BofA: “This Is The Ultimate China-US Trade War Play”

BofAML’s Savita Subramanian notes that populism is gaining momentum around the world, exacerbated by mass population displacements and surging income inequality. Concerns over immigration, autonomy and global competition have played a role in political campaigns across the globe. The Trump administration’s latest announcement to levy tariffs on steel and aluminum imports is consistent with anti-globalist shifts seen in this presidency.

It’s “Autarky Malarkey” according to BofAML’s Michael Hartnett. Simply put, as global QE ends, protectionism begins; and the war on inequality will now be fought via Protectionism, Keynesianism, Redistribution. Monetary & Fiscal policy is now spent, leaving markets to discount protectionism & global tariffs.

And while Trump’s actions could impact many nations negatively, China is without doubt the most vulnerable to a US trade war, according to BofAML’s latest report.

So how to trade a trade war?

Hartnett concludes, the ultimate China-US trade war play is short the Hong Kong dollar (which, as we noted previously, is currently trading at weakest level since peg introduced October 1983).

For a little better context, HKD has cratered in recent months… (testing the lows of the peg band)

On the heels of capital outflows and an ever-growing carry trade, enabled by a hawkish Fed…

Selling Hong Kong Dollars is a more liquid, cleaner proxy on china outflows (and less easily manipulated than CNY), plus USDHKD has dramatic downside if the peg breaks… which it might because standing in the way of The Fed rate-hike-driven carry trade avalanche will be very expensive.

It is a traditional devaluation play (asymmetric to the CHF peg break)


And already it appears, some speculators are betting on the peg snapping.

Bloomberg reports that USD/HKD call options struck at 7.8730 have transacted today (upper right corner of chart below), suggesting that at least one punter sees the chance of the band (green-to-red lines on chart) breaking within the next year.

The pair hasn’t quite hit 7.8500 so far, but that could happen in the next few days as the HKMA shows no inclination to soak up excess HKD liquidity just yet, but instead told citizens who are seeing their currency lose value to “stay calm.”