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FX.co ★ Yuan depreciation to threaten Hong Kong dollar

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Forex Humor:::2016-01-25T14:16:00

Yuan depreciation to threaten Hong Kong dollar

China has hardly recovered from the stock market meltdown and now is facing new challenges. This time the currency market of the country is put to a test. While onshore and offshore yuan exchange rate has been stable, bearish bets against the yuan were expected to ease. However, it did not happen. The official yuan rate started to drop followed by a decline of the Hong Kong dollar.

Notably, the Hong Kong dollar is pegged to its US counterpart. Still there is no reason for panic, but the current developments provoked a peculiar reaction from the market. Traders are betting that in the short term, the central bank will have to break the peg of Hong Kong’s currency to the US dollar. The attempt of the People’s Bank of China to stabilize the exchange rate has not brought the desired effect. Amid growing devaluation expectations, most of the stocks in the Asia Pacific region are trading in the red.

Investors start to take money out or prefer risk-free assets such as China’s government bonds. Global strategist at Societe Generale Albert Edwards said that the yuan depreciation and the slump in Chinese shares will push the US stock market into correction territory. As a result, the S&P 500 will tumble by 75 percent. The expert believes that the US Federal Reserve and other central banks ‘have created the conditions for another debacle’. According to Mr. Edwards, unless regulators take immediate actions, the global market will be driven into a recession ‘as large as the 2008 Global Financial Crisis.’

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