Taiwan Dollar Volatility Rises as Yen Drop Spurs Weakening Bets

Volatility in the Taiwan dollar, a measure of expected moves in the exchange rate, headed for the biggest monthly increase since May as the yen’s slide fanned speculation the central bank will allow depreciation to keep exports competitive.

Policy makers warned on Jan. 29 that they will step into the foreign-exchange market after the Taiwan dollar reached a four-year high against the yen on Jan. 28. The yen dropped 4.6 percent versus the dollar this month, while the island’s currency fell 1.5 percent. Taiwan and Japan compete in overseas markets for electronic products.

“The central bank isn’t too happy about the strength of the currency against the yen affecting exports,” said Suan Teck Kin, an economist at United Overseas Bank Ltd. in Singapore. “Volatility would naturally increase.”

One-month implied volatility in the Taiwan dollar, a gauge used to price options, climbed 134 basis points, or 1.34 percentage points, to 4.57 percent in January as of 4:14 p.m. local time, according to data compiled by Bloomberg. The contracts dropped in the last three months of 2012.

One-month non-deliverable forwards fell 2.1 percent in January to NT$29.545 versus the dollar, halting a four-month advance, data compiled by Bloomberg show. In the spot market, the currency declined to NT$29.582 against its U.S. counterpart from Dec. 31 and was little changed today, according to prices from Taipei Forex Inc. It touched NT$28.928 on Jan. 14, the strongest level since September 2011.

Bonds Fall

A government report today showed Taiwan’s economy expanded 3.4 percent in the fourth quarter from a year earlier, exceeding estimates in a Bloomberg survey for 3 percent. For the whole year, gross domestic product increased 1.25 percent, less than 4.1 percent in 2011.

“The data today will give a bit of comfort to the market to push the Taiwan dollar to the stronger side,” Suan said. “The fundamentals are improving.”

Premier Sean Chen asked policy makers last week to closely monitor the effects of the Bank of Japan’s monetary easing. The central bank has sold its currency near the close on most days in the past 10 months, according to traders, who asked not to be identified.

Government bonds fell. The yield on the 1.125 percent notes due September 2022 rose two basis points to 1.19 percent this month, according to Gretai Securities Market. The rate was steady today.