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Taiwan’s dollar jumped more than 2 per cent in volatile trading on Tuesday, as the country’s massive life insurance and export sectors rushed to contain the fallout from a weak US dollar.
The New Taiwan dollar closed the day 2.5 per cent stronger against the US dollar, at NT$29.16, marking its biggest single-day gain since a rapid appreciation at the start of May that exposed Taiwanese life insurers to huge losses on their holdings of US assets.
Taiwan’s life insurers hold $1.7tn in overseas assets, most of which are US bonds, meaning they have been heavily exposed to a slide in the greenback, which has suffered its worst start to the year since 1973.
Tuesday’s move was likely to have been driven by insurers hedging their currency exposure to a rapidly weakening US dollar by buying forwards on Taiwan’s dollar, said Chandresh Jain, emerging markets rates and foreign exchange strategist at BNP Paribas.
“The ongoing narrative of Taiwanese lifer hedging could be playing out and there is also an element of broad USD weakness,” said Saktiandi Supaat, head of forex research at Maybank. “These themes tend to be self-reinforcing in nature.”
Tuesday’s rally came after a sharp weakening on Monday, when the Taiwan currency closed 2.5 per cent lower following what many analysts said was an intervention by the central bank.
“The market has a suspicion the central bank has started to intervene,” said Lemon Zhang, forex and emerging markets macro strategist at Barclays.
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Foreign investors, including Taiwanese life insurers, appear to be hedging their exposure but not selling their US assets, said Dhiraj Nim, economist and foreign exchange strategist at ANZ, adding that he expected investors to rotate more of their assets into emerging markets over time.
“A lot of the moves are actually driven by the weak dollar itself,” said Edward Lee, chief economist and Asean and south Asia forex head at Standard Chartered.
BNP’s Jain noted that in the past two months, Taiwan’s life insurers had been using “proxy hedges” such as the South Korean won and Singapore dollar, but were now starting to hedge in their home currency again.
“Dollar-Taiwan kept moving faster than their proxy hedges,” Jain said. “They started coming back.”