Ackman’s Big Hong Kong Short comes at a bad time for Bears

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(Bloomberg) — Bill Ackman’s revelation that he is betting big on a collapse of the Hong Kong pegged dollar will come across as contrarian to some in the market and mistimed to others.

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The city’s many interventions since May to support its currency have rendered it unprofitable, driving interbank rates higher than their U.S. equivalents, cooling a once-popular carry trade. That helped the local dollar roar back to the middle of its tight trading band with the greenback, heading for its biggest monthly gain since March 2020. There are few signs of a currency crisis.

Still, hedge fund founder Pershing Square Capital Management LP said on Twitter that his company holds a “large notional position” in Hong Kong dollar put options, betting that the greenback peg will eventually break, without the size of the bet clarify.

“Conditions are not favorable for the selling of the Hong Kong dollar, which will suffer a negative carry,” said Carie Li, a strategist at DBS Bank Ltd. “The Hong Kong government also shows no intention to change the system.”

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Part of Ackman’s premise, referring to a Bloomberg Opinion column by Richard Cookson, is that it no longer makes sense that Hong Kong, a Chinese city deeply intertwined with the mainland’s slowing economy, is beholden to monetary policy. US policy.

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

And perhaps nowhere else is more exposed to two of the biggest concerns currently sweeping global markets: 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 equipped to deal with external shocks. Despite the recent decline, Hong Kong’s foreign exchange reserves are still much higher than during the Asian crisis. At $417 billion, they provide the city with enough firepower to defend the currency in the face of capital outflows.

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Meanwhile, increased local rates increase the appeal of holding the Hong Kong dollar after months of profitable depreciation betting. The quarterly interbank funding cost for the currency, known as Hibor, has risen to its highest level since 2007, well above comparable rates on the dollar – or Libor.

That marks a dramatic reversal from earlier this year when Hibor was lower than Libor. The resulting short trade in 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 repeatedly.

Other market indicators also reflect investors’ reluctance to bet that the peg will break. Quarterly risk reversals for the US-Hong Kong dollar, a gauge of the expected direction over that period, have turned negative. That suggests that traders have turned bullish on the outlook for the local dollar — at least in the near term.

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

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And he’s not alone this time. Hedge fund manager Boaz Weinstein, founder of Saba Capital Management, tweeted support for the trade, which he said saw a payout of more than 200 to one.

“Bill’s trade is a smart lottery ticket and I’m on it too,” he posted.

Weinstein calls Hong Kong Dollar Short a 200 to 1 lottery ticket

The HKMA reiterated Thursday that the pegged exchange rate system — a currency peg that has survived largely unscathed for nearly 40 years — will remain unchanged.

“Individual market participants have from time to time expressed doubts about the pegged exchange rate system,” it said. “Most of these comments are based on their misunderstanding of the system or their own fund positions.”

(Adds details on Weinstein bet.)

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