Bill Ackman, the billionaire hedge fund manager and founder of Pershing Square Capital Management, said he has taken a “large notional short position” against the Hong Kong dollar, arguing it is “only a matter of time” before the currency’s peg to the US dollar breaks.
In a Twitter post on Wednesday evening in the US, Ackman revealed that Pershing Square had a “large notional short position against the Hong Kong dollar through the ownership of put options”, which would pay off if the currency’s US dollar exchange rate crashes through the floor of its narrow trading band.
“The peg no longer makes sense for Hong Kong and it is only a matter of time before it breaks,” he added.
The high-profile bet against the Hong Kong dollar puts Ackman in the company of prominent western fund managers — including George Soros and Kyle Bass — who have challenged the peg, which has operated successfully without interruption since it was first introduced four decades ago.
Both Soros and Bass were ultimately forced to drop their short positions. While a break in the peg would be disruptive for global markets, analysts and investors said it was unlikely to happen given the ample reserves held by the Hong Kong Monetary Authority.
“I don’t see any signs of stress on the peg,” said Kelvin Lau, senior economist for greater China at Standard Chartered.
Lau said that while the currency’s exchange rate had repeatedly tested the weak end of its trading band this year and forced numerous interventions by the HKMA, “that’s part of the design of the peg, and it’s operating as it should”.
Ackman’s short position disclosure follows an extended stretch of softness for Hong Kong’s dollar, which for most of the past six months has held fast to the weak end of its US dollar trading band at HK$7.85.
Analysts said the outflows had largely been driven by an interest rate differential between Hong Kong and the US.
However, interest rates in Hong Kong recently rose above those in the US as liquidity in the city has tightened further, helping to boost the city’s currency. On Thursday in Asia, the Hong Kong dollar was trading at around HK$7.81 against the greenback.
“The HKMA has drained quite a lot of liquidity, and interest rates for the Hong Kong dollar have risen quite a lot,” said Ken Cheung, chief Asia foreign exchange strategist at Mizuho. “That’s why the currency has rebounded.”
Hong Kong’s currency board is run by the HKMA, which has a mandate to buy up Hong Kong dollars for US dollars when outflows push the exchange rate to the trading band’s weaker limit, leaving banks with fewer funds for short-term lending.
This eventually drives up interest rates and makes Hong Kong dollar assets more attractive than their US dollar counterparts, encouraging inflows that strengthen the exchange rate. The reverse is done when the currency becomes too strong.
Paul Chan, Hong Kong’s financial secretary, told attendees at a financial forum this month that “if you bet against the Hong Kong dollar, you are bound to lose”.
“You can verify my advice with certain hedge fund managers in the US who have been wrong about the Hong Kong dollar, time and again,” he added.