Tuesday, October 23, 2012

Bernanke – I Want to Bust the HKMA



The Hong Kong Monitory Authority (HKMA) was forced to intervene in the currency market again last night. This is the second time in a week that the upper end of the USDHKD peg has been tested by speculators.




There are two aspects to the attack on the HK$ that are worth noting:


1)   This is a “celebrity trade”.


2)   Ben Bernanke is responsible for the run on the currency.



Bill Ackman has made a very well publicized bet on the HK$. I find this  interesting as it reminds me of George Soros, in 1992, when he took on the Bank of England and forced a devaluation of Sterling Vs. the Dollar.


Bernanke has his hands all over the run on the HKD.  On October 14, he flew halfway around the world to deliver the message that specs should take on the HKMA.



I was surprised at how strong Bernanke’s words were at the IMF confab in Japan. At the time, I thought that he was guilty of economic saber rattling (Link). It was clear that Ben was addressing his strong language at Mainland China and its currency, the CNY. It appears that the FX markets have listened to Bernanke, and are now taking a run at China’s other currency, the HK$.


The HKMA has not been forced to intervene in support of the peg for more than three years. Five days after Bernanke spoke, it is forced to enter the currency market on a near daily basis. If you believe this timing is just a coincidence, think again. Everything in FX is connected.


I’m not smart enough to know if the following chart is going to be broken anytime soon. But the pot is boiling at the moment; big bets are being made. I believe that the HK$ story will be in the press a fair bit in the coming days. Who knows, maybe this time the specs will topple the HKMA.




Consider the implications of this:


- The head of the Fed has launched an economic attack against a sovereign state. If Ben is successful in toppling the peg, there will be many angry folks at the HKMA. If the HK$ ends up getting revalued, the HKMA will lose billions on its reserve holdings.


- It’s impossible for other CBs not to take notice of what has happened. Is Brazil the next country to get strong-armed by the Fed?


- If the HK$ goes, Ackman will get his pic on all the front pages. He will be touted as the next Soros. The guy who “toppled” a central bank. That “rep” may be deserved, but the fact is that Bernanke is the guy who will make it happen. That is just too much theater for me. Bernanke is pursing policies that make hedge funds rich, but this is over the top.



- If Ackman has a big win, there has to be consequences. Other central banks will speak up. After all, Bernanke has triggered a run on a major currency. That’s a very big deal.


- If the HKMA is forced to revalue its currency, then other peg currencies are going to come into speculator’s cross hairs. The Korean Won and Swiss Franc come to mind. The HK$ outcome is not the only factor that will decide the fate of other pegged currencies, but once money starts moving, it is very hard to stop. What is happening today in Hong Kong, could easily result in global capital market disruptions.



Just a point here. Toppling central banks is a messy business. This will be a “reval” versus a “deval” so it is different than what Soros did to the BOE, but messy and unforgettable none the less.


Watch out for the HK$ over the next few weeks. If it goes, it will not be a “risk-on event”, and Bernanke will get egg on his face for having started it.



  1. I don’t trade currency mkts, but do they call it a ‘run’ in the currency mkts when it is being bought up?

    To all us folks out here that don’t normally trade currencies, this terminology can get confusing. We normally think of a run as something going down.

    • What i meant was a ‘run on the bank’ as being something that is crashing. oh well

    • Conscience of a Conservative says:

      I agree, the term run has traditionally meant getting out of something. Here the term “run” is being used as a run into the currency.

      So Big Ben wants to devalue the dollar, the assumption being it will create jobs, but this clearly means he intends to reduce our purchasing power, create yet more inflation and reduce our standard of living. And types of products that benefit most from a depreciating currency are commodity items and not value added specialty items that are less price sensitive. Seems Ben is taking us down the economic ladder and not up the ladder preferring to have us compete with China and Brazil instead of say a Germany.

  2. Jim,MtnViewCA,USA says:

    “I was surprised at how strong Bernanke’s words were at the IMF confab in Japan.”
    Does this fit in with the Romney’s surge and his charge that China is a currency manipulator? Is Ben proactively appeasing a potential boss?

