Taiwan Highlights Local Dollar’s Limitations for Carry Trades

Taiwan’s central bank said the local dollar is ill-suited to fund carry trades as overseas investors are restricted from borrowing the currency and lower interest rates can be found in places including Hong Kong and Japan.

“In order to use the Taiwan dollar as a funding currency, foreigners must be able to freely borrow in that currency, but they can’t unconditionally borrow Taiwan dollars to invest in foreign currencies with higher rates,” the Central Bank of China (Taiwan) said today in a statement.

Deutsche Bank AG and Citigroup Inc., the world’s biggest currency traders, highlighted in the past month the Taiwan dollar’s attraction as a funding currency for carry trades in Asia, noting that the central bank was helping counter appreciation that may erode the profitability of the bets. Global funds can use offshore derivatives including non-deliverable forwards to effectively obtain Taiwan dollar financing for investments in higher-yielding currencies.

Taiwan dollars borrowed domestically and sold against a basket including Indonesia’s rupiah and China’s yuan have earned 1.9 percent in 2014, compared with a 2.5 percent loss for deals funded with yen, according to data compiled by Bloomberg.

The Taiwan dollar has weakened 1.2 percent versus its U.S. counterpart this year, following a 2.7 percent decline in 2013. The central bank has intervened to weaken the local currency in the run-up to the market close on most days since 2012, according to traders who asked not to be identified.

Policy makers are helping cap the currency’s gains and keep it stable, both important for getting reliable returns in carry trades, strategists including Siddharth Mathur, the Singapore-based head of Asian foreign-exchange and rates strategy at Citigroup, wrote in a Feb. 6 report.

Central bank Governor Perng Fai-nan, writing in The Banker magazine last month, said overseas investors trading Taiwanese assets and currency were undermining the island’s financial stability. Global funds accounted for 36 percent of currency trading in Taiwan, according to the article.

To contact the reporter on this story: James Regan in Hong Kong at jregan19@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.