Taiwan Dollar Turns Proxy for Spillover Ukraine Risks in Asia

(Bloomberg) -- Taiwan's dollar is fast becoming a favorite proxy for market risks in Asia triggered by Russia's invasion of Ukraine.

The currency was already one of the region's worst performers in February as investors withdrew from Taiwanese stocks. Now, options pricing indicates a dash for protection in case those moves start to accelerate, with a gauge showing that traders are the most bearish on the local dollar in almost two years.

The bets represent speculation over whether China could use Russia's invasion of Ukraine as a distraction to ramp up tensions with Taiwan. Even if few deem that likely, Taiwan's relatively deep and liquid markets make them appealing to investors seeking strategic positions with the rising geopolitical risks. Premier Su Tseng-chang has said the central bank has enough U.S. dollar liquidity to keep the local currency stable.

“The Taiwan dollar is being suppressed due to the Russia invasion, as Russia's actions may have implications on whether China would act against Taiwan in a military fashion,” said Stephen Chiu, chief Asia FX and rates strategist at Bloomberg Intelligence in Hong Kong. “The Taiwan dollar is deep and liquid enough. It is one of the most traded NDF pairs in the world.”

One-month risk reversals on the U.S.-Taiwan dollar exchange rate climbed to 1.1525% on Tuesday, signaling the most bullish sentiment toward the greenback since May 2020. The risk reversals jumped over 100 basis points in February, the largest one-month increase since 2012.

One-month non-deliverable forwards on the currency pair rose to 28.190 last month, the highest in almost a year.

Beijing's threats to use military force to stop Taipei from declaring formal independence have persisted for years. Taiwan President Tsai Ing-wen has played down concerns that Russia's invasion of Ukraine could trigger a similar crisis in Asia, warning against any efforts to use the crisis in Europe to sow panic in Taiwan.

History suggests that geopolitical factors exert substantial influence over the Taiwan dollar. The currency slid more than 3% versus the greenback between July 1995 and March 1996, when China conducted a series of missile tests in the waters surrounding the island.

Intervention

Still, any losses in the local dollar may be limited from here as the authorities step in to offer support. State-backed banks sold the greenback to help the Taiwan dollar erase losses before the close on Tuesday, according to traders who asked not to be identified as they are not authorized to speak publicly.

The Taiwan dollar slipped 0.1% to 28.050 per greenback on Wednesday after ending little changed the previous day.

The currency is relatively stable compared to major peers, and policy makers will maintain a flexible exchange rate policy, Premier Su said in a report to lawmakers on Tuesday. The authorities will monitor fund flows closely in case of abnormal fluctuations in the FX market due to the war, Su added.

Worries about heightened tensions are also showing up in the island's stocks. The put-to-call ratio on the largest exchange-traded fund that buys Taiwanese equities -- or the amount of outstanding bearish options contracts relative to bullish ones -- jumped to the highest since November.

That may also partly reflect concerns that Taiwan's companies could be affected by any disruption over Ukraine's supply of gases used in semiconductor output.

“While there isn't any key shortage as yet with chip makers holding above-norm levels of inventories, a protracted shock could challenge this outlook,” according to Citigroup Inc. analysts Johanna Chua and Yuanliu Hu.