Options Traders Line Up Bets That Hong Kong’s Dollar Peg Will Snap

(Bloomberg) -- Options traders are ramping up bets against the Hong Kong dollar as the city’s political unrest grows more violent and a slide in the Chinese yuan shifts attention to one of the world’s longest-standing dollar pegs.

The ultra-stable currency so far isn’t budging. It has held the peg versus the greenback since 1983, and since 2005 has moved in the tight HK$7.75-to-HK$7.85 per U.S. dollar range. That hasn’t stopped speculators from loading up on options that would pay off if the city’s dollar weakens beyond that range.

They are betting on the unthinkable: that they’ll breach a $448.5 billion wall that’s repelled attacks by some of the world’s most well-known activist investors, including George Soros.

The value of put options that pay off if the currency weakens to HK$7.90 has been surging versus bets against that scenario. The market-implied probability this happens within the next six months has crept above 50 percent, compared with just 14% at the end of July, according to calculations by Bloomberg using implied volatilities.

Options Traders Line Up Bets That Hong Kong’s Dollar Peg Will Snap

The change in bets demonstrates how market players are positioning. It’s also being reflected in the pair’s risk reversals, which contrast prices of downside and upside bets on benchmark options. They indicate traders are paying the most since 2016 for wagers that the currency will fall.

Even so, analysts are somewhat skeptical of the strategy.

Some Hong Kong dollar options strategies can be used as a “low-cost” wager that the peg breaks, said Patrick Bennett, head of macro strategy for Asia at Canadian Imperial Bank of Commerce in Hong Kong. “I view it as a raffle ticket rather than something which is likely to happen.”

The currency was little changed at 7.8420 as of 1:15 p.m. Hong Kong time on Friday.

The Hong Kong Monetary Authority is able to maintain its peg to the greenback if it holds at least enough dollars to cover the total amount of money in circulation plus deposits held by commercial banks, in aggregate known as the monetary base. At present, its $448.5 billion hoard gives the city’s de facto central bank enough funding to cover its needs more than twice over.

This year, it has repeatedly said the currency board system that stabilizes its dollar was working well, while deploying its foreign exchange reserves to crush increasingly frequent attacks by speculators on the peg.

That stance is unlikely to change when Eddie Yue, the incoming chief executive of the HKMA, takes over from incumbent Norman Chan on Oct. 1, said Stephen Chiu, FX and rates strategist at Bloomberg Intelligence.

The HKMA has “sufficient bullets” to defend the peg and Yue “surely wants to keep things stable under his watch,” Chiu said.

That hasn’t stopped some big-name investors from questioning the peg over recent months.

Outspoken investor Kyle Bass, founder of Dallas-based Hayman Capital Management LP, has been vocal about the risks to currency stability, saying in a report in April that “Hong Kong currently sits atop one of the largest financial time bombs in history.”

William Ackman, the famous activist investor and founder of hedge fund Pershing Square Capital Management LP, had a position in 2011 looking for the Hong Kong dollar to appreciate using call options, which proved fruitless. George Soros’s Quantum Fund tried to break the peg during the Asian financial crisis but was rebuffed by the HKMA.

“The currency is trading near 7.85, and 7.90 isn’t that far away,” Bennett said. “But in reality we believe it is a long, long way away -- the currency board system, we expect, will prevail.”

©2019 Bloomberg L.P.

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