USD/HKD likely to slide towards 7.80 in weeks ahead as market conditions could improve in the SAR of China, says Scotiabank

The USD/HKD currency pair is expected to slide towards 7.80 in the weeks ahead as market conditions could finally improve in the SAR of China, according to the latest research report from Scotiabank.

Fading yield advantage of the USD over the HKD is supportive of the latter. While the USD Libor is expected to slide further with more Fed rate cuts priced in the derivative markets, the HKD Hibor will remain supported amid shrank HKMA aggregate balance.

By considering the elevated China A-H premium index and the low price-to-book ratio of the HSI share index, mainland Chinese investors will remain net buyers of Hong Kong shares and continue pouring funds into HK equity markets through the so-called stock-connect schemes. In the first half of August, they have purchased a net HKD28.8 billion of HK shares.

In addition, US President Donald Trump has softened some of the rhetoric and extended an olive branch to Chinese President Xi Jinping in a series of tweets, with the aim of easing renewed trade war fears and stanching US stock bleeding. President Trump said Thursday that he has a call scheduled "very soon" with President Xi over trade, the report added.

Trump also told reporters that his administration has been having "very good talks with China" that he called "productive." Earlier, China said that planned US tariffs on an additional USD300 billion of Chinese goods is a violation of accords reached at the Trump-Xi Osaka Summit, vowing to take "necessary countermeasures" despite Trump’s decision to delay implementation of about half of September’s planned increases until December 15.

"In the meanwhile, we believe the HKMA will keep USD/HKD within a trading range between 7.75 to 7.85 under its Currency Board system, indicating a limited upside potential for the pair," Scotiabank further commented in the report.