Challenging regulatory tolerance, the New Taiwan Dollar plummets and then soars again!

New Taiwan Dollar Volatility Continues: Following a sharp decline on Monday, the New Taiwan Dollar surged again on Tuesday, marking the largest single-day increase since May. Analysts point out that the ongoing volatility of the New Taiwan Dollar is also challenging the tolerance of regulators.

The Taiwan Dollar rose 2.5% against the US Dollar today, the largest single-day increase since early May, reaching a high of 29.16 TWD. This rebound has expanded the cumulative increase of the New Taiwan Dollar this year to 12%, making it the strongest performer among all Asian currencies.

According to an article from Wall Street Journal, in the previous trading day, the New Taiwan Dollar suddenly plummeted 2.5% in the last trading minutes, marking the largest single-day decline since 2001.

Market participants generally believe that this significant volatility reflects the delicate balance that regulators must maintain between stabilizing the exchange rate and responding to the weakening trend of the US Dollar. Analysts expect that volatility will persist until the trade outlook becomes clearer.

Additionally, the recent two-day sharp fluctuations of the New Taiwan Dollar coincide with local companies preparing to release their semi-annual reports, and the exchange rate fluctuations will directly impact the financial performance of companies, including life insurance companies and exporters.

New Taiwan Dollar Volatility Challenges Regulatory Tolerance

Whether rising or falling sharply, the volatility of the New Taiwan Dollar has formed a clear pattern.

According to media reports, the sharp rise of the New Taiwan Dollar on Tuesday was mainly driven by local exporters selling off US Dollars in large amounts.

Media cited two traders who reported that there was a significant inflow of foreign capital and notable selling of US Dollars by local exporters on Tuesday morning. To stabilize market liquidity, state-owned banks immediately entered the market to buy US Dollars.

During the sharp decline of the New Taiwan Dollar on Monday, the Wall Street Journal article pointed out that, according to foreign exchange traders, state-owned banks aggressively entered the market to buy US Dollars after 3 PM on Monday, causing the Taiwan Dollar to drop rapidly.

This pattern of sudden depreciation in the last trading minutes is similar to the trend observed after the Taiwan Dollar reached a three-year high last Friday.

Christopher Wong, a senior foreign exchange strategist at OCBC Bank, stated that an "invisible hand" is sending a strong signal to the market, indicating that the regulators' tolerance for the appreciation of the Taiwan Dollar may be nearing its limit.

However, he also noted that the regulators' counter-cyclical intervention can only slow down the trend but cannot reverse the appreciation trend.

As Fiona Lim, a senior strategist at Malayan Banking Bhd. in Singapore, said:

"Window guidance-style interventions are essentially seasonal in nature, capable of pausing but not reversing the trend of the US Dollar against the Taiwan Dollar. As long as the US Dollar continues to decline significantly, the trade of selling US Dollars and buying Taiwan Dollars may continue."

Vishnu Varathan, head of macro research for Asia (excluding Japan) at Mizuho Bank Ltd., stated:

"Volatility may persist until the trade outlook becomes clearer. Regulators are trying to signal to speculative long positions in the Taiwan Dollar that the rebound in April-May was a one-time adjustment, not a long-term habit."

Life Insurance Industry and Exporters Under Pressure Prompt Regulatory Policy Adjustments

Since the beginning of this year, the New Taiwan Dollar has continued to rise, performing the best among all Asian currencies, due to:

Foreign capital heavily buying into Taiwanese stocks in June, exporters worrying about the continued depreciation of the US dollar and accelerating currency selling, and the return of funds from local asset management institutions in Taiwan also played a driving role.

However, the continuous appreciation of the New Taiwan Dollar poses risks to Taiwan's export-dependent economy and puts immense pressure on life insurance companies holding large amounts of US dollar-denominated assets.

Taiwan hopes to prevent excessive appreciation of the New Taiwan Dollar to protect export competitiveness and alleviate pressure on the life insurance industry.

Taiwan's Financial Supervisory Commission has issued several lenient measures for the life insurance industry, allowing companies to increase foreign exchange price fluctuation reserves to offset future exchange losses caused by the appreciation of the New Taiwan Dollar.

Regulatory authorities have also granted life insurance companies greater flexibility in using reserves to mitigate impacts.

Last month, the central bank also strengthened warnings regarding local trading companies' currency purchases and required foreign capital to exit positions betting on the New Taiwan Dollar through exchange-traded funds, demonstrating an increasingly firm determination to stabilize the exchange rate.

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