Last month I published an article ( that mentioned renowned Pershing Square hedge fund manager Bill Ackman’s FX strategy for a HKD trade.

His strategy revolves around the Hong Kong economy being under substantial inflationary pressure and also contending with a housing bubble. Currently the HKD is pegged to the USD and Ackman argues that the only way for HK to effectively deal with the mounting issues of inflation and a housing bubble is to allow the HKD to appreciate.

By fixing the HKD to the USD, Hong Kong is forced to import the USA’s monetary policy. This includes the USA’s record low interest rates. So an important policy tool for dealing with rising inflation and overheating housing markets; namely interest rate policy, becomes basically unusable. This is one example of why the current peg is constraining Hong Kong.

It’s a bit of a vicious circle as to keep the HKD pegged, at times requires large amounts of HKD money printing which over the last few years has led to a massive increase in the Money Supply.

And it is for this reason and others that Ackman believes there is no choice for HK officials than to act in some way to appreciate its currency. In his presentation, Ackman outlines four possible ways in which the HK Government may act.

1. Allow the HKD to float
2. Repeg the HKD to a trade-weighted basket
3. Repeg the HKD to the RMB
4. Keep the USD peg, but revalue to an appropriate exchange rate

Ackman’s money is on option 4 occurring, however he believes the medium term result will be a direct link with the RMB.

Ackman then goes on to express the 3 ways to make money from a correct call.

1. Buy HKD outright

2. Buy HKD with USD leverage

3. Buy HKD call options.

Ackman sums it up nicely: a highly undervalued currency plus a highly undervalued option equals an extraordinary investment opportunity.

Because we love our readers here at FX Strategy so much, we provide below the link to the 151 page presentation Ackman recently gave spelling out his HKD FX Strategy.


By Friday Fundamentalist, Published on 8th of October 2011
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