WEBVTT - Hong Kong Dollar and Why Hedge Funds Target It 0:00:01.400 --> 0:00:05.240 Hong Kong officials have intervened to support the currency five 0:00:05.440 --> 0:00:08.119 times in about three weeks to prevent the Hong Kong 0:00:08.160 --> 0:00:11.879 dollar from weakening too much. So far, it cost nearly 0:00:12.080 --> 0:00:15.440 ninety billion Hong Kong dollars. That's the equivalent of about 0:00:15.560 --> 0:00:17.200 eleven billion US. 0:00:17.800 --> 0:00:20.599 Just two months ago. The opposite was true, with the 0:00:20.600 --> 0:00:24.440 Hong Kong Monetary Authority or HKMA having to pump money 0:00:24.440 --> 0:00:27.360 into the system to keep it from strengthening too much. 0:00:28.000 --> 0:00:30.680 Never before has the Hong Kong dollar been so volatile, 0:00:31.040 --> 0:00:33.600 and it's a tough balance for officials who need to 0:00:33.720 --> 0:00:36.960 drain enough cash from banks to defend the currency, but 0:00:37.040 --> 0:00:39.240 not so much that the economy or markets get hit. 0:00:41.880 --> 0:00:44.879 You were listening to Asia Centric from Bloomberg Intelligence. I'm 0:00:44.920 --> 0:00:46.320 Krtydmitriva in Hong Kong. 0:00:46.520 --> 0:00:49.479 I'm John League, also in Hong Kong, and today. 0:00:49.240 --> 0:00:52.720 We're diving into all things Hong Kong currency, why the 0:00:52.760 --> 0:00:56.480 government is intervening, how we got here, and maybe even 0:00:56.480 --> 0:00:59.400 some more existential questions of why we even have a 0:00:59.520 --> 0:01:01.920 US PEG. And to walk us through all of this 0:01:02.040 --> 0:01:06.560 is Carlos Casanova, Senior Economists for Asia at Union Bonker 0:01:06.640 --> 0:01:08.760 preve Welcome to the show, Carlos. 0:01:08.880 --> 0:01:10.760 Thanks for having me and I'm really glad to join 0:01:10.800 --> 0:01:11.240 you today. 0:01:11.560 --> 0:01:14.320 Yeah, and it's a really interesting topic. It is suddenly 0:01:14.480 --> 0:01:17.800 Hong Kong dollar is hot again. I guess maybe just 0:01:17.800 --> 0:01:21.600 starting from the beginning, can you break down why the 0:01:21.640 --> 0:01:24.280 government had to step in, Like, how did we get here? 0:01:24.840 --> 0:01:26.959 Well, it has been a roller coaster of three to 0:01:27.040 --> 0:01:30.480 five weeks. We've not seen this level of volatility, I 0:01:30.480 --> 0:01:32.320 think in a long time, or if at all, since 0:01:32.319 --> 0:01:36.280 the establishment of the PEG. Obviously, following the announcement on 0:01:36.720 --> 0:01:39.679 reciprocal tariffs by Trump in April, the region as a 0:01:39.680 --> 0:01:42.560 whole experienced a lot of EFCS volatility and we saw 0:01:42.640 --> 0:01:46.400 broad ust dollar weakening. Hong Kong was not alone. We 0:01:46.440 --> 0:01:49.960 saw a lot of speculation around Taiwan, Korea and other 0:01:50.240 --> 0:01:55.360 carrier currencies, but Hong Kong experienced very aggressive volatility as 0:01:55.400 --> 0:01:57.720 a result, so it touched briefly the strong end of 0:01:57.720 --> 0:02:00.560 the band at seven point seventy five, prompted the Hong 0:02:00.640 --> 0:02:04.920 Kong Monetary Authority the HKMA, to intervene by buying seventeen 0:02:05.000 --> 0:02:07.920 billion US dollars and selling one hundred and twenty nine 0:02:07.920 --> 0:02:10.360 point four billion Hong Kong dollars. So the result of 0:02:10.360 --> 0:02:13.560 that operation is a massive search in the aggregate balance, 0:02:13.639 --> 0:02:17.400 which is an indicator of interbank liquidity, that surged to 0:02:17.639 --> 0:02:20.959 around one hundred and seventy four billion Hong Kong dollars 0:02:21.280 --> 0:02:23.840 on May sixth, and that's up from just forty four billion, 0:02:23.880 --> 0:02:26.000 which had been the norm for quite a few years 0:02:26.000 --> 0:02:31.000 prior to this big intervention. Now, that large spike in 0:02:31.000 --> 0:02:34.680 interbank liquidity fueled the widening of the three month high 0:02:34.680 --> 0:02:37.480 bore software spread, meaning the interest rates spread between Hong 0:02:37.560 --> 0:02:39.520 Kong and