Hong Kong’s US dollar overhang

• • A further rise in China’s trade surplus has been accompanied by bumper growth of US dollar deposits in Hong Kong. With confidence in the US dollar eroding, accumulation of these balances may slow or reverse. The recent fall in Hong Kong rates and appreciation pressure on the RMB are consistent with such a shift (see charts).
  • The US Conference Board’s leading index has issued a recession signal (see charts).
  • Japanese annual core CPI inflation adjusted for policy effects remains below 2% (see charts).
  • Eurozone / UK flash PMI results were little changed / slightly better respectively but still suggest weak growth (see charts).
  • UK annual core CPI inflation adjusted for policy effects fell to 3.0%, a post-pandemic low (see charts).
  • Please note: the next bulletin will be in w/c 7 July.

A further rise in China’s trade surplus has been accompanied by bumper growth of US dollar deposits in Hong Kong, suggesting that Chinese entities have been building a hedge against RMB depreciation:

Low inflation has allowed China to gain competitiveness without nominal depreciation, with the BIS real effective rate at a 13-year low:

US dollar deposits in Hong Kong are approaching $1 trillion ($975 bn, equivalent to 4.5% of US M2) and have almost caught up with the local currency money stock:

Is demand for US dollar balances starting to wane? The recent fall in Hong Kong rates is consistent with a switch into local dollars:

The one-year Hong Kong / US rate differential is the most negative since 2005, before a sustained appreciation of the RMB.

Hong Kong dollar deposit growth has picked up and has been correlated with MSCI China performance historically:

Meanwhile, Chinese f/x settlement numbers indicate that the authorities intervened to hold down the RMB for a second month in May:

The CNH / CNY forward differential suggests that upward pressure has persisted MTD.

CNY has moved from the weak end to the middle of the PBoC’s trading band, with the central parity rate edging higher:

The US Conference Board’s leading index met the organisation’s conditions for a recession signal in May (six-month annualised fall of below 4.1% with diffusion index of 50 or lower):

Caveat: subject to revision.

Even the Conference Board is dismissing the signal, following the false warning of 2022 – classic recency bias?

Housing numbers were ominous, with starts / permits at new post-pandemic lows and homebuilder sentiment falling further:

A fall in units under construction picked up speed, suggesting greater payrolls weakness ahead:

Japanese annual headline CPI inflation edged down, with core unchanged and below 2% even adjusting for a recent cut in education fees:

Eurozone / UK flash PMI results were little changed / slightly better respectively but still suggest weak growth:

UK annual core CPI inflation adjusted for policy effects eased further to a post-pandemic low:

Growth has underperformed MTD in the US and Europe, with Japan / EM bucking the trend: