FX.co ★ Hong Kong issue: the denouement is yet to come

The USD index continues to decline. The prolonged silence of Donald Trump regarding the recent events in China is affecting the US dollar negatively, so particular caution should be exercised today with regards to trading decisions. Significant changes could occur at the forex market at the end of the trading week.

The Chinese parliament has ratified the extension of the already existing national security law in Hong Kong, in which the National People's Congress will vote for its approval, presumably in June, and then the elite party will approve it, therefore most likely coming into force no earlier than August or September. Given the current situation in China, the Beijing initiative will undergo the necessary legislative processes, with only the procedural issues remaining. Much has already been said about the consequences of this law, as it "opens the gates" of Hong Kong to the Chinese security forces, greatly enhancing the influence of mainland China on the former British colony.

In the forex market, the reaction of the US to the bill played a huge role on the dynamics of the rates. Although at the time of this writing, they have not been fully affected yet, the USD index has already shown small reactions, dropping slightly due to the fact that demand for safe haven assets did not increase following the adoption of the Chinese law. In addition, rumors flew around the market that the White House's reaction is more political rather than economic. In particular, the highly influential publication The New York Times, citing sources in the presidential administration, reported yesterday that the US is planning to expel about three thousand Chinese students, graduate students and scientists - those who are somehow connected with universities that support the Chinese army. According to journalists,

The publication increased the overall demand for risky assets, displacing the dollar. Weak macroeconomic reports published yesterday also added to the pressure, as the second estimate of the US GDP for the second quarter was revised downwards, forecasting a -5% drop instead of the initial estimate of -4.8%. The data on orders for durable goods also collapsed to -17.2% in April, and the number of applications for unemployment benefits increased by 2 million 123 thousand (the forecast was about 2.1 million). Although the unemployment figures decreased, the total number of applications since mid-March has exceeded the 40 million (40 million 800 thousand), against the total number of residents of 320 million. Such statistics once again reminded traders of the Fed ' s warning that the recovery of the US economy will be slower and would take a lot longer compared to earlier forecasts. The factors became another catalyst for the dollar.

The outlook of the USD index remains vague. On the one hand, the macroeconomic statistics in the US is clearly not in favor of it, while on the other, the possibilities of another surge in dollar demand is quite high. According to available information, the US president will hold a special press conference today with regards to the "Hong Kong issue", to announce the response of the White House to the actions of the PRC. The event may change the dynamics of the currency.

In recent statements, US Secretary of State Mike Pompeo said that "Hong Kong no longer has significant autonomy within the PRC." Thus, he proposed that in the near future, the US could impose additional sanctions against China and the Hong Kong administration. Pompeo made it clear that with the bill, the White House will consider Hong Kong as part of China, so the country will lose its special status in relations with the US. The White House will equate Hong Kong to China's status in the application of customs tariffs and a number of trade and economic restrictions, which may cause Americans, US firms and corporations to leave from Hong Kong (thousands of businesses and almost 100 thousand US citizens are currently residing in Hong Kong).

The issue with Hong Kong has not yet concluded, so making any trading decisions on dollar pairs is at least risky. The results of Trump's speech today will significantly affect the USD index, which may turn 180 degrees and cheerfully step towards the 99th figure, simultaneously redrawing the price configuration in key currency pairs.