the rest of the world widened to and 0:02:39.600 --> 0:02:42.720 unprecedented two hundred and sixty basis points. And of course, 0:02:42.760 --> 0:02:44.919 whenever that happens, you see a lot of carry trade 0:02:44.960 --> 0:02:46.760 and demand for honkon dolla, and a lot of speculation 0:02:46.840 --> 0:02:50.200 around what that's going to happen. Following that decline in 0:02:50.200 --> 0:02:53.440 interbank rates, the spot currency moved so within the span 0:02:53.520 --> 0:02:55.440 of a few days it went from the strong end 0:02:55.440 --> 0:02:58.040 of the band all the way towards seven point eight three, 0:02:58.080 --> 0:03:00.840 which is towards the weekend of the band, and the 0:03:01.040 --> 0:03:04.240 twelve month forward outright also rebounded from seven point sixty 0:03:04.280 --> 0:03:07.400 eight to seven point a five essentially meaning that the 0:03:07.440 --> 0:03:09.640 market was expecting that the Hong Kong dollar, which remained 0:03:09.639 --> 0:03:12.519 on the weaker end of the band, for the foreseeable future, 0:03:12.560 --> 0:03:16.280 at least the whole year. So what happens when we 0:03:16.680 --> 0:03:20.280 hit the seven point eighty five, which we have five 0:03:20.360 --> 0:03:22.400 times over the past three weeks, is that the Hong 0:03:22.480 --> 0:03:25.600 Kong Monitory Authority to intervene to defend the currency. So 0:03:25.600 --> 0:03:28.160 it's bought a total of seventy two billion Hong Kong dollars, 0:03:28.240 --> 0:03:31.200 sold a total of nine point two billion US dollars 0:03:31.200 --> 0:03:33.959 since June twenty six, and as a result, we've seen 0:03:33.960 --> 0:03:36.440 a declining in the aggregate balance to eighty six billion, 0:03:36.520 --> 0:03:39.120 which is still double the amount of the forty four 0:03:39.120 --> 0:03:40.960 billion prior to Liberation Day. So we are still in 0:03:41.000 --> 0:03:42.880 a very liquid situation, but we've seen a lot of 0:03:42.960 --> 0:03:45.040 action by the Hong Kong may So if I could. 0:03:44.840 --> 0:03:48.280 Put that in layman's terms, in April, you're saying that 0:03:48.320 --> 0:03:51.680 the Hong Kong dollar was too strong versus the US dollar, 0:03:52.160 --> 0:03:55.360 and then recently it was two week so the HKMA 0:03:55.400 --> 0:03:56.840 had to intervene correct. 0:03:56.840 --> 0:04:00.400 So we saw huge US dollar weekending in April, causing 0:04:00.480 --> 0:04:03.080 a lot of strengthening in Asian currencies, Hong Kong Doola 0:04:03.160 --> 0:04:06.560 touched the strong end of the band, prompting a massive intervention, 0:04:07.000 --> 0:04:10.120 and that caused a huge search in the spread. Of course, 0:04:10.120 --> 0:04:13.440 fundamentals typically moved currencies. So because of the very specific 0:04:13.600 --> 0:04:15.920 EFS regime that we have in Hong Kong, the Hong 0:04:15.960 --> 0:04:18.400 Kong Dola weekend all the way to the weekend of 0:04:18.440 --> 0:04:20.280 the band within the span of a few days. 0:04:20.520 --> 0:04:22.040 Now, I know we had asked you to take a 0:04:22.080 --> 0:04:24.800 step back and explain all this, which is great. If 0:04:24.800 --> 0:04:27.160 we could take another big step back and just talk 0:04:27.200 --> 0:04:30.000 about why we have this peg to begin with, Why 0:04:30.160 --> 0:04:33.240 is Hong Kong's currency so unique in the region. Why 0:04:33.240 --> 0:04:35.000 do we have the peg which kind of leads us 0:04:35.040 --> 0:04:36.719 into these tricky situations. 0:04:37.040 --> 0:04:39.599 Yes, so to cover this question, I have to be 0:04:39.800 --> 0:04:41.920 the economist in the room, and I have to refer 0:04:42.760 --> 0:04:46.400 refer back to an economic axiom called the impossible trinity. 0:04:47.000 --> 0:04:50.039 So in Hong Kong we have a fixed exchange rate 0:04:50.640 --> 0:04:54.000 and we have free capital flows of course no capital controls. 