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Taiwan’s dollar jumped more than 2% in volatile trading on Tuesday.
The new Taiwanese dollar has closed a 2.5% day against the US dollar at $29.16, marking its biggest day profit since a swift appreciation at the beginning of May, exposing Taiwanese life insurance companies to great losses to holding US assets.
Taiwanese life insurance companies own 1.7 tons of overseas assets, most of which are US bonds. In other words, it is heavily exposed to the greenback slide, which has had its worst start since 1973.
Chandresh Jain, emerging market rates and forex strategist at BNP Paribas, said Tuesday’s move was likely driven by hedging currency exposure to the US dollar, which is rapidly weakened by buying ahead in Taiwan’s dollars.
“The ongoing narrative of Taiwan’s life system hedges may be unfolding, and there are also elements of broad USD weakness,” said Saktiandi Spertt, head of Forex Research at Maybank. “These themes tend to inherently self-reinforce.”
Tuesday’s rally came after Taiwan’s currency suddenly weakened on Monday, when it fell 2.5%, following what many analysts said was a central bank intervention.
“There is suspicion that the market has started to intervene by central banks,” said Lemon Chan, Barclays’ forex and emerging market macro strategist.
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Foreign investors, including Taiwanese life insurance companies, appear to be hedging exposure but not selling US assets, ANZ economist and forex strategist Dhiraj Nim added that he hopes investors will turn more assets into emerging markets over time.
“Many movements are actually driven by the weak dollar in the dollar,” said Edward Lee, chief economist and secretary of ASEAN and South Asian Forex Forex.
BNP’s Jain pointed out that for the past two months Taiwan’s life insurance companies had been using “proxy hedges” such as the South Korean victory and the Singapore Dollar, but have now started hedging with home currency again.
“Dollar Taiwan continued to move faster than the proxy hedge,” Jain said. “They’re starting to come back.”
