‘Yet Another Vol. Event’: What Happened In Hong Kong?

‘Yet Another Vol. Event’: What Happened In Hong Kong?

Folks are pretty fascinated on Friday with the sharp overnight rise in the Hong Kong dollar, which surged the most in a decade and a half today.

To say this was a rarity would be an understatement. HKD has only moved more than 0.4% a handful of times since the band was widened in 2005.


3M HIBOR jumped to its highest since December of 2008, while 1M implied vol. exploded higher (red highlight):



Speculation was rampant as to the cause, with traders and observers citing everything from low liquidity (ahead of a holiday and in the wake of the Meituan Dianping IPO) to the prospect of higher rates as Hong Kong imports Fed policy. One obvious catalyst here is speculation that a prime rate hike is coming for the first time in a dozen years.

There are myriad factors that made this discussion rather muddy today, but the bottom line is that this is just another manifestation of a carry trade blowup and you could see the shakeout in Treasurys.

“The Fed’s upcoming hike, in conjunction with the dollar’s sell-off and sloppy U.S. rates action has created yet-another ‘Vol Event’ in the FX carry-space, with ‘short-HKD’ positions being eviscerated in a 6 standard deviation move (vs 15 year returns) against the dollar”, Nomura’s Charlie McElligott said on Friday morning.


(Nomura, Bloomberg)

In other words, this probably isn’t much of a “mystery”. This thing got moving in the “wrong” direction, people started to cover (accelerating the move) and that forced out more people, etc. Here’s your unwind, visualized via the concurrent selloff in Treasury futs:


(Nomura, Bloomberg)

“[The] correlation between HKD spot and UST 10Y shows that the forced-unwind drove a further UST selloff overnight”, the above-mentioned McElligott notes, in the same short Friday missive excerpted above.

So I guess there are two possibilities here (and let’s just ignore all the in-betweens). If you get a hike to the prime lending rate or some other sign that the locals have some conviction when it comes to following the Fed, well then this could continue, potentially posing more spillover (i.e., bearish) risk for Treasurys. Or else the fear of the housing bubble and/or jitters about exposure to the ongoing deceleration in the mainland economy makes everyone gun shy, leading to a reversal of Friday’s anomalous action.

Whatever the case, it’s probably not a stretch to say that what happened on Friday is yet more evidence of market fragility. Seen in that light, it’s disconcerting no matter what happens next.

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