0:04:54.240 --> 0:04:57.520 As a result, we do not have any independent monetary policy. Instead, 0:04:57.600 --> 0:04:59.960 the Hong Kong may relies on the interest rates to 0:05:00.279 --> 0:05:02.880 by the Fed, So when the Fed hikes interest rates, 0:05:02.880 --> 0:05:04.560 the Hong Kong May has to do the same. When 0:05:04.600 --> 0:05:06.240 they cut interest rates, the Hong Kong May has to 0:05:06.279 --> 0:05:10.080 do the same. This is also called linked exchange rate 0:05:10.240 --> 0:05:14.520 system LRS LARS, and it was previously I think that's 0:05:14.520 --> 0:05:17.000 a very sort of technical term. It was previously known 0:05:17.240 --> 0:05:19.720 currency board. So we've seen examples of currency boards in 0:05:19.760 --> 0:05:22.120 Latin America. They were not very orthodox, very strict, so 0:05:22.160 --> 0:05:24.920 they didn't succeed. Hong Kong is usually the post a 0:05:25.040 --> 0:05:27.640 child for what a currency board should be, and it 0:05:27.720 --> 0:05:30.080 was introduced in the eighties to try to address some 0:05:30.120 --> 0:05:32.760 of the issues around hot money flows. It was very 0:05:32.839 --> 0:05:35.920 volatile prior to that. We are a small export oriented 0:05:36.000 --> 0:05:39.000 or externally oriented economy. So of course the currency board 0:05:39.000 --> 0:05:43.039 does provide stability, but it comes with its costs. And 0:05:43.080 --> 0:05:45.920 there are three principles that are enshrined in the Hong 0:05:46.000 --> 0:05:49.200 Kong Constitution, the Basic Law and that are unmovable. So 0:05:49.240 --> 0:05:52.240 this is something that oftentimes when we talk with international 0:05:52.240 --> 0:05:55.240 investors they don't understand to what extent this is part 0:05:55.240 --> 0:05:57.200 of the law of the region. And these are that 0:05:57.800 --> 0:06:00.000 any change in the monetary base must be matched by 0:05:59.839 --> 0:06:03.119 an equivalent change in foreign exchange reserves, ensuring that FX 0:06:03.120 --> 0:06:06.040 reserves cover at least one hundred percent of the monetary base, 0:06:06.080 --> 0:06:08.000 and Hong Kong is very good, so we have one 0:06:08.080 --> 0:06:11.720 hundred and fifty percent plus FX reserves, so very very 0:06:11.800 --> 0:06:14.839 orthodox in that front. The currency must be fully convertible 0:06:14.880 --> 0:06:17.360 on demand into a foreign anchor currency in this case 0:06:17.360 --> 0:06:19.880 the US dollar, and at a fixed rate, so we 0:06:19.920 --> 0:06:24.120 have seven eighty with the MA allowing some volatility around 0:06:24.120 --> 0:06:26.479 this band of seven eight five to seven seveny five. 0:06:26.880 --> 0:06:30.280 And lastly, monetary policy should be rule bound and automatic, 0:06:30.440 --> 0:06:34.040 so the HKMA has no discretionary monetary power to engage 0:06:34.080 --> 0:06:37.080 in fiduciary issuing of money, so they have no say over, 0:06:37.240 --> 0:06:39.080 you know, whether they want to stimulate the economy with 0:06:39.120 --> 0:06:42.320 monetary policy, if interbank raade should be high or low, 0:06:42.400 --> 0:06:44.719 they have no say over that. And there are ways 0:06:44.720 --> 0:06:48.200 to test the orthodoxy of a currency board through the 0:06:48.880 --> 0:06:52.680 reserve exchange pass through and we've done some research recently 0:06:52.800 --> 0:06:55.480 that proves that this pass through rate remains within zero 0:06:55.520 --> 0:06:57.840 two one hundred percent, so meeting the criteria of an 0:06:57.920 --> 0:07:01.080 orthodox currency board. So the aim of the currency board 0:07:01.200 --> 0:07:05.800 is to reduce exposure to effects, volatility provides stability to 0:07:05.920 --> 0:07:08.960 the region, and in exchange, you have no monetary policy 0:07:09.000 --> 0:07:11.360 and you have to adhere to these very strict principles, 0:07:11.400 --> 0:07:13.640 which Hong Kong does, and there are some costs that 0:07:13.680 --> 0:07:14.120 of course. 0:07:14.720 --> 0:07:17.640 Yeah, and I wonder one of the things, you know, 0:07:18.160 --> 0:07:20.320 because you've lived here for about twelve years, right, so 0:07:20.960 --> 0:07:22.800 over that period of time, how many times do you 0:07:22.880 --> 0:07:25.480 think you've heard this idea that we should unpeg or 0:07:25.520 --> 0:07:27.520 Hong Kong should unpeg from the US dollar. 