USD/HKD holds the clues for the Hang Seng’s next move

The Hang Seng has been the outperformer over the past three months, although all four major indices we track have pulled back from their May highs. With a month's worth of retracement behind them, perhaps there is some room for upside, at least over the near term.

There was a time when the Hang Seng shared a positive correlation with the CNH/HKD exchange rate, but this relationship appears to have broken down in Q4. No correlation is perfect, and these relationships come and go. It is worth noting that the Hang Seng now shares a stronger correlation with USD/HKD, although the relationship is inverse.

USD/HKD, Hang Seng technical analysis:

The daily chart shows that the 60-day and 20-day correlation coefficient between USD/HKD and Hang Seng futures sits at -0.86, indicating a relatively strong inverse relationship.
USD/HKD formed a prominent swing high around its 200-day EMA and 61.8% Fibonacci ratio on Monday, and momentum is turning swiftly lower.
Should the US dollar continue to weaken and send USD/HKD lower, it could be beneficial for global sentiment and send the Hang Seng higher.
However, if incoming US data comes in hot and sends the US dollar (and therefore USD/HKD) higher, it could weigh further on the Hang Seng.
Swing lows around 7.805 might provide interim support and cap upside potential for the Hang Seng, unless the US dollar experiences a significant decline.

Hang Seng technical analysis:

Hang Seng futures are turning higher at the beginning of the session, while USD/HKD is heading lower. The daily chart shows that the 9.2% pullback from the May high found support at the 50-day EMA and 50% retracement level. Daily trading volumes were diminishing as prices moved lower, suggesting bears were running low on ammo in the later stages of the retracement. A bullish engulfing day formed on Monday, marking a false break below 18k, and subsequent trading ranges have remained in the upper half of the engulfing candle.

The 1-hour chart shows a series of higher lows accompanied by strong buying volumes. The bias, therefore, remains bullish while prices remain above Friday's swing low. Bulls could seek dips above 18k or wait for a break above 18,500.

Of course, should incoming US data come in uncomfortably strong and kill hopes of Fed cuts, it will likely have a dire impact on risk appetite, sending the US dollar and yields higher to the detriment of global indices. In which case, the bias reverts to a break below 18k, and prices could head to the 17,500 region.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.

Contracts for Difference (CFDs) are not available to US residents.

FOREX.com is a trading name of GAIN Capital - FOREX.com Canada Limited, 30 Independence Blvd, Suite 300 (3rd floor), Warren, NJ 07059, USA is a member of the Canadian Investment Regulatory Organization and Member of the Canadian Investor Protection Fund. GAIN Capital – FOREX.com Canada Limited is a wholly-owned subsidiary of Stonex Group Inc.

Complaints are taken very seriously at FOREX.com. You can view our complaints procedure here.

Know your advisor