Yesterday, I posted about Bill Ackman's HKD trade, and mentioned that I was pretty impressed and at the same time, pretty sure he would be wrong. Yet, the idea is compelling and the trade very tempting as the risk is close to zero and the potential gain enormous.
I have been thinking — not too much but still — and I think I might have found a flow in the trade: basically, the point that Bill makes is that the HKD is undervalued due to its peg against the USD and that high inflation has been imported as a consequence. So he believes that a 30% revaluation of the HKD against the USD has a probability of 6:1.
Now, here's the flaw: what about the case where the USD rallies 30%? huh? Given that a major USD rally is in the docks — at least according to my forecast, which have been right so far — then what happens to the HKD revaluation?
In such a case, the commodities would get hammered, and inflation would drop dramatically. I am sure that you would get the results Bill Ackman mentioned the HK government should be aiming for, and this would happen without any need for difficult and dangerous revaluation. Note that if you play the FX, your loss would be minimal in this case. But if you play would options, it's likely that you would lose about 100% of your premiums. Caveat Emptor!
I will hence not consider playing this with options. I might look at playing it with FX, but will first wait for the USD to show us what it where it wants to go and whether the rally will be enough or not to prevent this revaluation idea.
What do you think?