  3. I am from the area and had wittness all the ups and downs of the history and eposides if the HKD USD peg. The current run is a strengthen ing of the HKD. so the Hong Kong’s Monetary Authority is actually SELLING HKD to pick up USD. Just like the Swiss Central Bank and PBOC. So there is fat chance that speculators could dethrone the peg..

    In any case, the current demand for HKD is driven by foreign hot money flowing into the local stock market (for much of October) – note the outerformance of the Hang Seng Index vs the S&P. On top of that, HIBOR has dropped quite a bit too (HKMA is flooding the money markets with plenty of HKD liquidity)

    Looking at the politics side too, no hell in chance that Beijing would sit back and sanction any Turbulance..

  4. HKMA had sold HKD again today, it seems to be forced to do this endlessly. Someone on the FX market seems making a big bet!

  5. Bruce

    Is this not a fairly limited downside trade if you own USD currently? Switch to the HKD and if the peg remains, you loose max 40bps (to upper band of 7.78) and if it does break, then you stand to make 20% assuming a repeg to CNY. If you have USD cash why not hold HKD cash instead?

  6. Dave from California says:

    Other than sounding scary, what’s the downside of a HKD reval? Govts are always mad when their plans go bad, but what does it really cost the HKMA to defend? It seems to be not like a deval at all.

  7. President Obama Wants To Remove The One Man Who’s Holding Back The US Economy

    Bruce: you were quoted as supportive of this Obama intent.

  8. Aint gonna happen

    We have seen inflation of 10%+ for consecutive years in Hong Kong due to our peg. And also subsequent outright deflation after a debt and property bubble in the late 90s.

    We did what the Germans call “internal adjustments” many times.

    This time won’t be different.

  9. Bruce,

    Think you missed a key point.

    The HKMA had defended the peg once in the late 1990s amid the Russian and Asian financial crisis. At the time it was under tremendous pressure and many thought it would lose big.

    But it hang on and beat back the speculators. I thought it was rumored that Soros was there too; but can’t be for sure. At the end, the losers blamed “government intervention” when they knew full well before they jumped in that was the game.

    PBoC will support (at least morally, thus relieve it the responsibility in case it ends badly) HKMA when needed.

  10. I don’t think it will happen until China has acquired substantial amount of gold, I think Ackman with Bernanke’s help is only testing the water.

  11. Surely when Soros busted the bank of england, he was selling pounds while the BoE were using a limited supply of FX to buy up pounds. Therefore, there was a limit in their resolve and as long as the size of sellers exceeded the UK’s FX holding the peg was to be broken.

    In this case, the HKCB are selling unlimited amounts of HKDs to keep the currency undervalued! Therefore spectators can buy up as much HKD as they want, they can buy it direct from the CB if they like considering the CB are the guys who print it!

    Surely this is a policy bet, do the HKCB feel a depressed currency is worth an unlimited supply of dollars and above average inflation?


  12. therooster of Christ says:

    Was the dollar truly developed to be a currency or is its currency role a stop-gap measure on route to market consciousness that its greater role is as a real-time measure for real-time gold-as-money ?? Real-time (floating) bullion based payment systems already exist as private and competitive payment processors that send your fully backed digital title (the currency backed by weight) from A to B as simply and as easily as PayPal send dollars from A to B. We already have a grass roots and decentralized market solution to debt currency. What we don’t have is an abundance of marketing and we cannot rely on the financial apex of power to endorse that particular cause. The support for bullion based payment system must be grass roots and bottom-up. We must be as wise as serpents.

  13. The fun here has JUST begun; watch for the Main Event when China starts a little “currency laboratory experiment” by pegging the $HKD to GOLD, now that they’ve built that shiny new state-of-the-art Vault there close to the HK Airport. And asked for their gold back to put INTO it. Don’t ever forget these two facts :
    1. China is the ONLY country in the world with not one, but two, currencies under its purview; and
    2. The Economic Day that follows the Sidereal Day from East to West is moving squarely onto China, and will be there for the rest of the 21st Century, just as the 20th Century belonged to the U.S.

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