By Anton Tonev 10-12-2020

2021 Grey Swan #7: HKD Peg Breaks the Lower Band

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The Covid-19 crisis for China may prove to be the economic equivalent of WW2 for the US. The US was the only major country to escape the war with its economy relatively unscathed. Similarly, China’s is proving to be the only major economy to show positive growth this year, consequently catching up faster to the US in nominal terms (China already gained the top spot in 2018 by GDP measured on a PPP basis).

But there’s more to the comparison than that. The Bretton Woods Agreement, which entered into effect shortly after the war, cemented the US dollar’s preeminent position in global trade. And just like that, China’s first-step advantage in creating and implementing a viable CBDC (through its own version called DCEP) could propel the Renminbi to the top spot in trade flow usage globally. China has proven far more prescient than other central banks in understanding the informational power of CBDC in managing the economy. This transcends any advantage CBDC has as simply a better payment method.

This brings me to the HKD peg. Just to be clear, despite numerous attempts throughout the years, it is practically impossible for the market to destroy the HKD peg. The only way the peg goes is by a policy decision. But consider the recent developments on the political side in Hong Kong, the gradual opening of the Chinese economy and its capital markets, progress on DCEP integration, as well as the change in the US leadership. With that in mind, I would be unsurprised if the Chinese authorities decide to break the link to the USD and peg the HKD to the CNH with the idea of merging the two at some future point.

The caveat is that HKD will strengthen against the USD rather than weaken. 





Anton Tonev is a former HSBC & Morgan Stanley researcher & trader with more than 20 years of experience across New York, London & Asia. His focus lies in Global Macro asset management with an Emerging Markets undertone based on risk factor investing, core trends, non-conventional economics and cross-discipline ideas.


(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)


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