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The Hong Kong Monitory Authority (HKMA) was forced to intervene in the currency market again last night. This is the second time in a week that the upper end of the USDHKD peg has been tested by speculators.
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There are two aspects to the attack on the HK$ that are worth noting:
1) This is a “celebrity trade”.
2) Ben Bernanke is responsible for the run on the currency.
Bill Ackman has made a very well publicized bet on the HK$. I find this interesting as it reminds me of George Soros, in 1992, when he took on the Bank of England and forced a devaluation of Sterling Vs. the Dollar.
Bernanke has his hands all over the run on the HKD. On October 14, he flew halfway around the world to deliver the message that specs should take on the HKMA.
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I was surprised at how strong Bernanke’s words were at the IMF confab in Japan. At the time, I thought that he was guilty of economic saber rattling (Link) [18]. It was clear that Ben was addressing his strong language at Mainland China and its currency, the CNY. It appears that the FX markets have listened to Bernanke, and are now taking a run at China’s other currency, the HK$.
The HKMA has not been forced to intervene in support of the peg for more than three years. Five days after Bernanke spoke, it is forced to enter the currency market on a near daily basis. If you believe this timing is just a coincidence, think again. Everything in FX is connected.
I’m not smart enough to know if the following chart is going to be broken anytime soon. But the pot is boiling at the moment; big bets are being made. I believe that the HK$ story will be in the press a fair bit in the coming days. Who knows, maybe this time the specs will topple the HKMA.
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Consider the implications of this:
- The head of the Fed has launched an economic attack against a sovereign state. If Ben is successful in toppling the peg, there will be many angry folks at the HKMA. If the HK$ ends up getting revalued, the HKMA will lose billions on its reserve holdings.
- It’s impossible for other CBs not to take notice of what has happened. Is Brazil the next country to get strong-armed by the Fed?
- If the HK$ goes, Ackman will get his pic on all the front pages. He will be touted as the next Soros. The guy who “toppled” a central bank. That “rep” may be deserved, but the fact is that Bernanke is the guy who will make it happen. That is just too much theater for me. Bernanke is pursing policies that make hedge funds rich, but this is over the top.
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- If Ackman has a big win, there has to be consequences. Other central banks will speak up. After all, Bernanke has triggered a run on a major currency. That’s a very big deal.
- If the HKMA is forced to revalue its currency, then other peg currencies are going to come into speculator's cross hairs. The Korean Won and Swiss Franc come to mind. The HK$ outcome is not the only factor that will decide the fate of other pegged currencies, but once money starts moving, it is very hard to stop. What is happening today in Hong Kong, could easily result in global capital market disruptions.
Just a point here. Toppling central banks is a messy business. This will be a “reval” versus a “deval” so it is different than what Soros did to the BOE, but messy and unforgettable none the less.
Watch out for the HK$ over the next few weeks. If it goes, it will not be a “risk-on event”, and Bernanke will get egg on his face for having started it.
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