Following the surge of the euro and Japanese yen against the US dollar, more Asian currencies have recently seen significant increases. On May 5th, the New Taiwan Dollar surged sharply during trading hours, with its single-day maximum appreciation against the US dollar approaching 10%. Meanwhile, the Hong Kong dollar has appreciated to the strong level of the peg against the US dollar, prompting the Hong Kong Monetary Authority (HKMA) to intervene several times in recent days by selling Hong Kong dollars to maintain the linked exchange rate system.
Ever since Trump was elected President of the United States, the "Mar-a-Lago Agreement" has been widely circulated. One of its core components is a weaker US dollar to boost American manufacturing. The concept of this agreement can be traced back to a report titled "A User's Guide to Restructuring the Global Trade System," released last November by Stephen Miran, Chairman of the White House Council of Economic Advisers. Although it is unclear whether the agreement has been implemented, it seems to be driving the recent market trading logic. The US Dollar Index has fallen by nearly 10% from its年初 high point to date.
According to George Tai, Chief Economist at Guotai Junan International, markets need both fundamentals and a story. The "Mar-a-Lago Agreement" and trade negotiations could be that story. Fundamentally, the New Taiwan Dollar tends to appreciate due to large trade surpluses (such as substantial semiconductor exports), with exporters needing to sell US dollars for New Taiwan Dollar wages. Additionally, Taiwanese life insurance companies offer high-interest policies to attract clients, which requires them to invest heavily in overseas assets, especially US dollar assets, necessitating foreign exchange hedging by purchasing New Taiwan Dollars in the forward market. These two factors determine that the New Taiwan Dollar is structurally prone to appreciation.
The sharp rise in the New Taiwan Dollar puts pressure on insurers and exporters
During the "May Day" holiday, the sharp increase in the New Taiwan Dollar against the US dollar caught the attention of global traders. On May 2nd, USD/TWD opened at 32.128, while by May 5th, USD/TWD briefly touched 26.93 at its lowest point, leaving a long lower shadow with a depreciation of up to 16%, closing at 29.115.
In response to the sharp rise in the New Taiwan Dollar, the monetary authority of the Taiwan region held an emergency press conference, stating that the US Treasury did not request the Taiwan region's currency to appreciate. The expansion of the trade surplus with the US mainly results from increased demand for Taiwan's technology products, rather than foreign exchange factors. They urged enterprises to stop considering unrealistic market analyses and avoid irrational selling of US dollars to prevent self-inflicted damage.
When asked whether they would strengthen foreign exchange market management, the department mentioned that due to strong appreciation expectations, market forces (mainly exporters and stock capital inflows) were too strong, causing excessive current market fluctuations. However, they also mentioned that they would not reverse market trends but would issue warnings against speculative behavior.
A Goldman Sachs trader noted that after the press conference, the non-deliverable forward (NDF) for USD/TWD fell another 3%, reaching around 28.3, as no signals were released indicating stronger measures to curb the historic appreciation.
However, on June 6th, the New Taiwan Dollar against the US dollar fell back slightly. As of 16:50 on that day, USD/TWD was reported at 32.054. Nevertheless, within just a few days in May, the New Taiwan Dollar still appreciated by nearly 3% against the US dollar, and its cumulative appreciation over the past year exceeded 7%.
Mr. Zhou Hao explained to reporters that the recent sharp appreciation of the New Taiwan Dollar has put some Taiwanese insurance companies under certain pressure, potentially exacerbating the appreciation of the New Taiwan Dollar.
He mentioned that on one hand, there are significant trade surpluses in the Taiwan region (for example, large-scale semiconductor exports), requiring exporters to sell US dollar foreign exchange income to pay New Taiwan Dollar wages; on the other hand, the interest rates offered by Taiwan life insurance companies are relatively high to attract customers, which requires these companies to allocate substantial overseas assets (with relatively higher returns), particularly US dollar assets, necessitating foreign exchange hedging by purchasing New Taiwan Dollars in the forward market (as policy returns are ultimately paid in New Taiwan Dollars), thus creating a situation where forward derivative markets consistently show the New Taiwan Dollar appreciating. These two factors determine that the New Taiwan Dollar is structurally prone to appreciation.
A foreign investment bank trader and strategist mentioned that in addition to the aforementioned fundamental factors,叠加 recent concerns about weakening creditworthiness of US assets and speculation that Asian countries and regions might achieve trade agreements through appreciation of their currencies against the US dollar, such "stories" have temporarily exacerbated the appreciation of Asian currencies, fueling speculative trading.
Three major Taiwanese life insurance companies—China Life Insurance, Fubon Life Insurance, and Nan Shan Life Insurance—stated that even if the exchange rate of the New Taiwan Dollar against the US dollar rises above 30, their net worth ratio and risk-based capital (RBC) ratio will remain within legal standards. According to current regulations in the Taiwan region, insurers' RBC must remain above 200%, and their net worth ratio must stay above 3%. There are currently no signs of a rush to withdraw funds, and liquidity does not need to be a concern.