0:07:28.280 --> 0:07:31.080 I have written about this many times over the past 0:07:31.160 --> 0:07:33.440 few years. The last time I did a big write 0:07:33.480 --> 0:07:35.679 up on the Hong Kong DOLLA was in twenty sixteen, 0:07:35.720 --> 0:07:38.040 and at the time I was fortunate enough to reach 0:07:38.080 --> 0:07:42.320 out to some of the top academic experts on currency boards, 0:07:42.400 --> 0:07:46.640 so Steve Hanke, Johns Hopkins, for example, comes up. And 0:07:46.680 --> 0:07:49.160 I was also able to reach out to some of 0:07:49.200 --> 0:07:52.600 the Hong Kong Monetary authority officials as part of that research, 0:07:53.360 --> 0:07:55.280 just to kind of get a sense of how strong 0:07:55.320 --> 0:07:58.240 the political will to support the currency was. So it's 0:07:58.240 --> 0:08:00.920 a topic that does come up on occasion, and I 0:08:00.920 --> 0:08:03.200 think the reason why it comes up on occasion is 0:08:03.200 --> 0:08:07.680 because there's a lot of interest from particularly hedge fund managers, 0:08:07.880 --> 0:08:11.040 especially in the US. The reason for this is that 0:08:11.080 --> 0:08:13.080 the basic law does not dictate that the Hong Kong 0:08:13.120 --> 0:08:16.160 dollars de facto anchor currency is a US dollar, and 0:08:16.200 --> 0:08:18.000 neither does it specify a level at which the Hong 0:08:18.040 --> 0:08:20.520 Kong dollars should be pegged against the foreign anchor currency, 0:08:20.880 --> 0:08:24.160 So that loophole quote unquote continues to serve as the 0:08:24.200 --> 0:08:26.760 basis for speculation that breakage could occur. And of course 0:08:26.800 --> 0:08:28.720 it's a tail risk. It's a fringe risk, but if 0:08:28.720 --> 0:08:30.680 you're a hedge fund manager, you can afford the losses 0:08:31.000 --> 0:08:32.360 and if you get it right, you make a lot 0:08:32.360 --> 0:08:34.880 of money. So every sort of five to ten years 0:08:34.920 --> 0:08:38.000 you get a fresh bout of someone putting, you know, 0:08:38.280 --> 0:08:40.839 options and trying to make money out of this possibility. 0:08:41.040 --> 0:08:43.880 But we think it's rather unlikely to be frank, So 0:08:44.080 --> 0:08:44.480 this is. 0:08:44.559 --> 0:08:47.000 Not a visual podcast. But as soon as you said 0:08:47.040 --> 0:08:49.480 hedge funds, John and I looked at each other and 0:08:49.520 --> 0:08:52.160 started nodding, made eye contact, started nodding at each other 0:08:52.160 --> 0:08:54.559 because we were just talking about this before the show. 0:08:54.920 --> 0:08:57.360 Yeah, like, I think it's it's in hedge fund law. 0:08:57.360 --> 0:09:00.320 But you know, George Soros famously broke the Bank of 0:09:00.360 --> 0:09:03.199 England I think in nineteen ninety two by forcing the 0:09:03.320 --> 0:09:08.720 UK government to withdraw from the European exchange rate mechanism. Interestingly, 0:09:08.840 --> 0:09:12.720 Scott Bessont was working for George Soros at that time. 0:09:13.160 --> 0:09:15.800 George Soros also tried to break a Hong Kong dollar 0:09:15.840 --> 0:09:18.560 peg I think during the Asian financial crisis in nineteen 0:09:18.640 --> 0:09:21.320 ninety eight. Do you think this could happen again? 0:09:21.880 --> 0:09:24.840 So we have George Soros, we have Bill Ackman. So 0:09:24.880 --> 0:09:28.920 there's a series of very big hedge fund guys who 0:09:29.000 --> 0:09:33.120 are also advisors to the Trump administration that have in 0:09:33.160 --> 0:09:36.040 the past at least put bets that the Hong Kong 0:09:36.080 --> 0:09:41.080 dollar peg would break. I think it reflects their inability 0:09:41.120 --> 0:09:44.360 to fully grasp the academic nature of what a currency 0:09:44.360 --> 0:09:46.880 board is and what it does. So it's very easy 0:09:46.920 --> 0:09:49.480 to look back at historical examples in Latin America and 0:09:49.480 --> 0:09:51.959 why that didn't work, or refer back to George Soros 0:09:52.000 --> 0:09:54.440 in the eighties speculating against the Bank of