Link: all this talk of depreciation/appreciation.

There are people talking about depreciation (of the US Dollar against the Hong Kong Dollar) and there are people talking about appreciation (of the Hong Kong Dollar against the US Dollar). They are generally talking about the same thing, which is the growing strength of the Hong Kong dollar.

So the Hong Kong dollar (HKD) is pegged to the US dollar (USD): which means that the HKD will fluctuate against all other currencies with the USD, but only against the USD within a certain range. A five year graph:

If you have a look at the axis on the right, you’ll notice that the exchange rate never drops below HKD 7.75 to USD 1. And that’s not an accident – it’s the lower limit of the range within which the HKD is allowed to fluctuate. And when the HKD is beginning to strengthen below those levels, China the Hong Kong Monetary Authority steps in and sells more Hong Kong dollars (by buying more US dollars) to keep the exchange rate within range.

For example, on Friday, they bought an extra USD 603 million (or sold an extra HKD 4,680 million – it’s saying the same thing*).

Anyway, the forward market** of HKDs and USDs seems to believe that this status quo will be maintained. But there’s a big invester, Mr William Ackman, who has announced that he has bought call options*** that are basically a bet on the pegged rate changing in the next three years.

The real question is: why is he telling us what he’s done? Does he just want everyone to jump on board? Because otherwise, I’d be keeping quiet about my bet, in the hope that I could make more before everyone cottons on…

My vote: he’s made a giant mistake. And he wants to sell those call options because he just realised that the “Hong Kong Monetary Authority” is China-in-disguise. Where George Soros broke the pound, he failed against the HKD in 1997. And then praised their ability to beat him.

Solution: pump up enthusiasm, and either sell those options to the newcomers, or get the investing world as a whole to launch an attack on China’s reserves.

*Perhaps a good analogy is to talk about swapping my cheeseburger for a slice of your pizza. Either I “bought a slice of pizza” with a cheeseburger, or I “sold a cheeseburger” for a slice of pizza. We’re just not used to talking about money as a commodity – which it is, in an exchange market. 

**A forward market is one where we know that we’re going out for dinner later, and we agree that we’re going to do the cheeseburger:pizza swap in advance. It’s based on an expectation of how hungry we’ll be and how expensive the burger is relative to the pizza. If we get there, and our assumptions are different, then some parties will benefit and some will lose. But there’s no uncertainty around what we’re going to eat, short of someone eating all their food before the swap takes place (in finance terms, this is “counterparty risk” – or the risk that the person you’re agreeing with goes bankrupt before time).

***A call option is the right to buy something at a given price at a future point in time. For example, I might buy a call option on Britney Spears concert tickets. Let’s say that I buy the right to buy a ticket for $50 on the day of the concert. If, on the day of the concert, the ticket price if actually $2 because Britney had a meltdown, then I wouldn’t exercise the option, and instead I’d buy the ticket for $2 in the open market. Or: let’s say that Britney was expected to have the breakdown mid-concert, and all the TMZ reporters and photographers were flocking in to document it, which meant that the tickets were $140 on the day of the concert. At that point, I’d “exercise” my option, buy the ticket for $50, and then sell it for $140 to Joan Rivers.