However, a local financial institution representative mentioned that the strong expectation of appreciation of the New Taiwan Dollar makes the cost of non-deliverable forward contracts extremely high, making it difficult to significantly increase foreign exchange hedging.
At the same time, Taiwan's export-oriented enterprises are also under pressure. A responsible person from a Taiwan textile export company mentioned that historically, the appreciation of the New Taiwan Dollar has been controlled, taking two years to appreciate by 2% to 3%. Such a sharp increase now may cause significant pressure on export enterprises, reducing the income from foreign exchange settlement.
Hong Kong Monetary Authority Intervenes to Stabilize the Hong Kong Dollar
The Hong Kong dollar has also surged against the US dollar in recent days, continuously touching the strong guarantee level of 7.75. Investor enthusiasm for the Hong Kong stock market, rising expectations of the Hong Kong dollar appreciation, and the increase in visitors during the "May Day" holiday have all acted as catalysts.
According to the Hong Kong Linked Exchange Rate System implemented since 1983, the Hong Kong dollar has a normal fluctuation range against the US dollar: 7.75 (strong guarantee) to 7.85 (weak guarantee). The Hong Kong Monetary Authority provides exchange guarantees, committing to sell Hong Kong dollars at the strong guarantee level of 7.75 upon bank requests and buy Hong Kong dollars at the weak guarantee level of 7.85 upon bank requests.
On May 6th, Edwin Wong, Chief Executive of the Hong Kong Monetary Authority, stated that the Hong Kong dollar had touched the strong guarantee level of 7.75 three times in the past few days, with the HKMA injecting a total of 116.614 billion Hong Kong dollars. It is predicted that Hong Kong dollar demand will further increase in the next 2 to 3 months.
The first injection occurred on the New York trading session on the 3rd, injecting 46.539 billion Hong Kong dollars; the second injection occurred on the Asian trading session on the 5th, injecting 9.532 billion Hong Kong dollars; the third injection occurred on the New York trading session on the 6th, injecting 60.543 billion Hong Kong dollars.
Chien An International Chief Hong Kong Stock Strategist Zhao Wenli told Caixin that the recent strong performance of the Hong Kong dollar is caused by multiple factors. Significant uncertainty in US policies has led emerging market funds to withdraw from US assets, resulting in general strength of Asian currencies (including the Chinese yuan) against the US dollar, further enhancing the strength of the Hong Kong dollar.
Meanwhile, since the fourth quarter of last year, active trading in the Hong Kong capital market and continuous new share financing activities have significantly increased demand for the Hong Kong dollar. Additionally, coinciding with the "May Day" holiday, visits to Hong Kong have significantly increased, short-term demands such as consumption and wealth management have intensified the demand for the Hong Kong dollar.
"It is worth noting that this time differs from before. Interest rate differentials do not support the sustained strength of the Hong Kong dollar, suggesting that carry trades are not the main driver of the appreciation of the Hong Kong dollar. If interest rate differentials and exchange rates continue to diverge, the strength of the Hong Kong dollar will converge in the future," Zhao Wenli stated.
Market Focuses on the Federal Reserve Meeting
Whether the abnormal movement of Asian currencies can continue depends not only on trade negotiations but also on the direction of US monetary policy. This week's Federal Reserve meeting will likely dominate the market.
Currently, optimism about trade negotiations, along with positive earnings reports from US tech stocks and economic data, has helped the US stock market rebound for two consecutive weeks. The S&P 500 index has risen for nine consecutive days, marking the longest streak of gains in 20 years, recouping all losses since the "reciprocal tariff" announcement on April 2nd, with this year's cumulative loss narrowing to 3.7%. The US Dollar Index has also rebounded to near 100, previously falling below 98.
Senior Analyst Jerry Chen from IG Group told Caixin that despite strong pressure from Trump, Federal Reserve Chairman Powell has repeatedly emphasized in recent speeches that "immediate interest rate cuts will not happen." Due to overall economic data (especially the better-than-expected non-farm payroll data last Friday), it is highly likely that interest rates will remain unchanged this week, but the outlook for interest rate cuts is the focus of market attention. If the decision is hawkish, it may test the resilience of the stock market rebound.
In his view, US employers added 177,000 jobs in April, lower than the previous month but better than expected, with the unemployment rate remaining steady at 4.2%. The non-farm payroll report shows that despite ongoing trade wars, the labor market remains temporarily stable. However, it is noteworthy that the figures for the previous two months have been revised downward, and the impact of tariffs may appear in future months' data. The worst phase of trade policy may have passed, but challenges facing the economic outlook are just beginning.
The wording regarding the path of future interest rate cuts in the statement and press conference of this Fed meeting will be crucial. Maintaining a hawkish stance (not rushing to cut rates) is likely to help the US Dollar Index maintain its upward momentum. Interest rate markets currently expect three rate cuts this year, with the first possible in July.
(This article comes from Caixin.)
Original source: https://www.toutiao.com/article/7501295429443748352/
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