England or 0:09:54.480 --> 0:09:57.880 even Thailand with the Asian financial crisis. Of course, he 0:09:57.960 --> 0:10:00.440 made vast amounts of money with those bets, and to 0:10:00.480 --> 0:10:02.680 try to extrapolate the situation on Hong Kong. But the 0:10:02.720 --> 0:10:05.800 truth is, Hong Kong has to peg to a currency 0:10:05.800 --> 0:10:08.480 that is fully convertible according to the Basic law, and 0:10:08.520 --> 0:10:11.040 it has been adhering strictly to the rules that are 0:10:11.160 --> 0:10:14.559 enshrined in its Basic law in terms of maintaining currency 0:10:14.600 --> 0:10:18.640 board orthodoxy. The Remenbe is not a good candidate for 0:10:18.679 --> 0:10:21.360 the Hong Kong DOLLA to repeg against because the Remenbe 0:10:21.720 --> 0:10:25.080 is not fully convertible. So what these hedge for managers 0:10:25.120 --> 0:10:27.360 have been betting on is that the Hong Kong government, 0:10:27.400 --> 0:10:30.560 for political reasons or what have you, will repeg away 0:10:30.559 --> 0:10:33.480 from US dollar and towards the Remenbe, and that is 0:10:33.559 --> 0:10:37.120 simply not possible under the current legal framework in Hong Kong. 0:10:37.720 --> 0:10:39.480 Now there is an argument to be made about whether 0:10:39.559 --> 0:10:42.400 or not the peg is serving us. It used to 0:10:42.480 --> 0:10:45.119 be the case that Hong Kong's economy was very correlated 0:10:45.160 --> 0:10:50.000 with the global business cycle, especially prior to the two thousands, 0:10:50.040 --> 0:10:52.760 when China wasn't such a dominant force in the global 0:10:52.800 --> 0:10:56.240 economy and global trade. Since then, the Hong Kong business 0:10:56.240 --> 0:10:58.760 cycle and the Chinese business cycle have become increasingly correlated, 0:10:58.800 --> 0:11:02.360 and we have become increasingly a service provider for Chinese 0:11:02.360 --> 0:11:06.120 companies going overseas, and naturally that means that the PEG 0:11:06.240 --> 0:11:09.240 sometimes acts as a pro cyclical headwind. By that, I 0:11:09.280 --> 0:11:13.040 mean when things are going south, it makes things even worse. 0:11:13.080 --> 0:11:15.000 So it's a pro cyclical the cycle is down and 0:11:15.040 --> 0:11:18.200 it makes things worse because typically when it happens, the 0:11:18.200 --> 0:11:20.240 FED is also hiking interest rates, as we have seen 0:11:20.240 --> 0:11:22.960 over the past few years. So there is a case 0:11:22.960 --> 0:11:26.000 to be made at some point eventually it will be 0:11:26.040 --> 0:11:27.959 necessary to change the board. Now, the Hong Kong may 0:11:27.960 --> 0:11:31.040 has done a lot of academic research evaluating whether or 0:11:31.080 --> 0:11:33.240 not the PEG brings prosperity to the region, and the 0:11:33.280 --> 0:11:35.600 long term view is that it does. The stability provided 0:11:35.600 --> 0:11:38.000 by the PEG does bring prosperity. It comes at the 0:11:38.000 --> 0:11:40.800 cost of these periods where you have a cyclical downturn 0:11:40.840 --> 0:11:44.000 and the PEG exacerbates those pressures. Typically the government is 0:11:44.080 --> 0:11:46.480 able to use fiscal to offset some of that pressure. 0:11:46.800 --> 0:11:48.959 What has happened is in the past couple of years 0:11:49.000 --> 0:11:51.960 post COVID, we now have a deficit which we are 0:11:52.000 --> 0:11:54.400 not allowed to have according to the constitution as well, 0:11:54.480 --> 0:11:56.600 and so they have less room to do fiscal to 0:11:56.640 --> 0:11:59.440 try to offset this. So if this situation of a 0:11:59.480 --> 0:12:02.920 strong US dollar continues, which may or may not be 0:12:02.960 --> 0:12:04.640 the case, we can get into that in a minute. 