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Hong Kong Dollar


WeiChiLoh
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I don't know whether this is the right place to post this idea, but the risk reward characteristics looks highly attractive.

 

History:

HKD peg to USD @ 7.75

Peg currencies must have similar monetary policies if not there will be arbitrage opportunities

But Hong Kong economy is now mainly driven by China, not US or EU.

China driven economy, US driven monetary policies = terrible results. High inflation rate. Property prices valuation at ludicrous levels. Result in a widening wealth gap, people with assets versus those who doesn't. 

 

In situation like this, we tend to see civil unrest, which we have seen as of late.

 

A recent interview with Hong Kong leader says that half of the people in HK earns less than USD$1.8K. If things goes to free voting, you get poor driven policies.

It seems to me that the government is finally realizing the effects of their legacy policies. They should unpeg soon if they cherish their jobs or if they wishes to sooth the riot.

Buying HKD now seems like an attractive opportunity. There is almost no borrow cost and the worst case scenario, to me, is that you dont lose money and the peg remains. However, if they unpeg and goes to a level like USDHKD 5x or go to free floating, the upside is tremendous. Personally, I have placed out 25x levered bets on the HKD.

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Can somebody please clarify? High inflation rates, social unrest and other issues in Hong Kong would mean that the Hong Kong Dollar (HKD) would LOSE value in relation to the US Dollar? Going short would be the right trade, yes?

 

The issue is there's a peg, so the trade isn't long or short it's just the binary bet that one day the peg will be removed.  I remember Ackman pitching this, I remember a discussion around it on here as well. 

 

It could be another 5,10,15 years until the peg is removed.  No one knows.  Maybe when the Chinese elite start to bet on this trade it's time to join them.

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Can somebody please clarify? High inflation rates, social unrest and other issues in Hong Kong would mean that the Hong Kong Dollar (HKD) would LOSE value in relation to the US Dollar? Going short would be the right trade, yes?

 

High inflation and social unrest are a result of a pegged currency, although social unrest is more of a sub-result of high inflation.

The core idea is that the problem is a pegged currency, so to solve the problem, unpeg and let the HKD appreciate. Yes it is true that in the short run HKD will lose value in relation, but that is more of a result. And even if so, the HKD peg trades at a very tight band on 7.75 to 7.85, so the downside isnt significant.

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Can somebody please clarify? High inflation rates, social unrest and other issues in Hong Kong would mean that the Hong Kong Dollar (HKD) would LOSE value in relation to the US Dollar? Going short would be the right trade, yes?

 

The issue is there's a peg, so the trade isn't long or short it's just the binary bet that one day the peg will be removed.  I remember Ackman pitching this, I remember a discussion around it on here as well. 

 

It could be another 5,10,15 years until the peg is removed.  No one knows.  Maybe when the Chinese elite start to bet on this trade it's time to join them.

 

Interesting point. I will take note of it. However, don't you think if this issue is left to fester, the resulting chaos is not really worth a peg which, in the first place, should be remove a lot time ago? I believe that the peg would be remove sooner rather than later and I would want to be position my portfolio correctly.

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Can somebody please clarify? High inflation rates, social unrest and other issues in Hong Kong would mean that the Hong Kong Dollar (HKD) would LOSE value in relation to the US Dollar? Going short would be the right trade, yes?

 

It is very difficult to see how removing the peg could cause a devaluation as every HK$ in existence is backed by US$ in a 7.8:1 ratio. The markets have also been clearly betting on the possibility of appreciation as long term HK$ govt bonds are trading at significantly lower yields than equivalent US treasury bonds (the yields should be equal if nobody expects the peg to collapse given that there is essentially zero possibility that either govt defaults).

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Reading he Ackerman presentation a few thoughts come to mind. Ackerman's presentation was made when the HK economy was strong and America's was weak. The idea was that accommodative monetary policy in an economy where factor's of production are fully utilized will result in inflation. HKD's monetary policy is the same as the US due to the peg. Thus HKD gets an accommodative policy at exactly the wrong time...when its economy is strong.

 

However we now find ourselves in a situation where the Chinese economy is slowing down and the US economy is speeding up. The US is tightening its monetary policy. In this situation we have exact reverse of what we had before. If you want a tight monetary policy there is no point in removing the peg because the US is about to provide you with exactly what you desire which is tight monetary policy. You would only ever remove the peg if you wanted HKD to be devalued relative to USD.

 

The other problem I have with this trade is that I believe the China bubble is bursting and the Chinese economy is slowing down. My vague impression is that HK is levered to the Chinese economy....when the Chinese economy falters...Hong Kong does even worse. So my view is that HKD is not likely to strengthen with respect to USD and HK properties and equities are likely to do poorly.

 

In addition the HKD property market is in a bubble. I don't understand why you would want to bet on it.

 

Finally and most importantly I think the decision to remove the peg would constitute the dumbest and stupidest possible decision anyone could make. The peg was created to provide stability at a time when people were fearful and markets were jittery (HK's transition to China). I fail to understand how removing the peg would increase political stability. Once the peg is removed there is no way of knowing what will happen. HKD could appreciate or over time depreciate. Removing the peg only add uncertainty, increase fear and promotes the chances of a major crisis. In addition removing the peg makes no sense given that China's currency is pegged and HK's currency would the free float relative to China's. This would result inhabit trade and commercial relations and doesn't make a lot of sense for two economies that are so closely linked. Think about what it would be like to do business in NY if NY had its own currency which fluctuated relative to USD. You would avoid it if possible. Therefore I conclude that the peg will remain to the extent that China's peg remains. One thing to note is that China is very slowly weakening their peg.

 

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