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Billionaire investor Ackman bets Hong Kong dollar peg can break

Stock Markets Nov 24, 2022 01:25AM ET
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© Reuters. FILE PHOTO: A Hong Kong dollar note is seen in this illustration photo May 31, 2017. REUTERS/Thomas White/Illustration
 
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By Tom Westbrook

SINGAPORE (Reuters) - Billionaire investor Bill Ackman said he's betting the Hong Kong dollar will fall and that its peg to the U.S. dollar can break, the latest big money manager to take a public short bet as U.S. rate hikes turn the blowtorch on Hong Kong's currency system.

"We have a large notional short position against the Hong Kong dollar through the ownership of put options," he said on Twitter. "The peg no longer makes sense for Hong Kong and it is only a matter of time before it breaks."

The details of Ackman's position were unclear. A spokesman for Ackman's fund, Pershing Square, declined to comment further.

The Hong Kong dollar has been pegged in a tight band between 7.75 and 7.85 per greenback for nearly four decades and tends to face pressure - and thus far unsuccessful speculative challenges - every time U.S. interest rates go up.

The Hong Kong Monetary Authority maintains the peg by moving interest rates in lockstep with the U.S. Federal Reserve and by currency intervention, which drains Hong Kong liquidity and is designed to drive local rates up until inflows stabilise the currency.

Earlier in the month, Hong Kong's financial secretary sought to warn speculators.

"If you bet against the Hong Kong dollar, you are bound to lose," Paul Chan told an audience at an investment summit in the city.

However, some economists say the speed and scale of this hiking cycle is the sternest test yet, particularly as Chinese growth falters, making for an uncomfortable time to be raising rates.

U.S. fund manager Kyle Bass has long bet against the Hong Kong dollar and told Reuters on Thursday he had a fund dedicated to being short Hong Kong dollars versus the U.S.dollar.

"It's nice to finally have others agreeing with our thesis. Rigid currency pairs harnessed to asynchronous economies are destined to fail," Bass said in an emailed response.

"One bad day of deposit/currency outflows will likely bring unimaginable stress to the situation. The press and the HKMA like to tout 'Total Reserves' but just imagine if the HKMA had to sell HK stocks or private equity in order to defend the peg."

American investor George Soros is among those who have in the past bet against the peg, but his 1998 attack on the peg was in vain.

Liquidity is draining very fast as the HKMA has sucked up about $30 billion in some 40 rounds of intervention since the Fed began raising rates in March.

Earlier this month, the aggregate balance - a key gauge of cash in the banking system - fell below HK$100 billion ($12.8 billion) for the first time since 2020.

The one-month Hong Kong Interbank Offer Rate currently stands at a 14-year high.

Since May, the Hong Kong dollar has been pinned near the weaker end of its band, although it has lifted a bit in recent weeks as markets start to price a peak in U.S. rates. It was last at 7.8142 per dollar.

A spokewoman at the HKMA said it would not comment on any individual's commentary about the peg.

However, "some market participants have at various times expressed their queries about HK's linked exchange rate system (LERS) over the years. These comments are primarily based on their own misunderstanding on the HK's system, or the position of their own books," she wrote in an email reply to Reuters.

The LERS has endured several economic cycles and periods of significant capital flows over its nearly 40 years of operation, continues to perform well and does not need to change, the HKMA said.

GRAPHIC: Hong Kong rates, liquidity (https://fingfx.thomsonreuters.com/gfx/mkt/znvnbdmnzvl/Pasted%20image%201667444840422.png)

($1 = 7.8132 Hong Kong dollars)

Billionaire investor Ackman bets Hong Kong dollar peg can break
 

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