0:12:04.720 --> 0:12:07.120 But then, yes, the fiscal wouldn't be enough to upset this, 0:12:07.160 --> 0:12:09.200 so Hong Kong would be in a very stackflationary outcome 0:12:09.200 --> 0:12:11.280 for a long time, and possibly at that point they 0:12:11.320 --> 0:12:14.520 could consider moving into something different. In my opinion, it 0:12:14.559 --> 0:12:16.640 won't be a repeg, It will be a completely different 0:12:16.640 --> 0:12:19.800 EFTs regime based on a basket of currency, similar to 0:12:19.800 --> 0:12:22.240 what we see in Singapore. That could happen, but I 0:12:22.280 --> 0:12:24.240 don't think the betting on a repag to the remybe 0:12:24.400 --> 0:12:26.400 is going to make anybody any money anytime soon. 0:12:27.000 --> 0:12:29.640 What would that look like? You just said if we 0:12:29.679 --> 0:12:32.960 don't have a world where the pegged to the RENMNB 0:12:33.160 --> 0:12:35.480 makes sense, and you just mentioned that it could be 0:12:35.520 --> 0:12:37.360 pegged to a basket of currencies. Could you explain that 0:12:37.400 --> 0:12:38.640 a bit more, what that could look like. 0:12:38.840 --> 0:12:41.560 Yes, So what we have in Singapore is a very 0:12:41.559 --> 0:12:45.560 similar situation where they have the need to mitigate the 0:12:45.600 --> 0:12:48.920 impact of EFX volatility on their system, but instead of 0:12:48.960 --> 0:12:53.200 pegging strictly against one currency, they manage the Singapore dollar 0:12:53.240 --> 0:12:56.840 against a basket of currencies, and as we are moving 0:12:56.880 --> 0:13:00.240 towards a bifurcated world, that would make sense so for 0:13:00.320 --> 0:13:02.720 China to broaden the basket of currencies that it uses 0:13:02.760 --> 0:13:05.600 in its own management of its its own currency away 0:13:05.600 --> 0:13:09.000 from US dollar towards other regional partners. So Hong Kong 0:13:09.000 --> 0:13:13.079 could adopt a similar mechanism, and in that case they 0:13:13.120 --> 0:13:15.960 would no longer be subject to the FED, so they 0:13:16.000 --> 0:13:19.240 wouldn't have to cut or hike interest rates in tandem 0:13:19.240 --> 0:13:22.360 with the FED, but they could manage monetary policy easing 0:13:22.360 --> 0:13:26.120 and tightening by addressing the slope or the pace at 0:13:26.120 --> 0:13:28.960 which they allow the currency to appreciate in trade weighted 0:13:29.040 --> 0:13:32.960 terms against their partners. So typically that's what Singapore does. 0:13:33.160 --> 0:13:37.360 Hong Kong could study and doing something similar, but it 0:13:37.440 --> 0:13:40.240 would require a change in the basic law and that 0:13:40.320 --> 0:13:42.040 is not something that you do lightly. 0:13:43.480 --> 0:13:46.800 Asia Centric is produced by Bloomberg Intelligence, with more than 0:13:46.840 --> 0:13:50.680 five hundred experienced analysts and strategists work around the clock 0:13:50.760 --> 0:13:54.240 to bring you timely, world class research. Our coverage spans 0:13:54.280 --> 0:13:58.600 two hundred market industries, currencies, commodities and industries, as well 0:13:58.600 --> 0:14:01.920 as over two thousand equities credits. To learn more about 0:14:01.920 --> 0:14:05.880 Bloomberg Intelligence, visit b I go on the Bloomberg terminal. 0:14:06.400 --> 0:14:08.920 If you like what you hear, don't forget to subscribe 0:14:08.920 --> 0:14:10.000 and share. 0:14:11.720 --> 0:14:12.080 Calos. 0:14:12.080 --> 0:14:15.439 Can you make the argument that this exchange rate mechanism 0:14:15.559 --> 0:14:19.200 didn't serve Hong Kong world after COVID, because you know, 0:14:19.240 --> 0:14:21.680 the US dollar was very strong, the US economy was 0:14:21.800 --> 0:14:24.760 very strong versus the rest of the world, the US 0:14:24.840 --> 0:14:28.720 height interest rates at the same time Hong Kong economically 0:14:29.000 --> 0:14:32.040 was suffering. We had a strong currency, we also had 0:14:32.120 --> 0:14:36.360 high interest rates, and that really impacted the retail segment 0:14:36.480 --> 0:14:37.080 in Hong Kong. 0:14:37.400 --> 0:14:40.560 I think you make a very valid point. It's not 0:14:40.680 --> 0:14:44.800 just Hong Kong. We are exiting a world of zero 0:14:44.880 --> 0:14:48.000 interest rates, and we are entering a world of higher 0:14:48.040 --> 0:14:53.320 for longer with both higher rates in the US, structurally 0:14:53.360 --> 0:14:57.560 higher inflation globally, and also higher tariffs. So US consumers 0:14:57.600 --> 0:15:00.720 are now facing eighteen percent tariffs that's unheard of since 0:15:00.720 --> 0:15:03.280 the nineteen thirty So we are entering and charted territory 0:15:03.720 --> 0:15:06.520 in a world where the dollar is structurally stronger and 0:15:06.600 --> 0:15:11.880 rates structurally higher than Yeah, Hong Kong faces significant stackflationary risks. 