EDUCATION FROM BROKERS
Fri 29 May
USD: Outlook from Hong Kong
How will the dollar react?
Breaking it down
Hong-Kong is a sovereign matter of China.
Historically, it became a global issue
since the British Empire took over this important city in the XIX century.
During the entire XX century, it has been in possession by the British under
lease agreement serving their economic and geopolitical interests. In 1997, it
was returned to China.
Economically, after the global balance of
economic power shifted from the dissolved British Empire to the US, the
American interests are now what stands in the way of China taking full control
over the city. Hong-Kong's own interests and independence from China would be
an easily resolved problem if it was only between Hong-Kong and China. But it
isn't; that's why it is so complicated.
Geostrategically, Hong-Kong is an ideal
penetration point through which the US can exert their influence and leverage
power over China. Playing the Hong-Kong's "independence and democracy" card,
ideologically aligned with the Western rhetoric, against the Chinese
"domination and communism" card, the US has a politically outsourced stronghold
in Hong-Kong. Its primary target is to attract and consume China's attention
and resources as much as it's needed to keep China's international aspirations
The US presidential election is coming. Of
course, there are underlying economical and political disputes between the US
and China that clash in Hong-Kong, and these will not stop emerging from time
to time. But this year's global political agenda suggests making a "small war"
over Hong-Kong and eventually winning it may earn voters admiration to the US
President. Namely, Donald Trump. Voices of the reasonably thinking and the
moderately patriotic citizens in the US will be shouted down by the admiration
of the millions who see their President as strong as ever reinstating
"democracy and freedom" in Hong-Kong right in front of China - at the peak of
anti-China moods in the US. As always, to make victory one needs an enemy, a
war, and an excuse to make it. China, Hong-Kong, and "democracy at risk" are
the three respective elements that perfectly fit this narrative.
Hong-Kong to China and the US is the same
is Moon to Earth and Mars. As unique and important as it is, Hong-Kong will
inevitably drift to the gravity of China, while the US is just too far away.
Nonetheless, there will be fights over it for the reasons explained above.
These fights, however, have limitations from the US side more than China.
Primarily, there are a lot of American corporations with their regional
headquarters, production centers, and outsource bases in Hong-Kong. While
Donald Trump may imply that he is it trying to protect their interests over
there, practically, any turbulence over Hong-Kong shakes the stability of these
corporations operation in this region. That questions the long-term prosperity
of these companies and most of all, supply chains. Market sectors dependent on
trade would be exposed to the highest risks.
Second, any deterioration of the US-China
relations drags investors' attention to the US dollar. Consequently, the Chinese
yuan loses value. It has lost already quite much - in fact, the USD/CNH currently
trades at historical highs of 7.20. In theory, that's unacceptable to the US
exporters who cannot compete with cheap yuan. So far, Chinese financial
authorities are forcefully suppressing the USD/CNH. But nothing will be able to
stop it increase in the case of further deterioration potential to a second
cold war, as warned by the Chinese officials. Therefore, aggressive positioning
against China may strike at the US in the long-term keeping the USD as high as
ever in the times of prolonged risk aversion.
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