Ackman’s Big Hong Kong Short Film Comes at a Bad Time for Bears


Read more from Bloomberg

The city’s multiple interventions to support its currency since May have made it unprofitable to short, pushing interbank rates higher than their US equivalents, cooling popular carry trade. That helped the local dollar move back towards the middle of its tight trading band with the greenback, on track for its biggest monthly gain since March 2020. There are few signs of a currency crisis.

However, the founder of hedge fund Pershing Square Capital Management LP said on Twitter that his firm has a “large speculative position” in Hong Kong dollar put options, betting that the peg will eventually break with the greenback, without elucidating on the size of the bet.

“The conditions are not favorable for selling the Hong Kong dollar, which will suffer negative behavior,” said Carrie Li, strategist at DBS Bank Ltd. “The Hong Kong government also shows no signs of changing the system.”

Part of Ackman’s premise, which he referenced in Richard Cookson’s Bloomberg Opinion column, is that it no longer makes sense for Hong Kong, a Chinese city deeply intertwined with the mainland’s economy, to be subject to US monetary policy.

That logic is easy to follow. As a small and open economy, Hong Kong is particularly vulnerable to money flowing in and out. It was hit hard by the Asian financial crisis of the late 1990s, which eventually led to the city’s de facto central bank buying up Hong Kong stocks and using its foreign currency reserves to protect the dollar peg.

And perhaps nowhere else is it more exposed to two of the biggest concerns threatening global markets right now — the Federal Reserve’s rapidly tightening monetary policy and China’s sputtering economy.

EXPLANATION: How the Hong Kong Dollar Peg works: QuickTake

But today the city is much better able to deal with external shocks. Despite the recent decline, Hong Kong’s foreign exchange reserves remain well above the levels seen during the Asian crisis. At $417 billion, they provide the city with plenty of firepower to defend the currency against capital outflows.

Meanwhile, the appeal of owning the Hong Kong dollar is growing as local rates rise after months of lucrative promises of depreciation. Three-month interbank funding costs for the currency, known as Hibor, have risen to their highest level since 2007, rising well above comparable rates on the greenback — or Libor.

That represents a significant reversal from earlier in the year, when Hibor was lower than Libor. The resulting short trade of the Hong Kong dollar became so popular that the currency was repeatedly pushed to the weak end of its trading band against the greenback, prompting the Hong Kong Monetary Authority to intervene again and once more.

Other market indicators also show that there is little appetite among investors to bet that the peg will break. Three-month risk reversals for the US-Hong Kong dollar, a measure of the expected direction over that time frame, have turned negative. That suggests traders have turned on the prospects for the local dollar — at least in the short term.

The idea of ​​hitting against Hong Kong dollar pegs is not new. Kyle Bass, founder of Hayman Capital Management, and George Soros have both tried and failed to bet on the currency’s fall. Ackman himself bet that the peg would break on the strong side in 2011.

And he is not alone this time. Hedge fund manager Boaz Weinstein, founder of Saba Capital Management, expressed support for the trade, which he said had a payout of more than 200-to-one.

“Bill’s trade is a smart lottery ticket and so am I,” he posted.

Weinstein claims a 200-to-1 Lottery Ticket on a Short Hong Kong Dollar

The HKMA reiterated on Thursday that the pegged exchange rate system — a currency peg that has existed unscathed for almost 40 years — will remain unchanged.

“Individual market participants have expressed doubts about the linked exchange rate system from time to time,” he said. “Most of these statements are based on their misunderstanding of the system or their own situation in funds.”

(It details Weinstein’s bet.)

Read more from Bloomberg Businessweek

©2022 Bloomberg LP

Leave a Reply

Your email address will not be published.