By Ambar Warrick
Investing.com-- Activist investor Bill Ackman said on Thursday that his hedge fund Pershing Square holds a large short position against the Hong Kong dollar, and that it was only a matter of time before the currency’s peg to the dollar breaks.
Ackman said that Pershing Square holds 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,” Ackman said in a tweet, commenting on a Bloomberg article discussing the increasing pressure on the Hong Kong currency’s peg against the greenback.
“In light of the US/China decoupling of recent years, we find it particularly surprising, almost embarrassing, for China to continue to peg the HK dollar to the U.S. dollar.”
The Pershing Square CEO also criticized the Chinese yuan’s peg against the dollar.
Both the Hong Kong dollar and the Chinese yuan are allowed to trade only within a tight range against the greenback, with Hong Kong and Chinese authorities intervening in foreign exchange markets if the two currencies move past the range. The People's Bank of China sets the yuan's range on a daily basis.
The Hong Kong dollar has been pegged to the greenback since 1983, and is allowed to trade within a narrow range of 7.75 to 7.85 against the dollar.
But maintaining the Hong Kong dollar’s peg has been a costly affair in recent years, with an increasing number of traders dumping the city's currency amid a growing interest rate gap with the rest of the world.
The Hong Kong Monetary Authority (HKMA) was forced to maintain accommodative monetary conditions earlier this year to help tide the city’s economy through its worst yet COVID-19 outbreak, which ground activity to a halt.
But the authority has still hiked interest rates in order to keep pace with the Federal Reserve in recent months.
The HKMA has reportedly spent over HK$238 billion ($1= HK$7.8164) this year to support the currency’s peg against carry trades - more than what it had spent during the Asian Financial Crisis in 1997.
This has caused a 15% drop in the monetary authority’s foreign exchange reserves, and has also invited an increasing number of calls that the peg will eventually break.
Strict anti-COVID measures over the past two years have also weighed heavily on the Hong Kong economy, which has become increasingly tied to mainland China in recent years.