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Why is the Taiwanese Dollar Suddenly Surging?

Why is the Taiwanese Dollar Suddenly Surging?

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 Investors were caught off guard last week when the Taiwanese dollar surged to a multi-year high. Our strategists Michael Zezas and James Lord look at what was behind this unexpected rally.Read more insights from Morgan Stanley.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income Research and Public Policy Strategy.James Lord: And I'm James Lord Morgan Stanley's, Global Head of FX and EM Strategy.Michael Zezas: Today, we'll focus on some extreme moves in the currency markets and give you a sense of what's driving them, and why investors should pay close attention.It's Thursday, May 8th at 10am in New York.James Lord: And 3pm in London.Michael Zezas: So, James, coming into the year, the consensus was that the U.S. dollar might strengthen quite a bit because the U.S. was going to institute tariffs amongst other things. That's actually not what's happened. So, can you explain why the dollar's been weakening and why you expect this trend to continue?James Lord: I think a big factor for the weakening in the dollar, at least in the initial part of the year before the April tariff announcements came through, was a concern that the U.S. economy was going to be slowing down this year. I mean, this was against some of the consensus expectations at the beginning of the year.In our year ahead outlook, we made this call that the dollar would be weakening because of the potential weakness in the U.S. economy, driven by slow down in immigration, limited action on fiscal policy. And whatever tariffs did come through would be kind of damaging for the U.S. economy.And this would all sort of lead to a big slowdown and a kind of end to the U.S. exceptionalism trade that people now talk about all the time. And I think since April 1st or April 2nd tariff announcements came, the tariffs were so large that it raised real concerns about the damage that was potentially going to happen to the U.S. economy.The sort of methodology in which the tariff formulas were created raised a bit of concern about the credibility of the announcements. And then we had this constant on again, off again, on again, off again tariffs. That just created a lot of uncertainty. And in the context of a 15-year bull market of the dollar where it had sucked enormous amounts of capital inflows into the U.S. economy. You know, investors just felt that maybe it was worth taking a few chips off the table and unwinding a little bit of that dollar risk. And we've seen that play out quite notably over the last month. So, I think it's been, yeah, really that those concerns about growth but also this sort of uncertainty about policy in general in the context of, you know, a big bull run for the dollar; and fairly heavy valuations and positioning. Those have been the main issues, I think.Michael Zezas: Right, so we've got here this dynamic where there are economic fundamental reasons the dollar could keep weakening. But also concerns from investors overseas, whether they're ultimately founded or not, that they just might have less demand for owning U.S. dollar denominated assets because of the U.S. trade dynamic. Now it seems to me, and correct me if I'm wrong, that there was a major market move in the past week around the Taiwanese dollar, which reflected these concerns and created an unusually large move in that currency. Can you explain that dynamic?James Lord:  Yeah, so we've seen really significant moves in the Taiwan dollar. In fact, on May 2nd, the currency saw its largest one-day rally since the 1980s, and over two days gained over 6.5 percent, which for a Taiwan dollar, which is pretty low volatility currency usually, these are really big moves. So in our view, the rally in the Taiwan dollar, and it was remarkably big. We think it's been mostly driven by Taiwanese exporters selling some of their dollar assets with a little bit of foreign equity inflow helping as well. And this is linked back to the sort of trade negotiations as well.I mean, as you know, like one of the things that the U.S. administration has been focused on currency valuations. Historically, many people in the U.S. administration believe the dollar is very strong. And so there has been this sort of issue of currency valuations hanging over the trade negotiations between the U.S. and various Asian countries. And local media in Taiwan have been talking about the possibility that as part of a trade negotiation or trade deal, there could be a currency aspect to that – where the U.S. government would ask the Taiwanese authorities to try to push Taiwan dollar stronger.And you know, I think this sort of media reporting created a little bit of a -- well, not just a little, a significant shift from Taiwanese exporters where they suddenly rush to sell their dollar deposits in to get ahead of any possible effort from the Taiwanese authorities to strengthen their currency. The central bank is being ...
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