Bill Ackman’s Hong Kong dollar (USD/HKD) short is not going well

The Hong Kong dollar (USD/HKD) has done relatively well this year even as the US dollar index (DXY) jumped to the highest level in months. It has also performed well even as many emerging market currencies like the Chinese yuan, Turkish lira, and Argentinian peso have plunged.

The USD/HKD exchange rate was trading at 7.83 on Wednesday, lower than the YTD high of 7.85. It has remained inside the HKD peg of between 7.75 and 7.85 this year. As a result, several hedge funds, including billionaire Bill Ackman, have suffered as the currency has remained in this band.

Bill Ackman revealed that he was short the Hong Kong dollar in November 2022. At the time, he argued that the Hong Kong dollar peg made no sense and that it was just a matter of time before it cracked.

Bill Ackman is not the only billionaire hedge fund manager to bet against the peg. Boaz Weinstein, the founder of Saba Capital, also placed a short against the currency. A few months earlier, Kyle Bass and Christopher Odey had shorted the currency and lost money.

This is a very thoughtful piece and I agree. We have a large notional short position against the Hong Kong dollar through the ownership of put options. The peg no longer makes sense for Hong Kong and it is only a matter of time before it breaks. https://t.co/efp62TuB03

— Bill Ackman (@BillAckman) November 24, 2022

Does the HKD dollar peg make sense?

Most investors short the HKD argue that the peg makes no sense for Hong Kong. For one, the Hong Kong Monetary Authority (HKMA) has relinquished its power to the Federal Reserve. Because of the peg, the HKMA tends to follow the actions of the Fed.

The Fed actions might not always be in the city’s interest. In some cases, the Fed could hike interest rates when the US has high inflation and Hong Kong has none. Another reason is that Mainland China could be unhappy that Hong Kong pegs its currency against a hostile state.

However, the reality is that the HKD peg has been net positive to the city by incentivising foreign investors to the city. Many foreigners love Hong Kong because of its stability compared to other emerging market currencies.

Most importantly, HKD shorts are failing because Hong Kong’s government has enough resources to defend the peg. The most recent data showed that the HKMA had over $421 billion in dollar reserves. These funds represented over five times the amount of currency in circulation.

Therefore, this fortress balance sheet means that the central bank can adequately defend the peg when it moves below or above the peg. As such, unless a major black swan event happens, I suspect that shorts on HKD will lose money over time. This view is in line with what I warned when Bill Ackman unveiled his HKD short bet.