GBP has had a volatile week, with a number of competing/contradictory fundamental factors at play.
USD weakness has been broadly supportive, while Brexit news has resulted in two way action.
Today, however, GBP saw volatility on a seemingly brand new theme…
Earlier on this week, UK Foreign Secretary Raab said that the UK may offer Hong Kong residents citizenship in the UK, should China press ahead with implementing its new national security laws (i.e. cracking down on freedoms in Hong Kong).
The UK has close connections to Hong Kong, given that the island city former part of the British empire until 1997.
Hong Kong was handed back to the Chinese, but China agreed that the region would be able to largely maintain its own autonomy from the mainland.
However, growing Chinese authoritarianism since the rise of current Chinese President Xi Xinping has seen Hong Kong independence gradually eroded, and led to the current tense political climate we see in the region now.
Most recently, China passed a new set of national security laws that will bring the city more closely under Beijing’s thumb (this has been a key driver of mounting US/Chinese tensions also).
The UK has urged the Chinese not to go ahead with implementation of the new laws, and has mulled the idea of offering Hong Kong citizens citizenship in the UK (basically, a way into the UK if they want to escape mainland Chinese authoritarianism).
This would make sense for the UK, wealthy immigrants coming in from Hong Kong would be a big plus for the UK economy! Naturally, this has angered China, who this morning said that China reserves the right to “respond” to the UK on this issue.
The UK does do a reasonable amount of trade with China that the Chinese could target. Chinese investment into the UK is also rather large, another area the Chinese could target. All said, if this does escalate between the UK and China, it won’t be good for the UK economy (but ought not be catastrophic).
Though GBP has recovered this morning from losses to do with the Chinese threat, this will be another theme worth keeping an eye on moving forward.
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