Escalation
US-China tensions have escalated, and this has eased off the stellarrally in the U.S. equity markets that we experienced yesterday. However, boththe European and U.S. futures are still trading higher but not with the samemomentum.
Donald Trump, the U.S. president, and his administration are consideringa range of sanctions on Chinese officials, businesses, and financialinstitutions due to a security law that Beijing is attempting to impose on HongKong. Trump is on record as saying that Beijing’s interference in Hong Kongthrough a security law threatens Hong Kong’s position as a financial hub.
FX traders are wary of this heightened tensions between the two superpowers, and they are switching to currency proxies to hedge against this risk. It looks like traders are returning to the blueprint of the strategies they used last August when similar friction between the U.S. and China erupted over a trade deal. If history repeats itself, watch for the Taiwan dollar and HKD to experience mammoth volatility.
Tuesday’s option activity proved HKD/USD to be one of the most traded foreign exchange pairs. This currency pair has become the instrument of choice among speculators. Yesterday, the pair saw nearly $1.4 billion in options traded. The upside is that any weakness in the Hong Kong dollar that pushes the pair below 7.61 per dollar makes the trade profitable. Options trading activity for the Taiwanese dollar was also noteworthy as investors increased their call options on the dollar by nearly four times.
Traders are preparing for both the Taiwanese dollar and Hong Kong dollar to lose their value over the next month. Trump’s strong stance against China shows he is determined to punish Beijing.
The Circus
Equitymarkets continue to react to vaccine news as pharma companies race to develop avaccine for Coronavirus. So far, the results are still at a nascent stage, and thepharma companies remain far from the end goal. Yet, equity markets react to anypositive news about the Coronavirus drug trail as it is the ultimate solutionto all their problems.
Last week, we saw the Dow Jones surge over 1000 points during Monday’s trading session, and yesterday’s price action was similar. The S&P500 was only nine points shy from closing above the 3,000-mark while the Dow Jones was off from closing above the 25,000-level by five points.
This isbecause investors anticipate higher business activity levels and life returningto normality.
Any further positive development on the vaccine front is likely to empower the bulls. We may also see another stellar rally in the U.S. equity markets.