Taiwan Markets Targeted With Dollar Risk Highest Since 2017

(Bloomberg) -- A gauge of implied swings in the Taiwan dollar is headed for its highest close in over five years as fears of escalating tensions with China continue to dog the currency.

The local dollar tumbled to the lowest since April on Tuesday, a day after outflows from Taiwanese equities swelled to the most in over a year. Investors see the island’s assets as a proxy for the risks stemming from the war in Ukraine given the fraught relationship between Taiwan and China.

The losses in Taiwan’s assets highlight Taipei’s ongoing frictions with Beijing, which issued a stern warning to the U.S. on Monday against expanding ties with the island. The drop in the local dollar also reflects broader worries about stagflation as rising commodity prices add to already elevated price pressures.

“The ongoing Ukraine crisis has badly dented investor sentiment and led to a selloff in global equities, which has filtered through into Taiwan,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. “It is large foreign equity outflows that is mainly driving the Taiwan dollar weaker.”

Three-month implied volatility in the U.S.-Taiwan dollar exchange rate jumped 0.16 vol to 7.570 on Tuesday to head for its highest close since January 2017. The local dollar fell as low as 28.385 to the greenback, the weakest since April.

On Monday, Chinese Foreign Minister Wang Yi rejected comparisons between Taiwan and Ukraine, saying one was a sovereign country and the other was an “inalienable” part of China. He added that expanded U.S. ties with Taiwan “would not only push Taiwan into a precarious situation, but will also bring unbearable consequences for the U.S. side.”

The authorities have pledged to offer support should swings in the Taiwan dollar become excessive. Last week, Premier Su Tseng-chang said the central bank has enough U.S. dollar liquidity to keep the local currency stable.

©2022 Bloomberg L.P.