HONG KONG - Fears that capital will flee Hong Kong are visible just about everywhere in the city's financial markets, yet the currency remains resistant for now.
Conviction that turbulence will get worse is also evident in the swaps market, where the spread between local and US rates reached levels last seen in the 1990s. One-year forward points closed at the highest since 1999, suggesting a spike in demand to hedge against depreciation in the currency, which remains close to the strong end of its trading band against the greenback.
Hong Kong is the epicentre of escalating US-China tensions following Beijing's shock decision last week to impose a law to curb dissent in the city. That stoked the Hong Kong dollar's biggest drop in six weeks and the worst stock rout since 2008. The Trump administration is considering responses that could include revoking Hong Kong's special trade status, a risk that threatens to undermine the city's standing as a global financial hub.
"Some capital inflows chasing new listings in the city could offset some fund outflows this quarter," said Ken Cheung, chief Asian currency strategist at Mizuho Bank."However, the main risk is how the US will deal with Hong Kong's special status."
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