0:15:12.240 --> 0:15:14.760 Meaning lower growth and deflation. And keep in mind that 0:15:14.800 --> 0:15:17.680 we are importing a lot of deflation from China, perhaps 0:15:17.680 --> 0:15:19.920 more so than any other economy, so that would be 0:15:19.960 --> 0:15:23.080 a risk for Hong Kong. Where this changes, however, is 0:15:23.120 --> 0:15:26.720 if we enter a world of US dollar weakness. So 0:15:26.800 --> 0:15:30.080 if the US dollar you know what triggered this big 0:15:30.320 --> 0:15:33.680 surge in interbank liquidity. It was the announcement of reciprocal 0:15:33.680 --> 0:15:37.640 tariffs in April. It was investors being concerned that a 0:15:37.720 --> 0:15:41.240 lack of visibility on US trade policy and to some extent, 0:15:41.280 --> 0:15:45.760 domestic policy was eroding US exceptionalism and some of the 0:15:45.880 --> 0:15:49.520 rights that come with that, including US dollar strengthening since COVID. Essentially, 0:15:49.920 --> 0:15:52.520 so if we move away from a world where the 0:15:52.600 --> 0:15:56.360 US dollar strengthens structurally and you have upside on US equities, 0:15:56.360 --> 0:15:58.640 if we move to a world where US total equity 0:15:58.640 --> 0:16:02.520 returns are flat because you have currency weakness, then it 0:16:02.560 --> 0:16:04.560 doesn't put pressure on the Hong Kong economy to the 0:16:04.600 --> 0:16:06.680 same extent. So we do think that the FED will 0:16:06.720 --> 0:16:09.400 start to cut interest rates towards the fourth quarter of 0:16:09.400 --> 0:16:11.640 this year, Hong Kong may will do the same, and 0:16:11.680 --> 0:16:14.760 then we are also expecting red cuts in twenty twenty six. 0:16:15.120 --> 0:16:18.320 So my guess is that the debate is going to 0:16:18.320 --> 0:16:21.120 phase out and fickle out over the coming months and 0:16:21.160 --> 0:16:23.480 it won't be such an important point on the policy age, 0:16:23.480 --> 0:16:26.560 and then you won't have US hedgeman managers making any 0:16:26.560 --> 0:16:30.120 bets against the Hong Kong DOLLA until conditions reverse. So 0:16:30.200 --> 0:16:32.800 potentially if we enter another phase of like two to 0:16:32.800 --> 0:16:34.760 three years of US dollar strengthening, then it will become 0:16:34.760 --> 0:16:37.360 another topic before the time being. I think it is 0:16:37.480 --> 0:16:38.520 just a matter of waiting. 0:16:39.280 --> 0:16:42.320 There's probably some hedge fund macro head fund managers that 0:16:42.360 --> 0:16:45.000 could be listening to this podcast right now if they 0:16:45.080 --> 0:16:48.320 do try to attack the Hong Kong dollar. Does the 0:16:48.520 --> 0:16:51.160 HKMA have enough funds to defend the currency? 0:16:51.800 --> 0:16:53.800 They have a lot. So, Hong Kong May has a 0:16:53.800 --> 0:16:57.680 lot of EFX reserves. As I mentioned, the law requires 0:16:57.720 --> 0:17:01.080 us to have one hundred and fifty percent of the 0:17:01.160 --> 0:17:03.720 monetary base one hundred percent. We have over that, we 0:17:03.760 --> 0:17:06.399 have one hundred and fifty something percent. I believe Hong 0:17:06.480 --> 0:17:08.800 Kong May has made very public remarks in recent weeks 0:17:08.800 --> 0:17:10.879 that they are committed to defend a PEG, and you 0:17:10.960 --> 0:17:16.200 have to understand the role that accessing US dollar markets 0:17:16.280 --> 0:17:19.760 place for China. So until China is able to fully 0:17:19.760 --> 0:17:23.240 liberalize its capital accounts, which is perhaps a topic of 0:17:23.240 --> 0:17:27.480 another podcast. I mean, if they do, then at that 0:17:27.520 --> 0:17:29.800 point it might make sense to repag against them inb 0:17:29.920 --> 