The divergence is the latest sign of seemingly insatiable demand for the Taiwan dollar driven by speculation the authorities will allow it to appreciate to help advance trade talks with this US. That sentiment helped the local dollar post the biggest gain since 1988 on Monday. The rally also bolstered regional currencies including the Malaysian ringgit and Chinese yuan.
The Taiwan dollar has been turbocharged by exporters rushing to convert their holdings of US dollars to the island’s currency and signs life insurers may have been hedging their greenback-denominated portfolios.
“The talk is around the rush to sell dollars from the exporter market and the lack of any meaningful central bank response,” Brad Bechtel, global head of foreign-exchange at Jefferies LLC, wrote in a research note. The trading trend “could be the start or a sign of something bigger going on in the currency markets,” he said.
Taishin Financial Holding Co.’s life insurance subsidiary said Tuesday it won’t increase hedges against short-term fluctuations in the foreign-exchange market. The rally in NDFs has made them an expensive hedging tool against overseas assets, chairman Welch Lin said in a briefing.
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NDFs are typically two-party derivative contracts to exchange cash flows between the forwards and spot rate, and are Taiwanese insurers’ favorite tool for hedging.
Taiwan’s currency trimmed some of its recent gains Tuesday, dropping 0.5% to 30.28 per US dollar. Exporters continued to sell the greenback in the morning session, while Taiwan dollar demand from overseas investors and retailers eased, traders familiar with the transactions said.
The local dollar may extend gains toward 28 to the US currency over time as corporates and retail investors repatriate currency and life insurers boost their hedges, BNP Paribas SA strategists including Ju Wang in Hong Kong wrote in a research note.
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Three of the island’s biggest insurers told the financial authorities on Monday that their risk-based capital ratios would remain within regulatory standards and they had no plans to increase hedging for now, Taipei-based Economic Daily News reported, citing people familiar with the discussions.
The central bank also sought to calm markets Monday saying the two-day surge in the local dollar was partially due to market chatter and warned against irresponsible speculation.
While limiting their hedges has helped life insurers benefit from a strengthening US dollar in recent years, the recent slide in the greenback means they face potential losses and cash-flow issues. Taiwanese life insurers only hedged around 65% of their holdings at the end of last year, according to Bank of America estimates.
Trade Surplus
President Lai Ching-te weighed in on Monday to calm market concerns, saying the island’s growing trade surplus with the US primarily reflected American demand for Taiwanese technology rather than being fueled by the Taiwan dollar’s exchange rate.
Taiwan’s office of trade negotiations said Monday it wrapped up the first round of tariff-reduction negotiations with the US last week. The talks didn’t touch upon the issue of the currency, the office said in a statement.
The local dollar’s surge this week was amplified by a number of factors, according to Michael Wan, a senior currency analyst at MUFG Bank Ltd in Singapore.
A key driver may have been increased liability-hedging activity by Taiwan’s life insurance companies, Wan wrote in a research note. “Exporter conversion with build-up and hoarding of US dollar deposits, combined with low liquidity probably all exacerbated the moves.”
