North Asia Currency War Seen Heating Up on Taiwan Dollar Shorts

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Taiwan is winning allies in its battle to weaken the local dollar with sell calls mounting on Asia’s best-performing currency.

BNP Paribas SA said May 29 that it favors using options to short the island’s dollar, after the yen’s biggest weekly drop this year exacerbated a currency war between Japan, South Korea and Taiwan. Australia & New Zealand Banking Group Ltd and Westpac Banking Corp. are suggesting clients bet against the Taiwanese currency using derivatives and buy offshore yuan.

The Taiwan dollar has rallied 2.2 percent against the greenback this year, buoyed by a net $8 billion of stock inflows betting on the prospect of an exchange link between Taiwan and China. The island’s central bank stepped up intervention last week to curb gains and safeguard the competitiveness of its exporters.

“This divergence in the Taiwan dollar compared to other Asian currencies is looking too stretched,” said Khoon Goh, a Singapore-based senior strategist at ANZ, ranked the most-accurate forecaster of the island’s currency last quarter by Bloomberg. “We expect the Taiwan dollar to start to weaken and play catch up to the rest of the Asian currencies as the hype over the stock connect subsides.”

Some offshore investors favor derivatives because they don’t have access to the Taiwan dollar onshore, he said.

Exports Hit

Taiwan’s currency has trounced the 0.04 percent advance in the yuan, Asia’s next-best gainer in 2015. Over the past year, it dropped 2.8 percent, compared with declines of 8.2 percent in the won and 18 percent in the yen.

The island’s exports fell 9.5 percent in May from a year earlier, after a 12 percent drop in April, according to a Bloomberg survey before data due June 8. It competes with South Korea and Japan in everything from computers to auto parts.

While Taiwan’s central bank regularly weakens its currency in the run-up to the close, it took the rare step of doing so before the midday trading break on May 28, when the local dollar fell 0.3 percent during the final minute of the morning trading session. The spot rate has declined an average of 0.4 percent during the last hour of trading over the past month, compared with 0.2 percent in 2014.

‘Aggressive Intervention’

The increased intervention has seen the currency weaken 2.1 percent to NT$31.032 against the greenback as of 2:42 p.m. local time from this year’s intraday high of NT$30.394 on May 22, according to prices from Taipei Forex Inc.

“We could see more heavy aggressive intervention,” said Jonathan Cavenagh, a foreign-exchange strategist at Westpac in Singapore. “The Taiwan dollar looks too expensive on a nominal effective exchange-rate basis.”

An Westpac index shows it reached the highest level since 1997 against a trade-weighed basket of peers on May 28.

While trades shorting the Taiwan dollar against other Asian currencies incurred losses of 1 percent to 6.5 percent in the first five months of the year, the prospect of weakness would make them more attractive. Selling the local dollar to buy other regional currencies will hand investors returns of 1.2 percent to 7.1 percent by the end of the year, according to Bloomberg surveys of analysts.

Using the island’s dollar as a funding currency to buy higher-yielding assets is popular because of Taiwan’s relatively low borrowing costs.

Carry Effect

“The very solid pace of equity inflows really began into Taiwan in April betting on the Shanghai-Taiwan stock connect and the idea that it may drive a lot of capital inflows from mainland China,” said Mirza Baig, head of foreign exchange and interest-rate strategy at BNP Paribas in Singapore. “Now that everybody knows about the stock connect, it’s probably in the price.”

China’s securities regulator is studying setting up a stock-trading link between Shanghai and Taipei, the Economic Daily News reported April 22. The island’s bourse is home to suppliers of Apple Inc. and the world’s biggest chipmakers.

“Net foreign buying of Taiwan stocks this year should be pretty strong,” said Yang Jin-Feng, Taipei-based manager of SinoAm Conventional Industry Fund, which is beating 95 percent of peers this year and run by Franklin Templeton SinoAm Securities Investment Management Inc. “We are buying these stocks but not particularly because of the link expectation.”

‘Obvious Short’

The Taiwan dollar strengthened 16 percent against the yen in the past year and 5.5 percent versus the won. It will drop 2.4 percent against the greenback by Dec. 31 and a further 1.5 percent in 2016, median estimates in Bloomberg surveys show.

“The level of strength in the Taiwan dollar, while not extreme, has been idiosyncratic,” said Sacha Tihanyi, a senior currency strategist at Scotiabank in Hong Kong. “This is looking like an obvious short at current levels.”

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