Soaring 6.5% in two days, New Taiwan Dollar "Major Earthquake"

The New Taiwan Dollar surged 6.5% over two days, putting immense pressure on Taiwanese life insurance companies holding hundreds of billions of dollars in U.S. Treasuries, prompting urgent discussions by Taiwan's financial market regulators.

According to media reports on the 5th, the Financial Supervisory Commission has requested discussions with several of Taiwan's largest life insurance companies regarding the impact of the rapid appreciation of the New Taiwan Dollar on their operations. These life insurance companies are among the largest holders of U.S. debt in Asia, some analysts claim they are collectively panicking and hedging against the chain reaction triggered by their dollar exposure. A long-anticipated financial storm may be quietly approaching: the massive scale of currency mismatches is like a ticking time bomb, set to explode with the depreciation of the dollar.

Currently, regulators find it difficult to intervene significantly in the foreign exchange market, but it is noteworthy that Yang Chin-long, the Governor of the Central Bank of Taiwan, stated at a media conference on currency held at 16:30 that if exchange rate fluctuations threaten market stability, they will intervene. They have adjusted the market in the past two trading days and have issued warnings upon discovering phenomena similar to currency speculation.

He indicated that the strong expectations for the New Taiwan Dollar's appreciation partly stem from market commentators, and that the exchange rate has been excessively volatile recently. He also urged market commentators not to speculate on the foreign exchange market.

Taiwan also stated that the tariff negotiations with the U.S. did not touch upon exchange rate issues.

Risks Accumulated Over Years, Market "Bullish" on the Dollar

On Monday, the Taiwanese market suffered a heavy blow, with the New Taiwan Dollar soaring 5% at one point, marking the largest single-day increase in over forty years. Exporters rushed to sell dollars, partly due to market expectations of the New Taiwan Dollar's appreciation.

Additionally, the life insurance giants in Taiwan collectively hedged their dollar exposure in panic, triggering a chain reaction.

As of January this year, Taiwan's foreign exchange reserves reached a staggering USD 1.7 trillion (most of which are U.S. bonds), equivalent to over 200% of its GDP and more than five times the size of Taiwan's bond market, with life insurance companies playing a key role.

Specifically, about USD 1 trillion is held privately, with USD 700 billion specifically held in insurance investment portfolios. The recent appreciation of the New Taiwan Dollar means they face potential losses and cash flow issues. Bank of America estimates that as of the end of last year, Taiwanese life insurance companies had only hedged about 65% of their held assets, close to historical lows.

Brad Setser, a senior researcher at the Council on Foreign Relations, wrote on social media platform X that this lack of hedging risk has accumulated over many years. The Taiwanese financial industry is "bullish" or optimistic on the dollar and hopes to "mitigate risks in a way that amplifies any further appreciation of the New Taiwan Dollar."

Martin Whetton, the head of financial market strategy at Westpac Banking Corp. in Sydney, stated:

"In the past three to four years of the US dollar appreciation, life insurance companies have enjoyed yield, narrowing interest spreads, and of course, capital gains from the dollar. The New Taiwan Dollar has been soaring, which will harm the foreign exchange-related returns from recent purchases—if they haven't done so already, this will force them to reconsider their hedging strategies."

Regulatory agencies currently find it difficult to intervene significantly

Taiwan's insurance companies have been grappling with this pain for years. Most of the bonds held by Taiwanese life insurance companies are long-term and complex dollar-denominated bonds, which makes the fluctuations in US interest rates highly correlated with Taiwan's financial system. An increase in US interest rates leads to substantial accounting losses for life insurance companies.

For a long time, Taiwan's "central bank" has maintained superficial stability by providing swap transactions to help life insurance companies hedge risks.

However, under the current circumstances, trade frictions have not only pushed up US Treasury yields but also placed more external pressure and constraints on Taiwan's "central bank" when intervening in the foreign exchange market. This has made it difficult for its central bank to intervene in the foreign exchange market as significantly as in the past, which is one of the key reasons for the surge of the New Taiwan Dollar last Friday.

According to reports citing informed sources, life insurance companies have been asked to assess the impact of foreign exchange trends and the measures they can take to respond to foreign exchange risks. More insurance companies may be invited to participate in meetings in the coming days