Market Bets Spike on 70% Chance Hong Kong Dollar Peg to Dive

Bets against the Hong Kong Dollar (HKD) have spiked with chances it falls in the next six months at 55%, up significantly from just 13% only last month.

Option traders are setting odds at 73% the peg will fall in the next twelve months amid concerns capital inflows might turn into capital outflows.

The decades old peg to the dollar has an upper bound of 7.85 HKD to USD, with the Hong Kong Monetary Authority (HKMA) keeping the peg by selling or buying dollars in the open market.

Dollars have generally entered Hong Kong instead of leaving, so making HKMA’s job somewhat easy. Following perceived interference by China, however, markets are betting the situation might change. That dollars might leave the country.

“HKMA appears to be using a combination of spot intervention and HKD liquidity management to keep ‘market pressures’ from forcing a breach of the band’s upper 7.85 bound,” Stephen Gallo, European head of FX strategy at BMO Capital Markets, says before adding:

“Lower USD rates over the course of 2019 have also done their part. But what intrigues us the most is the tendency for USDHKD to keep bouncing back up towards the top of the band, despite HKMA’s efforts.”

Hong Kong’s version of the central bank (HKMA) said earlier this month their currency reserves stood at $448.5 billion as at the end of July 2019.

At the end of July, however, markets were not quite betting against the peg. Thus how the situation has changed is not clear, but rumors are circulating in Hong Kong the peg will fall.

On social media they urge people to withdraw funds from banks and convert HKD into USD so as to retain monetary value if the peg falls with lines apparently forming at Citibank because it seems you can open a USD account there.

Most banks in Hong Kong also serve international companies that do business in China. Meaning this could potentially affect the mainland as well.

Some analysts however think the peg will hold because there have been such speculative attacks before.

“Speculators have been selling the HKD since last year, pushing the HKD-USD exchange rate to the weak side of the convertibility range. Such situations have occurred many times over the peg’s 36-year life and have always ended the same way – the HKD peg holds firm and the speculators get burned,” says Chi Lo, an economist at BNP Paribas. “It’s a mystery to me why speculators would want to pick a fight with a currency backed by persistent capital inflows.”

One reason might be the economy is not doing very well. It was growing at 4.6% last year. Now it’s at just 0.5%. In addition, inflation has spiked to 3.3%. Meaning the economy is contracting in real terms.

This downturn might be one reason why Hong Kong has descended on the streets, with protestors blaming China due to what they say was a breach of China’s promise to maintain the British rule of law in Hong Kong, so threatening its status as a commercial hub.

They’re now demanding democracy, the right to vote for their own parliament and government, and general autonomy.

China’s response so far has been to send tanks near the border, but it has not directly intervened, nor has there been any response from an economic perspective as it’s only recently that protestors began a movement of sorts to convert HKD into dollars.

That could affect the Chinese economy in a ripple effect, so potentially leading to China’s government thinking again about their demands.

Whether China will relent, however, is not clear, but this demand for democracy appears to be supported by pretty much all Hong Kongers.

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