The Chinese and Hong Kong stock markets have recently garnered significant attention due to their strong performance. The outlook for both markets is closely tied to the effectiveness of Chinese government measures aimed at revitalizing the slowing economy and property sector. Additionally, the exchange rate between the U.S. dollar and the Hong Kong dollar (USD/HKD) offers valuable insights into the potential direction of these markets.
Over the past 12 months, the Hang Seng Index (HSI) has demonstrated a notable inverse correlation with the USD/HKD exchange rate, with a correlation coefficient of -0.6. This indicates a strong relationship between the HSI and the strength of the Hong Kong dollar. So, what does the current USD/HKD rate suggest for the HSI?
Despite the recent decline in the HSI, the Hong Kong dollar remains resilient, hovering near the strong-side Convertibility Undertaking level of 7.7500. This suggests minimal capital outflows from Hong Kong, reinforcing the case that it’s too early to declare the end of the current bull market for HSI and A-shares. Nevertheless, investors should continue to monitor the USD/HKD exchange rate closely for any signs of a market slowdown or the conclusion of the bull run.
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