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Options traders line up bets that Hong Kong’s dollar peg will snap
[HONG KONG] 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 US 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.
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 per cent, compared with just 14 per cent at the end of July, according to calculations by Bloomberg using implied volatilities.
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.
"It's a low-cost way to get that exposure with a defined cost, and some people are prepared to take that," 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 7.8404 as of 8:30pm New York time on Thursday.
To be sure, the Hong Kong Monetary Authority holds more than twice the value of the city's monetary base in FX reserves and this year has repeatedly defended the currency board system that stabilizes its dollar.
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," Mr Chiu said.
That hasn't stopped closely watched 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," Mr Bennett said. "But in reality we believe it is a long, long way away - the currency board system, we expect, will prevail."