Can Hong Kong Retain Its USD Peg?

May 06, 2019 5:28 AM ETHSBC, SCBFF, EWH, FHK, FLHK4 Comments
Ariel Santos-Alborna profile picture
Ariel Santos-Alborna


  • The HKD/USD peg is under pressure from mounting economic inefficiencies and a HIBOR/LIBOR spread of 80 bps.
  • The Hong Kong Monetary Authority has already spent 80% of its reserves defending the peg.
  • Speculating on the peg break risks 1% to gain 50%.

The precarious situation of the Hong Kong/U.S. dollar peg has come to light after Kyle Bass, managing partner at Hayman Capital Management, went public with what he believes to be an asymmetric trade based on the high likelihood that the HKD breaks its peg with the USD. This article examines the facts presented by Bass, counterpoints to his thesis, and how to trade around the idea.

I do not hold Bass’ conviction that the peg is destined to break as the United States’ exported tightening credit on over-leveraged Hong Kong markets, a theme that will be explained later, has paused. However, a HIBOR (Hong Kong Interbank Offered Rate) and LIBOR (London Interbank Offered Rate) spread of 80 bps has led to massive conversions from the lower yielding HKD to the higher yielding USD. In light of this, the Hong Kong Monetary Authority (HKMA) is running out of reserves to defend the peg, increasing the likelihood of a break. With a massive risk-reward ratio, I believe that this trade is worth putting on.

The Second Order Effects of the HKD-USD Peg

In order to sustain its peg, Hong Kong must keep the same monetary policy as its anchor. If interest rates meaningfully diverge between the two countries, investors will convert to the currency with the higher yield. If investors all convert from HKD to USD (as many are doing now), the HKMA will have to sell its dollar reserves and purchase more of its own currency in order to sustain its peg of 7.75-7.85:1 (HKD:USD).

Importing nearly a decade of near-zero interest rates have stabilized the peg, but led to massive inefficiencies in the Hong Kong economy. For one, it has the most expensive real estate in the world. Benefiting from ultra-low rates and rapid Chinese credit growth, wealthy Chinese have pushed real estate costs to

This article was written by

Ariel Santos-Alborna profile picture
Ariel is author of the book, "Understanding Cryptocurrencies: Bitcoin, Ethereum, and Altcoins as an Asset Class," available on Amazon, Barnes and Noble, or the Business Expert Press website. He has been featured in Forbes and Ariel specializes in macro, Bitcoin, and early stage Web3. In addition to writing investment content, Ariel worked as a product manager and advisor to Web3 startups and investment funds. He is currently an MBA Candidate at Harvard Business School.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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