Lazard and Pimco profit from shorting Hong Kong dollar

Repeat interventions from HKMA fail to revive a currency under pressure from rising US rates

Hong Kong dollar

The rapid rise in US interest rates has roiled investments from technology stocks to cryptocurrencies. But one trade is enjoying a renaissance: shorting the Hong Kong dollar.

Lazard Asset Management, Fiduciary Management and Pimco held net short positions of US$323 million, US$110 million and US$89 million in Hong Kong dollar FX forwards, according to data gathered from regulatory filings in the US (see figure 1). The investors placed their short bets at prices ranging from HK$7.7567 to HK$7.8239 per US dollar, well above the HK$7.8317 price at which many of the forwards expired on June 15.



Rising US rates have put pressure on many currencies, but they are especially problematic in Hong Kong, where the central bank has set a lower limit on the currency of HK$7.85 per US dollar. The Hong Kong Monetary Authority has intervened to shore up the local currency twice since the beginning of May, buying HK$13.6 billion (US$1.73 billion) on June 13 and 14 in addition to the HK$17.6 billion it bought a month earlier.

“As long as the Fed continues to hike, Hong Kong will continue to intervene,” says Stephen Chiu, chief Asia FX and rates strategist at Bloomberg Intelligence. “What happened before will happen over and over again.”

Despite total local currency purchases of nearly US$4 billion and a 0.75% interest rate increase from the HKMA on June 16, the Hong Kong dollar remained stuck at 7.85 to the US dollar – its lower limit – in spot markets on June 21.

Private equity giant Blackstone and hedge fund manager AQR held net long positions of US$554,297 and US$231,917 in Hong Kong dollar FX forwards that expired the same week. GuideStone Funds, a “faith-based” asset manager, had a net long position of US$14.6 million on the Hong Kong dollar and therefore the biggest potential loss when the contracts expired.

Lazard and Allianz-owned Pimco declined to comment, as did Blackstone and AQR. Fiduciary Management did not respond to requests for comment.

More than half of Hong Kong’s trade is with mainland China, but its tie to the US dollar compels it to react to monetary policy set in Washington, DC. The result is devalued Hong Kong real estate assets and stifled local investment, says Richard Cookson, a former fund manager at Rubicon Fund Management and the former chief investment officer at Citi Private Bank. “Why does this peg still exist?” he asks. “Its time has passed.”

Some asset managers have to trade the Hong Kong dollar, while others may be betting on its direction, according to James Binny, global head of currency at State Street Global Advisors. Sellers of FX options may have been hedging currency risk from other investments. “Firms that were long may have been taking a view on the peg itself,” he says. “Through the years, many have speculated in both directions.”

Why does this peg still exist? Its time has passed
Richard Cookson, former fund manager

Hedge fund managers have bet against the peg and lost. Odey Asset Management’s founder, Crispin Odey, declines to say how much the firm lost in 2015 and 2016 because he tries to forget the trades that fail. He does recall it being a massive waste of time to gather enough information to form strong views on what China would do. He later realised those views were misguided.

Odey won’t trade the Hong Kong dollar again, he says. “I’ve had a wonderful time since inflation returned. I can play much closer to home.”

As for the peg, it may not be tradeable, but it is interesting. “You’ve got to think about how expensive it is for China,” he says. “As interest rates fall in China, the Hong Kong dollar peg remains cheap. It will survive as long as it serves China.”

The HKMA has amassed US$38 billion to defend the peg, says Bloomberg Intelligence’s Chiu. He says the central bank will spend anywhere from US$16 billion to US$36 billion this year to defend the currency’s trading limits. At its latest meeting, the Federal Open Market Committee’s members increased their forecast for interest rates. The dot plot of members’ interest-rate projections now suggests that rates will reach 3.4% by the end of this year.

Hong Kong will need to find a way to peg its currency to the yuan in the long term, says Chiu. “It wouldn’t yet benefit either Hong Kong or China to peg this currency to renminbi, given the market volatility and dollar strength,” he says. “It would just make matters worse.”

SSGA’s Binny doubts that China will peg the Hong Kong dollar to the yuan. “The reason the peg is successful is because it’s successful,” he says. “People have taken it on in the past and failed. This time, I think, they’re going to have more fun elsewhere.”

Editing by Will Hadfield

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