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I recently read an article which highlighted that a weaker dollar tends to coincide with rallies in Hong Kong stocks. I did some quick analysis:

I calculated monthly returns on the Dollar Index and Hang Seng Index (from Dec' 14 to Dec' 17) and plotted a 6-month rolling correlation. The correlation tends to be between -0.15 and -0.9. More often that not, it's below -0.5.

My question is simple: What's the explanation behind this negative correlation between the two?

Thanks, V

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  • $\begingroup$ What is the name of the Dollar Index you mention? $\endgroup$ – Daneel Olivaw Jan 16 '18 at 10:39
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What is the relationship between Hong Kong and the US? Hong Kong is a net exporter to the US (by 4 or 5:1), and most of its exports are either to China (whose largest export market is the US) or directly to the US.

If the HKD/USD spot shifts so that the HKD costs 1% less in USD terms, then all those exported goods cost importers 1% less to purchase (the impact on shipping is much lower), and represents a price cut in the US market. But in the HK market, HKD/HKD is unchanged, so that price cut costs them nothing. Since HK imports very little from the US, there is almost no secondary impact on costs (as there would be in a market like SEK/EUR where imports and exports are the same market).

Thus, every time HKD strengthens (weakens), Hong Kong exporters lose (gain) expected future value, and their stock price lowers (rises).

Voila, negative correlation.

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  • $\begingroup$ HKD is pegged to USD. $\endgroup$ – RRG Jan 17 '18 at 4:50
  • $\begingroup$ 1. It is pegged to a range, 2. Much of the exports are via the mainland, so the same relationship (albeit indirect) will occur. The key is the dependence of the index on exports, which ties it to the value of the USD. $\endgroup$ – Phil H Jan 17 '18 at 10:43

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