The Taiwanese dollar is moving erratically again: what is behind its appreciation?

The volatility around the new Taiwan dollar (TWD) remains extremely high while investors evaluate the news related to trade compared to the exposure of Taiwan life insurance companies to assets called in US dollars (USD). After falling almost 5% on Thursday, the USD/TWD pair recovered and was last quoting about 29.50, losing about 1.5% in the day.

The USD/TWN resumed its bearish trend on Thursday. Source: FXSTERET.

These sudden movements are rare for a currency that generally barely attracts holders: what could be telling us the recent increase in Taiwan dollar?

Optimism about commercial conversations benefits Taiwan

You might think that the movement responds to a better perspective regarding conversations about tariffs between the US and China. In the end, the Taiwan dollar surely benefits from the decrease in commercial tensions and relatively optimistic performance of technological actions in the US.

This is because giants such as Apple, Nvidia and Qualcomm depend largely on the semiconductors supplied by TSMC (Taiwan Semiconductor Manufacturing Company).

The recent US inflation data may also have contributed to the strength of the Taiwanese dollar. The US inflation data lower than expected on Wednesday harmed the US dollar and the yields of the US Treasury bonds, which led to USD capital exits towards, among others, the TWD.

Although the current environment seems advantageous so that the Taiwanese economy – and its key chips sector – continues to expand at a healthy pace, the appreciation of the Taiwan dollar could have some adverse effects.

The role of Taiwanese life insurers

According to Bloomberg, there is another key factor that could be influencing the market beyond commercial conversations: Taiwan’s insurance companies have more than 90% of their assets abroad called in US dollars, unlike many other insurers in other countries that diversify their portfolios. This exhibition of Taiwan insurers puts them under a significant threat of financial losses when the Taiwan dollar is seen in front of the USD.

“Taiwan is in the epicenter of this massive dollar that institutional investors have maintained. With the TWD having another great movement today, we should not have doubts that the global pension funds and life insurers are closely observing how the elimination of this dollar’s imbalance is developed and what lessons should they extract for their own portfolios,” said Deutsche Bank analysts.

There are few signs that insurers are preparing an important review of their investment model given the limited size of the Taiwan financial market and its dependence on regulatory support in difficult times, Bloomberg wrote.

“That means that the loss of currency of 4,000 million dollars of the sector between January and April and the profits of some of its largest actors can only be the beginning of more clashes, asking questions about the systemic risks for the finance of the island and the savings for retirement,” he added.

Previously, in May, the USD/TWD lost almost 10% in a period of two days and touched its weakest level in nine months below 28. The pair rose around 6% in the following days, since the governor of the Central Bank of Taiwan said they had intervened to stop what they considered as “excessive” flows.

At that time, many speculated that the Central Bank had negotiated with the US a weakening of the currency as part of the negotiations to ensure a beneficial commercial agreement with the Trump administration. Taiwan denied such rumors.

It is currently not clear if the Central Bank is intervening in the currency markets. But investors could be refraining from betting on a greater appreciation of the Taiwan dollar given the risk of being trapped on the wrong side in case of an intervention.