Taiwanese currency experiences significant depreciation suspected to be due to alleged intervention by the Central Bank in foreign exchange markets.
The Taiwanese economy has been experiencing a significant shift in recent months, marked by a sharp decline in the value of the Taiwan dollar (TWD) in late June 2022. This depreciation was influenced by a combination of external and internal economic factors.
Taiwan’s exporters increased their foreign exchange sales, converting U.S. dollars earned from exports into TWD, exerting initial downward pressure on the TWD. Additionally, the broader weakening of the U.S. dollar and risk mitigation strategies by insurance companies, such as selling off U.S. dollar assets, contributed to fluctuations in the USD/TWD exchange rate.
Uncertainty about U.S. tariff policies and the early delivery of goods to avoid potential new tariffs created a high comparison base that dampened manufacturing sentiment, affecting Taiwan’s export-driven manufacturing sector. This uncertainty, coupled with the appreciation of the TWD by about 12% against the U.S. dollar since early 2022, has led to revenue fluctuations in export-oriented manufacturing, especially in the semiconductor and related high-tech sectors.
The selling off of U.S. dollar assets by insurance companies for risk mitigation hints at increased currency risk exposure. Fluctuations in TWD value could impact the valuation of their foreign currency assets and liabilities, affecting their balance sheets and profitability. The decline in manufacturing and service sector confidence, driven partly by currency fluctuations and tariff uncertainties, suggests a cautious economic outlook. This hesitancy could slow investment and hiring within Taiwan’s critical export sectors.
In an effort to control risk, the Taiwan Central Bank has taken action. Foreign investors using certain tools were asked to repatriate funds quickly, and state-owned banks were reported to have actively bought U.S. dollars during the drop. The Central Bank has also addressed growing speculative flows into the currency, citing ETFs and inverse ETFs as the primary drivers. Holdings in one major inverse stock ETF grew to 914 million shares, up over 90 times from early this year, causing concern among authorities.
Regulators eased some currency hedging restrictions to help insurers manage the risk, aiming to reduce financial stress without encouraging more speculative behavior. Domestic insurance companies face losses when the local currency strengthens due to large U.S. dollar-denominated investments. The massive 12% rally in the Taiwan dollar, the largest single-day jump since the 1980s, forced the central bank to respond decisively.
Analysts are watching for rising stablecoin inflows or premiums on digital currencies as signals that investors might be seeking alternatives to traditional currencies. Some economists have warned that the appreciation might reduce the competitiveness of Taiwan's export sector, particularly electronics and high-tech products. The cryptocurrency markets are monitoring the Taiwan dollar's weakness for potential regional impact, with past local currency drops increasing demand for crypto assets like Bitcoin.
The situation remains fluid, and much depends on how long pressure on the Taiwan dollar value continues and how the market reacts in the coming weeks. The Taiwan Central Bank and regulatory bodies will continue to monitor the situation closely and take necessary actions to stabilise the economy.
- The cryptocurrency markets are keeping a close eye on the Taiwan dollar's weakness, as past local currency drops have increased demand for crypto assets like Bitcoin.
- Analysts are also watching for rising stablecoin inflows or premiums on digital currencies as potential indicators that investors might be seeking alternatives to traditional currencies.
- The Taiwan Central Bank and regulatory bodies are monitoring the situation carefully and will take necessary actions to stabilize the economy, given the potential impact of the Taiwan dollar's fluctuations on the banking-and-insurance industry, finance, and even the crypto industry.
