VWO - The Emerging-Market Problem

• The Hong Kong Monetary Authority pegs the HKD to the USD at a range of 7.75-7.85.
• A rise in US yields threatens to disrupt this rigid currency peg.
• Hong Kong yields/rates would have to also rise as the HKMA buys HKD (reducing local HKD liquidity) and to prevent carry trade outflows into the USD.
• Hong Kong's economy, equity, and housing markets cannot tolerate higher yields/rates.
• The impossible trilemma in economics is maintaining a fixed exchange rate, zero capital controls, and an independent monetary policy.

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