Morning Commentary: Collision Course

Foreign Exchange - Morning Commentary
Collision Course
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
China’s National People’s Congress kicks off today.  At this meeting, China introduced new national security legislation for Hong Kong.  By doing this, Beijing has circumvented Hong Kong’s quasi-democratically elected law-making body and has put China and US much closer to another collision course on Hong Kong.  To this point, President Trump said he would respond "very strongly." 

As a reminder, last year, the US passed the US HK Human Rights and Democracy Act.  This act requires the US State Department to annually certify Hong Kong’s autonomy in order for Hong Kong to retain its status as a separate economic region under US law.  On May 6, Secretary of State Pompeo announced that this annual report would be delayed until after any decisions on Hong Kong at the National People’s Congress.

This makes China’s action a clear challenge to the US to follow through on its threats.  Should the US do so, expect further escalation as China will see this as US meddling with its internal political affairs. 

For Hong Kong, these developments are a clear negative, but it could avoid direct consequences.  US law doesn’t mandate direct action against Hong Kong.  Likely, this is due to the US’s desire to not disproportionately harm Hong Kong.  Instead, if the US does take action, it will likely target Beijing interests rather than Hong Kong interests.  The bigger issue, from Hong Kong’s perspective, is that China’s actions will re-inflame domestic discontent and tensions that derailed the Hong Kong economy last year.

For the rest of the world, recent actions from China and the US represent a steady ratcheting up of tensions.  Should rhetoric turn into action, it would be a significant blow to the global economy just as fragile economies are starting to re-open and support a USD bid as well as a weaker yuan.       
  • The first day of China’s National People’s Congress was mixed bag.  Premier Li Keqiang stated that the country was committed to honoring the Phase One trade deal despite COVID-19 related headwinds.  However, for the first time in decades, China abandoned its GDP growth target and shifted its focus to employment.  COVID-19 related issues put Chinese officials in a difficult position.  Maintaining its prior growth goal would mean putting out clearly unattainable growth targets while a realistic GDP growth target would be uninspiring. 
  • The Bank of Japan met overnight and launched a new lending program while keeping rates and QE unchanged.  This new lending program will help small businesses through March.  The BoJ will provide free loans to institutions and pay them 0.1% interest on funds loaned out. 
  • Australia’s AAA rating was cut from stable to negative by Fitch.  The ratings agency cited the sharp increase in government debt/GDP stemming from the government’s COVID-19 response. 
  • UK retail sales dropped -18.4% and the budget deficit rose to 62.1 billion pounds last month, the most since 1993 and equal to the total borrowing in the whole of last fiscal year. 
  • Canadian retail sales dropped -10.0%, setting a new record for the largest month-over-month drop.    
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