HKMA would inevitably have to raise interest rates to ensure safeguards. Meanwhile, the renminbi exchange rate has depreciated by nearly 1 percent over the past two months.
Notably, official Chinese media reporting on the Hong Kong government using its foreign exchange to buy HK dollars has tapered off recently, an indication that Beijing is very concerned about the state of Hong Kong’s economy. The weakening HK dollar would likely affect the outcome of Sino-U.S. trade negotiations.
SinoInsight 2
Top economic advisors in the Trump administration could be in Beijing on May 3 or May 4 for trade talks, according to media reports on April 24.
The U.S. team would include U.S. Treasury secretary Steven Mnuchin, U.S. Trade Representative Robert Lighthizer, National Economic Council director Larry Kudlow, and White House trade adviser Peter Navarro.
OUR TAKE
1. The Sino-U.S. trade talks come after the April 27 inter-Korean meeting. This suggests that the outcome of trade issues between China and the U.S. is somewhat tied to North Korean denuclearization. We previously wrote that Beijing would push Kim Jong Un to denuclearize to gain a bargaining chip for the de-escalation of trade tensions.
2. We believe that both the U.S. and China would make concessions at the Beijing trade talks. For instance, America could announce a period of “observation” and “probation” for ZTE (facing 7-year U.S. supplier ban) and Huawei (facing criminal investigation) instead of immediately enforcing punishment for violations. Meanwhile, China could pledge never again to flout export bans to Iran or other authoritarian countries.
3. If Beijing takes concrete steps to open up China’s economy even further and dial back its forced transfer of intellectual property and ensure IP safeguards, the U.S. could consider easing up on China import tariffs.