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Dollar Depeg Du Jour: 32-Year Old Hong Kong FX Regime In The Crosshairs

Tyler Durden's picture




 

On Monday, we brought you two charts which vividly demonstrated market expectations for the abandonment of more currency pegs in the wake of Kazakhstan’s decision to float the tenge and China's "unexpected" move to devalue the yuan.

As you can see from the following, the market seems to be convinced that Saudi Arabia and UAE, under pressure from falling crude revenue, will ultimately be either unwilling or unable to maintain their dollar pegs (incidentally, the Saudis did succeed in jawboning USDSAR forwards down 125bps on Tuesday): 

Of course no discussion of global dollar pegs and entrenched FX regimes would be complete without mentioning the Hong Kong dollar and as you can see, the 12-month forward chart looks remarkably similar to those shown above:

Needless to say, the dynamic here is complicated by the degree to which Hong Kong is effectively wedded to US monetary policy (which is itself now thoroughly confused), the extent to which HKD has tended to sit at the strong end of the band, economic links to the mainland, exposure to weakening regional currencies via tourism, and expectations of an eventual yuan peg.

Below, for what it’s worth, is some commentary from the sellside.

*  *  *

From Citi

Our long-standing house view remains that the HKD peg will stay status quo, with an eventual re-peg to RMB when the latter is fully convertible. The LERS has weathered HK through even larger external shocks since 1983, and it is an important sign of stability for businesses in HK, and policymakers of HK and China. The current Linked Exchange Rate System is likely to withstand regional FX moves, but the economy would have to adjust with (1) moderate raw food prices decline with a lag, (2) other second-round price impacts from an overall slower economy, but (3) likely sharper reversals in asset prices appreciation that we have witnessed in recent years (as already started in the equity market, and worries could spread to the property market).

RMB and other regional FX depreciation will make tourist shopping more expensive...It is important to gauge both tourist arrivals and tourists spending trends -- if we start seeing even tourist arrivals fall, then it will be quite worrying, and should force shop rents to fall more broadly and faster.

From BNP

Predictably, Hong Kong’s peg with the USD has, once again, come under scrutiny. On the same day Kazakhstan abandoned control of its exchange rate, one-month implied volatility of HKD options spiked to a ten-year high (Chart 1). 

Periodic bouts of price and pay swings are inevitable, as Hong Kong has effectively delegated the determination of its monetary policy to the US, even when the business cycles of the two economies do not move in tandem. As the Federal Reserve moves ever closer to delivering the first interest rate hike in almost a decade, Hong Kong is condemned to import tighter US monetary policy. In fact, Hong Kong is caught in a pincer movement between a prospective US monetary policy tightening and the continued slowdown and travails of the mainland economy with whom Hong Kong’s economic cycle is increasingly more correlated. Downward pressures on domestic costs and asset prices, including property values, will build, adding to more popular discontent against the peg (Chart 2). 

But painful as the operation of the peg may be in the short term, there remains a distinct lack of alternatives.  

From Barclays

In contrast to other currency pegs, including the VND and SAR, the HKD is not facing depreciation pressures due to the capital outflows but rather the contrary. In fact, over the past year the HKD has been trading near the strong side of the Convertibility Undertaking of 7.75 (Figure 3), despite the rising USD against most majors and EM currencies. Even after the PBoC announced changes to the USDCNY fixing mechanism, after an initial spike spot USDHKD has moved little, although HKD forwards and option vols have moved more sharply in recent days. 

Importantly, unlike the oil producers, Hong Kong does not face the same extent of downward pressures on its current account and fiscal balances due to the collapse in oil and commodity prices. That said, it is likely that Hong Kong will face more downward pressures on business activity and BoP services receipts due to China’s growth slowdown. This raises the question was to whether the link to the USD and the US monetary policy – especially now that the Fed is closer to tightening – remains relevant for the Hong Kong SAR given the growth drag from China.

A depreciating CNY could perhaps make it easier for the Hong Kong and Chinese authorities to change the anchor of the HKD currency peg, although there are few signs that a policy change will happen in the near term. The HKMA has said that pegging to a strong and appreciating CNY would pose downward pressures on Hong Kong’s domestic prices (including wages, consumer prices and property prices), or could lead to structural deflationary pressures.

*  *  *

Finally, it's worth noting that, back in 2011, Bill Ackman took to a 150-page presentation to explain why betting on an HKD revaluation was a slam dunk.

Bonus: History of the peg via Citi


 

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Tue, 08/25/2015 - 17:48 | 6470276 Omega_Man
Omega_Man's picture

old soviet anti tank missile vs abrams 

 

https://www.youtube.com/watch?v=S0nDHV_mkiY

Tue, 08/25/2015 - 20:14 | 6470773 Otrader
Otrader's picture

The west is hostage to the Stanley Fishers and company.  The rest of the world will take painful steps to slowly get off the US of A bandwagon and free themselves.  Kazakhstan was just the beginning. 

 

Tue, 08/25/2015 - 18:01 | 6470317 tarabel
tarabel's picture

 

 

Armor w/o infantry support. Bad plan.

Stationary target. Also bad plan.

Interesting video. Thanks.

Tue, 08/25/2015 - 18:04 | 6470328 Divine Wind
Divine Wind's picture

 

 

 

Nope.

Ultra Fail, asshole.

Saudi Abrahms do not have reactive armor nor any of the other goodies outfitting the U.S. version.

Such a shot against a U.S. Abrahms would not have the same result.

10000 Lumens Super Bright Flashlight Torch 10000 Lumens Super Bright Flashlight Torch
Tue, 08/25/2015 - 18:09 | 6470346 Omega_Man
Omega_Man's picture

bah.. just hit the reactive armour with some 50's first 

 

Why so sensitve? Do you have one of these tanks?

