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A Proposed Export Channel for Dollar–Hang Seng Correlation

Article Quant Q&A · Author: Vladimir Nabokov
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Summary

The note asks why the Dollar Index and Hang Seng Index showed a negative rolling correlation in a short monthly-return sample. The included answer proposes an export competitiveness channel: a weaker Hong Kong dollar against the US dollar can make Hong Kong-linked exports cheaper for US buyers, potentially improving exporters’ expected value and share prices. A stronger Hong Kong dollar could have the opposite effect. This is a proposed economic mechanism, not a demonstrated causal explanation for the reported correlation. The discussion focuses on Hong Kong’s trade exposure and argues that limited imports from the US reduce an offsetting cost effect. It does not test that channel against other drivers, detail how Dollar Index movements translate into the Hong Kong dollar exchange rate, or establish whether the relationship persists beyond the stated sample. The observation should therefore be treated as context-specific and potentially affected by other market forces.

Key ideas

  • The note reports a negative rolling relationship between Dollar Index and Hang Seng returns in its sample.
  • The proposed mechanism is that a weaker Hong Kong dollar can improve export price competitiveness in the US.
  • Exporter expectations may affect Hong Kong share prices through anticipated future value.
  • The discussion offers a hypothesis but does not establish causality or rule out other drivers.

Tags

EquitiesForexChina markets
Full text
# Dollar Index vs Hang Seng Index: Negative correlation, but what's driving it?


# Dollar Index vs Hang Seng Index: Negative correlation, but what's driving it?












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

## Answer by Phil H (score 0, accepted)

https://quant.stackexchange.com/a/37753

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.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.