Taiwan Dollar Forwards Weaken Most in Five Weeks on Fed Concern

Taiwan dollar forwards weakened the most in five weeks on concern the Federal Reserve will scale back fund infusions that have fueled demand for riskier assets. Government bonds declined.

Fed policy makers said they will probably end their $85 billion monthly debt purchases sometime in 2013, with members divided between a mid- or end-of-year finish, according to the minutes of the Federal Open Market Committee’s Dec. 11-12 meeting released yesterday. The bond-buying programs in the U.S., Europe and Japan prompted overseas investors to boost their holdings of Taiwan’s stocks by $4.9 billion in 2012, contributing to a 4 percent appreciation of the local dollar.

“Stopping bond buying will hurt investor confidence in the market,” said Samson Tu, a Taipei-based fund manager at Uni-President Assets Management Corp., which oversees $700 million. “Investors doubt whether the U.S. recovery is strong enough to warrant an end to quantitative easing.”

One-month non-deliverable forwards fell 0.2 percent to NT$29.003 per dollar as of 4:21 p.m. in Taipei, according to data compiled by Bloomberg. That’s the biggest gain since Nov. 28. The contracts fell 0.3 percent this week and are at a 0.4 percent premium to the spot rate, which slipped 0.1 percent to NT$29.125, based on Taipei Forex Inc. prices. Local financial markets were closed on Dec. 31 and Jan. 1 for public holidays.

The monetary authority has bought the greenback to counter gains in the island’s currency on most days in the past nine months, according to traders who asked not to be identified. The central bank’s mandate is to keep relative exchange-rate stability and to intervene in the event of abnormal moves, Governor Perng Fai-Nan said Dec. 19.

Implied Volatility

One-month implied volatility in the Taiwan dollar, a gauge of expected moves in exchange rates used to price options, fell five basis points, or 0.05 percentage point, to 3.15 percent.

The yield on the 1.125 percent notes due September 2022 rose one basis point to 1.168 percent and was little changed this week, according to Gretai Securities Market. The overnight interbank lending rate was steady at 0.387 percent today, from 0.413 percent on Dec. 28, a weighted average compiled by the Taiwan Interbank Money Center shows.

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