I should say... no real chance of the peg breaking unless our friends up north wanted it to. With the amount they are turning inward going on I'd only be a little bit surprised if an extended bank holiday was announced from 1 July and we re-denominated into RMB at the prevailing rate.
The Monetary Base is fully backed by US dollar assets, and all changes in the Monetary Base are fully matched by corresponding changes in US dollar assets held in the Exchange Fund at a fixed exchange rate.
Really though it only persists because oldies and poorer people keep their savings in HKD in a fairly illogical way. I'm always straight into USD for anything that isn't for spending here. Unless you believe in Beijing one day redenominating at HKD1 = RMB1 there's no real reason to hold HKD. HSI is a totally moribund and failed index... I really can't think of anything worth holding that's priced in local currency.
I guess in theory the peg could break. When the reserves are all gone, the idea is that a higher HIBOR than LIBOR would attract people back to HKD. But if the sentiment is crazy negative on HKD and HK, perhaps no matter how high HIBOR is, people would still just keep selling HKD. In such a scenario the peg would actually break. But then we are talking that 1 month HIBOR is 15% and nobody still wants to hold HKD even if you can enjoy that interest rate. Possible but much more unlikely than that Tether breaks with its unknown collateral pool.
There had been tries by the Soros of the world to try break this exchange peg, and they didn't succeed during the worst of times (98 Asian financial crisis). Will they succeed if they try this round ? Nobody has a clue. If its fully coordinated globally with everyone starting from Kyle Bass to Tim Cook and Elon Musk decides to join in the folly, maybe.. who knows. Counting on Bass then forget about it. But I think a successful attack will need to see guys like LKS and LSK joining the foray.. will that happen ?
Is HKD fully backed ? I think we have to then analyze the M1/M2/M3 numbers. Put it simply, those HKD that were 'created' when 'foreigners' decided to convert their foreign currencies into HKD, the assets are all saved up in fairly liquid (US Treasuries?) foreign currency assets under the exchange fund. So these HKD are fully backed. But the HKD that has grown over the years from GDP growth (e.g. economy, stocks, real estates) are kind of 'organic growth' and are not backed up by foreign assets.
If we look at currency attacks, they generally happen when the country in concern are in deep economic or balance sheet sh*t. See Thai Baht and Malaysian Ringgit during the 98 crisis. In contrast, SGD during that time withstood the attack easily and also HKD somewhat similarly. Arguably, HK is still on an extremely healthy balance sheet (relatively, one of the last few net undebt countries in the world) and balances the fiscal projection most years, despite the government really not doing much good job there.
Then what can be the risk ? I think immigration is one huge risk. Say if 10% or 20% of HKers decide to sell their apartment/assets and convert them all into foreign currencies, and if there isn't corresponding inflow of capital (foreigners deciding to pick up these assets), the stress of the USD-HKD peg can rise.
Then what ? Say if Soros/Bass decides to now go for the peg.. they can sell all the HKD that they currently own, which isn't likely to be alot. Then they would need to borrow truck loads of HKD notes (literally, from the sanction guys that are hoarding those notes now!?) to continue their attacks of the currency. Robroy quoted that 15% overnight rate we saw during the AFC... Can Soros/Bass sustain a prolonged 15/20% borrowing cost and continue to attack the peg, I really doubt so. Especially when there is a large backer with more than a trillion of USD (remember, in hk we talking about reserves in billions of HKD, but over there that chap has a trillion USD sitting idling) that will be happy to join in a war that can divert away the attention to their internal issues. Just can't see how Soros/Bass can fund a sustained attack with no chance of a quick end to the battle.
The HKD peg has been quite an interesting one. Today, with backyard being one of the largest economy in the world, to keep a peg of this admin zone to the currency of their adversary, is indeed puzzling. I think one issue is the current SAR government just do not have any idea how to depeg the currency, so pretending they don't see the need to. The current undertaking is around 1.3% spread between the 2 barriers. So if the interest rate spread is wider than 1.3% (need for full year as FX spread is absolute and not p.a.), players can indeed take a very low risk arbitrage (risking a depeg) to borrow HKD to buy USD, and place them in deposits. For this reason, 1y rates in HKD has grown quite high over the last few months, and short term interest rates are extremely steep with the overnight/1wk hibor floored at rock bottom due to the still high aggregate balance in the system. We saw something similar I think 3-4 years back at the start of the social unrest.. but for whatever reason (probably due to the huge chunk of IPOs that went thru during that few years) that stress then just flipped and HKD became much in demand.
Attacks on currency/financial systems must be coordinated. With liquid markets like the equity being used to support fire on the currency. But with HKEX stocks having corrected so much ahead of the US markets, selling/shorting HK equities at this valuation is honestly quite risky. So just outright attack from the currency angle really can't see much chance of a success. I think when Bass did that call options on USD-HKD, he should have bought some puts on the HSI instead. If HKD really depeg, HSI would have crashed thru and his puts would have made money.. even depeg didn't happen over the last 18 months his put would have made money as well. 8-) So he was just being egoistic and wanted to one-up the world, and picking an entirely wrong fight.
No I am not a FX trader. Just have to deal with issuing debts and borrowing money occasionally, but growing interested in how these things work. The recent attack on Luna is actually quite an interesting case study on how fiat markets can collapse. Everything happens so quickly compared to real collapse of, say, Turkey Lira, that takes several years to build up. Good case study to draw analogy to our world now if you can read some real description of the setup versus what the speculators feed thru (the buy/sell calls with the jargons).
Last edited by freeier; 14-05-2022 at 12:00 PM.
The lunatic has escaped asylum and is back shitposting boring insightless rubbish.