The Taiwan dollar is on the verge of overtaking the yuan as Asia’s best carry-trade target given its lower risk of interest-rate and currency volatility.
A strategy of borrowing the island’s currency to invest in higher-yielding alternatives has generated the second-highest return over the past month among Asian currencies behind the yuan, based on the Sharpe ratio that measures risk-adjusted relative returns.
Taiwan’s currency may soon replace its mainland peer as the region’s favoured carry trade tool, analysts say, citing Beijing’s efforts to support the yuan that can create wild swings in borrowing costs. In contrast, the island’s central bank can afford to be more relaxed as any weakness in the local currency ends up benefiting the export-driven economy, and can attract artificial intelligence-led capital flows into local stocks.
“The Taiwan dollar has been one of the better funding currencies in Asia along with the offshore yuan, but with recent intervention risks in the yuan placing bigger chances of a short squeeze, Taiwan dollar becomes much more attractive,” said Stephen Chiu, chief Asia foreign-exchange and rates strategist at Bloomberg Intelligence.
Elsewhere in Asia, the yen is facing a cycle of interest-rate hikes, while other potential funding currencies are either more expensive to short or have higher volatility, he said.
The yuan’s appeal as a funding source for carry trades is weakening as the People’s Bank of China steps up its currency defence ahead of anticipated tariff hikes under a second Donald Trump presidency. The central bank’s measures, ranging from setting an artificially strong reference exchange to draining liquidity and verbal warnings, have turned the offshore yuan into Asia’s third most volatile currency in the past month.
Meanwhile, the Taiwan dollar is starting to look even more attractive as a funding source after weakening beyond what was seen as a key psychological level of 33 per US dollar for the first time in nearly nine years this week.
The Taiwan dollar is poised to decline further, along with its regional peers, with Trump’s return to the White House accentuating risks from more challenging trade dynamics to a less dovish Federal Reserve, according to Joey Chew, head of Asia foreign-exchange research at HSBC Holdings Plc.
“Nevertheless, with fundamentals robust, Taiwan’s economy is relatively well placed to ride through this near-term volatility,” with a lower risk for aggressive currency intervention from the central bank, Chew said.
