No 889 - Social zero

磐石金融有限公司（ BANDS Financial Limited ）在香港注册成立，是一家持有香港证监会（SFC）2号牌照的期货经纪公司，业务涉及中国以外全球大部分活跃期货及期权市场。

The DXY USD dollar index is trading this morning at 104.77 a 19-year high. Last night's 30-year Treasury bond auction closed at 2.997% up from 2.815% last month and the 30-year interest rate has peeled back to trade at 3.01% down from the 3.30% it reached on Monday.The offshore RMB has fallen to 6.83 the lowest level since mid-2020 and is around that level this morning. Similarly, the HKD has fallen to 7.85 to the USD but unlike the RMB which follows a fixed trading range around a floating fixing point which is adjusted each day. The HKD is at the lower end of its fixed trading range (7.85 – 7.75) against the USD. In effect, for the first time in 3 years, the Hong Kong Monetary Authority must now buy HKD and sell against its considerable stocks of USD reserves.Although they have not done so yet, we may see the PBOC lowering rates and the RRR to protect or support the Chinese economy, conversely, the HKMA may be forced to raise rates to protect the USD HK peg, which is an entirely different metric indeed. In effect to protect the currency peg, the HKMA would usually move in lockstep with US interest rates. However, the economic situation in HK and that of the US could not be more divergent. HK GDP YoY fell 4% in Q1, unemployment is at 5%. Whereas, demand-driven US markets are priced for at least a half percentage point rate increase at each of the next two Fed meetings in June and July. So we may see HK raise rates at the very time its economy is least able to shoulder the cost.Now, I‘m not an expert on the currency peg, and indeed some of my oldest friends can convincingly argue I’m not an expert on anything. But, let us look at this differently. If the RMB were fully convertible, would the HKD exist at all, and what purpose would it serve？In the medium term, the peg is expected to hold. But the ultra-low interest rates that underpinned Hong Kong's famously expensive housing market are gone. It is not as if HK cannot defend the peg, it is the rationale through which it emerged that will once again be under review.Here in Shanghai at a press briefing this morning, Wu Qing, member of the Standing Committee of the Municipal Party Committee and executive vice mayor, clarified some basic definitions. Stating if the proportion of new daily infection increase in the total population of a district for three consecutive days is less than 1/100,000 of the total population in that district, it can be considered that “the social aspect is basically cleared”; If the number of new infection additions in a single day for three days is zero, then it can be considered that “social zero” has been achieved. I look forward to reading a dialogue as to when the schools will reopen. However, the road which runs past my compound now has a recently constructed metal fence across it, turning the street into a cul-de-sac. Therefore despite the potential for ending compound wide lockdowns, access from district to district within Shanghai is likely to remain limited.