MONEY GOES HOME - The Taiwan Front-Running
Are Incoming 100% US Tariffs on Taiwan Semiconductors The New Blockade?
Mainland markets in Taiwan/Asia do not re-open until Tuesday. Regional currencies including the CNH, KRW, SGD were sent spiking higher over the weekend, but none as intensely as TWD - 7% just last night.
Reports are that the Taiwan Central Bank intervened, but the spike caused Hong Kong CB to intervene at record levels to defend their peg.
The best economic post on the subject comes from Brad Setser. He talks about how the Taiwan dollar had been incredibly weak, as evidenced from Taiwan's 15% of GDP current account surplus. Even the outsized success by Taiwan Semiconductor did not help bid the TWD over the years, as their CB intervened or threatened to.
The big aha moment is looking at the chart of holdings of foreign bonds that represented ~170% of Taiwan's GDP.
"And specifically a huge share of the life insurers $1.1 to $1.2 trillion in assets has been invested abroad -- and a significant amount of that investment is unhedged"
See Brad's article in FT: How Taiwan became a quiet bond market superpower
"So a 1% move in the Taiwan dollar all else equal generates mark to market losses (tho not necessarily accounting losses) of around $2b/ a 10% move losses of more like $20b"
He expects the CBC to intervene:
In periods of stress (which for Taiwan comes when the Taiwan dollar appreciations, creating a mismatch between fx assts and TWD liabilities), stability has requires heavy fx accumulation by the central bank.[they] generally started to resist appreciation more firmly as the TWD through 30 to 29 and then 28. They absolutely defended 28 with hefty intervention back in 2020 and 21"
But, what if this is related to US political pressure?
"The other new variable of course is the trade negotiations with the US -- if the US is serious about bringing down its bilateral deficit, undervalued Asian currencies (like the TWD) do need to appreciate and the US cannot make it too easy for the CBC to protect the lifers"
The underlying financial exposure for Taiwan is massive, but so are the implications.
MONEY GOES HOME - The Asian Version
It goes without saying that Taiwan is strategically important to the US for its semi chip manufacturing. But it's more than that.
“Taiwan has become a financial superpower thanks to its life insurance companies amassing a $1.7tn pile of overseas assets, most of which are US bonds.…Taiwan’s life insurance industry has bet its solvency (with the support of its regulators) on the assumption that Taiwan’s central bank will be able to avoid a meaningful appreciation of the Taiwan dollar.” FT Article
Might be a tad late for that, as Joe Weisenthal of Bloomberg snarks,
"This is what it looks like if you're a Taiwanese investor holding Treasuries"
And then there are the rumors & speculations. This one bears watching.
Louis-Vincent Gave - and this chart showing the 4.24 standard deviation TWD move - triggers echoes of my MONEY GOES HOME mantra.
"Are we witnessing the reversal of the 1997 Asian crisis - a period of massive transfer of purchasing power from the West to the East? Clearly the Trump admin no longer wants US consumer to be the consumer of last resort. So what happens next? Either Asia steps up to the plate… or the world enters depression. This currency move points to the former…"
Not betting on the "either/or depression" part, but I can absolutely see this as a large position unwind!
As such, Bloomberg has many-a-headline on the official response: h/t Homin Lee @leveltargetnow
* TAIWAN CBC REITERATES US DID NOT REQUIRE TWD TO APPRECIATE
* TAIWAN CBC ASKS ANALYSTS NOT TO COMMENT ON FX MKT SPECULATIVELY
* TAIWAN CENTRAL BANK SAYS WON'T MANIPULATE CURRENCY
* TAIWAN CBC SAYS TO STEP IN FX MARKET IF STABILITY THREATENED
* TAIWAN CBC HAS SMOOTHED FX MARKET IN THE PAST TWO SESSIONS
* TAIWAN CBC: AMOUNT OF SUSPECTED CURRENCY SPECULATION IS 'LARGE'
* TAIWAN REGULATOR SAID TO INVITE INSURERS TO MEETINGS ON FX (14:16 SG/HK time)
* TAIWAN CENTRAL BANK TO HOLD PRESSER 4:30PM ON FX MARKET (13:44 SG/HK time)