EM sentiment continues to improve, and regional equities all in the green and USD broadly weaker. China complex in focus today following headlines that PBOC will issue bills via HKMA.
Hong Kong Dollar
The PBoC will via HKMA issue notes ( bills) Hong Kong. The market has interpreted this as one more tool to control liquidity in the offshore market, hence capping offshore spot upside.
Massive liquidation in long USDHKD positions sent liquidity tighter this morning as a pass-through from elevated funding rates following Pboc announcement to issue bills in Hong Kong, and the CNH curve gapped much higher.
I guess are we going to see more Pboc presence in HK money markets after the memorandum of cooperation was signed between HKMA and the Pboc and will probably continue taping and draining the HK money markets and pushing rates?? Which is an ominous sign for property markets
While this takes a tremendous amount of pressure off the peg, but none the less a worrisome sign for property investors who given soaring real estate prices in Hong Kong are highly leveraged and remain at the mercy of floating HIBOR rates.
I suspect funding will remain tight for the foreseeable future until the Pboc intentions are fully vetted.
The other big discussion in Asia is China reducing Import Tax
Two significant takeaways, there could be a more bilateral trade with the rest of the world to compensate for increase tariff is one theory. However, if you look across Asia at the new iPhone release, I wonder just how much mainland consumer preference will change from what will amount to a 10 % increase on selected US products.
The other takeaway which is more significant in my view is that this tax break accelerates Mainland’s push to increase domestic demand and move off the reliance on traditional brick and mortars to stimulate the economy.
Finally, I think this a brilliant and measured response from Chinese authorities to not fight fire with more fire.