Kyle Bass confident in bet against Hong Kong dollar

Kyle Bass, founder of Hayman Capital Management, said he’s shorting the Hong Kong dollar against the U.S. dollar to express his view that Hong Kong’s usable reserves for defending its currency peg are insufficient.

“We are very long dollars and that means we are short Southeast Asian currencies, and we are focused on Hong Kong,” Bass told Bloomberg TV on Tuesday.

An analysis on the Hong Kong dollar that Bass released Monday is based on a misunderstanding about the linked-exchange-rate system and exchange fund, a spokesperson from the city’s de facto central bank said in an emailed response to questions from Bloomberg.

The Hong Kong dollar’s peg is officially set at 7.80 per dollar, but the currency is allowed to trade 5 cents to either side. The pair currently trades at 7.8492, close to the weaker end of its band, amid lower interest rates relative to the U.S. The Hong Kong Monetary Authority intervened last year for the first time since 2005 at the weak side of the band, and has tapped its reserves this year as well to defend the peg.

Hong Kong falls short of basic International Monetary Fund reserve adequacy, according to a letter to investors from Hayman Capital on Monday. By Bass’s calculations, the net result of even a conservative minimum reserve requirement is around USD495 billion. This is more than the $436 billion reserve pile kept by the HKMA.

Bass’s analysis “ignored the fact” that the Exchange Fund Ordinance states that the exchange fund may be used to maintain the peg, according to the HKMA spokesperson. The HKMA also said “many market participants” have pointed out the “various inaccuracies” in his calculations.

“HKMA has sufficient reserves to defend the peg,” said Wells Fargo currency strategist Brendan McKenna. “Kyle Bass’s analysis did not include the Exchange Fund Ordinance, which is key to how the exchange rate moves.”

The ratio of Hong Kong’s reserves – which are underpinned by the exchange fund – to its monetary base now stands at more than two times, compared with the one-to-one match mandated by its linked exchange-rate system.

Still, Bass said in the letter that Hong Kong’s actual usable reserves are “a meager 13% of reported reserves” and “are woefully inadequate.”

The Hayman founder says the Hong Kong dollar peg to the greenback will naturally expire in 2047. He says the switch is inevitable and the debate is when investors should begin discounting the timing of the expiration. DB/Bloomberg