Tue, 08/25/2015 - 18:15 | 6470362 Divine Wind
Divine Wind's picture

 

 

 

Just responding to an asshole troll.

Nothing more.

:)

Tue, 08/25/2015 - 23:12 | 6471432 Omega_Man
Omega_Man's picture

takes one to know one zio lover

Tue, 08/25/2015 - 17:48 | 6470279 NoTTD
NoTTD's picture

So,give me the wisdom of your combined experience: Buy, Sell or Hold HKD in advance of this de-peg?

Tue, 08/25/2015 - 17:58 | 6470302 tarabel
tarabel's picture

 

 

I'd say hold. HKD is China's escape hatch to the West. Money parked there can go both ways-- east and west. If it devalues or even shows volatility, the usefulness of it as an exit drops significantly and money will find someplace else to park offshore from China proper.

Tue, 08/25/2015 - 17:54 | 6470291 Perimetr
Perimetr's picture

Chinese battle cry:

Remember the RMB

Tue, 08/25/2015 - 17:54 | 6470293 Burnbright
Burnbright's picture

You know what really backstops the world reserve currency? All other currencies. All these FX swings are symptoms of a future dollar collapse.

Tue, 08/25/2015 - 18:42 | 6470439 Berspankme
Berspankme's picture

correct

Tue, 08/25/2015 - 18:50 | 6470465 JamaicaJim
JamaicaJim's picture

AGAINST...what?

 

GREAT argument vs. Gold and Silver....but vs. which other CURRENCIES????

Tue, 08/25/2015 - 19:09 | 6470524 Burnbright
Burnbright's picture

I am as much a believer in gold and silver as most around here but a currency is back stopped by domestic product of said country. Or rather the productive labor of that country's people. So that's why I believe all these collapsing commodity prices and devaluing currencies will lead to a de-dollar event. You can't have this kind of volatility in a world reserve currency. It is going to end up destroying all those countries economies because of their relationship with using the dollar in international trade.

Wed, 08/26/2015 - 00:19 | 6471571 rex-lacrymarum
rex-lacrymarum's picture

Fiat money isn't "backed" by anything. It is only in use due to legal tender laws and the State demanding it be used for paying taxes (the latter is also why a secondary market for wooden sticks worked for centuries in England - it creates an artifical demand for something everybody knows is actually worthless). 

Wed, 08/26/2015 - 03:32 | 6471790 Burnbright
Burnbright's picture

Oh contraire mon frere. Backing may be a poor term to use and weather or not a currency has value is a non argument.  But all that matters is what you can buy with said worthless pieces of paper that counts. Being that generally all countries have their own currency and they also collect taxes in said currency (to force its use) the forced use of paying a debt creates its own backing by the suckers forced to trade with it. Its only value, if you will, then becomes based on its utility in trade. 

Wed, 08/26/2015 - 03:32 | 6471791 Burnbright
Burnbright's picture

Oh contraire mon frere. Backing may be a poor term to use and weather or not a currency has value is a non argument.  But all that matters is what you can buy with said worthless pieces of paper that counts. Being that generally all countries have their own currency and they also collect taxes in said currency (to force its use) the forced use of paying a debt creates its own backing by the suckers forced to trade with it. Its only value, if you will, then becomes based on its utility in trade. 

Tue, 08/25/2015 - 17:59 | 6470304 earleflorida
earleflorida's picture

"People's Bank of China finally cuts rates"     8/25/15

http://atimes.com/2015/08/peoples-bank-of-china-finally-cuts-rates/

Tue, 08/25/2015 - 18:03 | 6470322 gwar5
gwar5's picture

"Dollar! Much strong, like the bull!"  -- doctor, lawyer, indian chief

Tue, 08/25/2015 - 18:12 | 6470355 ghostzapper
ghostzapper's picture

Market is starting to take very seriously that the big reset expected by anyone with a brain may in fact be well underway.  

Fed Moves in 2015 - 0

Other CB Moves - a shitload

Tue, 08/25/2015 - 18:41 | 6470416 falak pema
falak pema's picture

Day of the jackal; assassinations will be on the rise when tipping times arrive.

Politics and despots run the world. And their model has failed. Now it'll be payday. heads must roll.

This will inevitably provoke social unrest and rival distrust; whence the day of the jackal.

When the Cuban Crisis occurred and JFK decided he would curtail CIA --and shadow MIC plays in its aftermath-- he practically signed his Jackal's contract himself.

The MIC needed lebensraum worldwide and no president to muzzle it.

We may be heading to a similar stalemate and defense spend cuts will cause much dissension which will cause Jackals to start howling.

Unless we go the other way bigtime, like the US did then.

But then it was rich. Whereas now all governments are broke!

Tue, 08/25/2015 - 18:49 | 6470458 JamaicaJim
JamaicaJim's picture

JFK may well have been a cockhound, son of a bootlegger...but this is why he went down..

a) His stupid brother Bobby, going after the Mob (who has runs things globally for centuries)

They "won" him the razor thin election (just think, if ONE vote in each US precinct at the time, went for Nixon, this whole shebang would have been....well..without JFK)...that's how close...and this douchebag goes after them...idiot.

b) JFK fought the Fed. "Silver Certificates"...since THAT time, the US has been on a long, slow, shitty decline.

c) JFK did not want US troops in SE Asia. The MIC did.

Sitting Duck in Dallas.

 

Tue, 08/25/2015 - 18:56 | 6470482 FedFunnyMoney
FedFunnyMoney's picture

Break the HKD-USD peg and you will make Soros look like a pauper in comparison. The Chinese will spend billions to defend it.

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