Currency traders are betting in the forward exchange rate market that the Hong Kong Monetary Authority will abandon its currency's 24-year peg to the U.S. dollar as overseas investment floods into the city.
In the forward currency market, an investor can buy Hong Kong dollars now for delivery in 12 months at HK$7.7106 per U.S. dollar, above the HK$7.75 top of the Hong Kong Monetary Authority's permitted trading range. The authority sold HK$7.828 billion ($1 billion) to defend the currency yesterday, twice as much as two previous interventions since Oct. 23.
It has become costlier to place bets on the peg ending. Volatility implied by U.S. dollar-Hong Kong dollar options expiring in six months rose to a 10-month high of 1.25 percent, according to prices from Tullett Prebon Plc. Traders quote implied volatility, a gauge of expected swings in exchange rates, as part of pricing options.
``What the forward market is telling you is that the pressure is not going to go away anytime soon,'' said Russell Jones, global head of foreign exchange and fixed-income research at RBC Capital markets in London, who believes the link will remain. ``The monetary authority is going to have to keep intervening to maintain the peg.''
I view this as a clear warning sign that the dam has signs of bursting in this market. The recent financial turmoil here in the U.S. is starting to create a high level of distrust between investors and dollar denominated assets. Especially within the investment banking sector. People from other countries are starting to ask how they can own dollar denominated assets when the underlying asset is declining and the currency is declining.
The US Dollar index is the calculated using the exchange rate against 6 other major currencies:
Weighting of each currency in the index:
Chart of the US Dollar Index:
(Click for a sharper image)
I would not be surprised to see the Renminbi added to the list on the USD index in the coming years.
I would not be surprised to see the Renminbi added to the list on the USD index in the coming years.
Down Goes Citi!!! Down Goes Citi!!!
When a stock like Citigroup declines 20% in a month, I think that it is a call for serious concern. It has now become obvious that they have been hiding their losses. Today they announced a $6-$10 billion dollar write off.
Citigroup faces a write-down in the range of $6 billion to $10 billion, mainly because of exposure to subprime mortgages and collateralized debt obligations, CNBC has learned.
The size of Citi's write-off is still being debated, though a source told CNBC that Citi's board is pressing company finance executives to clarify the issue. The firm's audit committee is also scheduled to meet Sunday, in advance of the emergency board meeting.
Chart of Citigroup:
(Click for larger image)
Citigroup currently has a market cap of $182.69 billion. If they write down $8 billion dollars of losses (middle range of $6-10 billion). On Monday, 4.2% of the company will vanish into thin air.
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