0:17:32.399 because it would be fully convertible. But the conditions for 0:17:32.440 --> 0:17:35.320 them to be able to achieve that will you know, 0:17:35.320 --> 0:17:36.840 it will take me with ten or twenty years. So 0:17:37.200 --> 0:17:40.440 during that period they will still require an offshore center 0:17:40.440 --> 0:17:43.439 in order to facilitate their technological upgrade and enable that 0:17:43.480 --> 0:17:46.400 some of these up and coming tech companies can raise 0:17:46.560 --> 0:17:49.959 US dollar financing. So we are seeing a huge surge 0:17:50.000 --> 0:17:52.240 in the IPO pipeline in Hong Kong because borrowing rates 0:17:52.280 --> 0:17:55.280 are lower and US dollar is still a ruble reserve currency. 0:17:55.720 --> 0:17:58.880 So I think even if we are in a situation 0:17:58.920 --> 0:18:01.000 where that Hong Kong dollar remains on the weekend of 0:18:01.040 --> 0:18:03.680 the band for so long, because the speculation by us 0:18:03.720 --> 0:18:05.919 A trial managers is, you know, they're so committed to 0:18:05.960 --> 0:18:08.880 this trade that they push the Hong Kong are made 0:18:08.920 --> 0:18:10.720 to burn through all of its effects reserves. At that 0:18:10.760 --> 0:18:13.920 point in China injects like they will not risk accessing 0:18:14.000 --> 0:18:17.280 US dollar capital markets via Hong Kong in exchange for 0:18:17.320 --> 0:18:20.440 some political you know, making a political statement about the 0:18:20.520 --> 0:18:22.800 US dollar through a repeg to a currency that is 0:18:22.840 --> 0:18:26.000 not fully convertible in itself. So unless they all agree, 0:18:26.040 --> 0:18:28.560 I don't think any individual US actual manager has enough 0:18:28.720 --> 0:18:32.240 cash at hand to burn to achieve this outcome. But theoretically, 0:18:32.240 --> 0:18:34.800 if it was possible, I think the Chinese government would 0:18:34.800 --> 0:18:38.040 intervene because of the important role that Hong Kong serves 0:18:38.040 --> 0:18:39.639 as an offshore intermediary. 0:18:40.680 --> 0:18:43.600 So maybe George Sorrow. So if you're listening to our 0:18:43.640 --> 0:18:51.960 podcast pro tip, so what's your best outlook? Then, Carlos, 0:18:51.960 --> 0:18:54.840 for how many more times the government might have to 0:18:54.920 --> 0:18:57.280 intervene from here? Is it sort of like until we 0:18:57.359 --> 0:18:59.680 see that first cut from the Federal Reserve? What's your 0:19:00.119 --> 0:19:01.320 what's your best outlook here? 0:19:02.119 --> 0:19:04.800 So I think that the Fed will start cutting by 0:19:04.800 --> 0:19:06.800 the end of the year, So this situation should at 0:19:06.880 --> 0:19:09.320 least last until the end of the year. The hybrid 0:19:09.400 --> 0:19:12.360 rates are abnormally low, so the overnight rate I think 0:19:12.520 --> 0:19:16.320 is just slightly above zero percent. The three month high bore, 0:19:16.400 --> 0:19:19.320 which banks are now using to price mortgages is around 0:19:19.320 --> 0:19:22.720 two percent, so we do expect that hybrid rates will 0:19:22.720 --> 0:19:26.000 go up, but they will stabilize at levels that are 0:19:26.040 --> 0:19:29.080 higher than or we had prior to the Liberation Day 0:19:29.160 --> 0:19:32.560 tariffs because of a myriad of factors, including the fact 0:19:32.600 --> 0:19:35.200 that you are having more easy in Man and China, 0:19:35.200 --> 0:19:37.240 and the demand for credit in Hong Kong with the 0:19:37.359 --> 0:19:40.439 situation in the housing sector just isn't very high. So 0:19:40.480 --> 0:19:42.680 we do think that higher rates go up from here, 0:19:42.720 --> 0:19:45.119 but they will stabilize at lower levels, and that is, 0:19:45.280 --> 0:19:49.119 in my opinion, actually moderately stimulative for Hong Kong assets, 0:19:49.160 --> 0:19:53.840 including both equities equities first and then even real estate. 0:19:53.960 --> 0:19:56.040 So now with mortgage rates at two percent, yields at 0:19:56.080 --> 0:19:58.400 three percent, there's a one percent positive carry, perhaps not 0:19:58.520 --> 0:20:02.000