It's what is known in the markets as a 'tail risk': a highly unlikely scenario in which Hong Kong's currency peg suddenly snaps. Yet market pricing suggests bets on such a shock are building in the hedge fund world, and some traders say it makes a lot of sense.
A Hong Kong dollar note is seen in this illustration photo May 31, 2017. REUTERS/Thomas White/Illustration
But they can be relatively cheap and even profitable regardless of the peg staying intact, and it buys insurance against unlikely but not impossible chains of events, such as a sudden blow-up in China, devaluation or a geopolitical chill. The cost and size of these positions is unclear, but Ackman and Parrilla have said their bets are placed using options.
The Hong Kong Monetary Authority maintains the peg by moving interest rates in lockstep with the United States, and by currency intervention, which drains cash from the system and is designed to drive local rates up until inflows stabilise the currency. "As long as capital controls still remain in China...Hong Kong still provides a good window for the inflow and outflow of money," said Redmond Wong, Greater China strategist at Saxo Markets. "I don't see why there is any immediate trigger ... to change the status quo."Even wrong bets on the peg breaking can be profitable, and protected by the peg itself.
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