The recent bullish trend for the Taiwan dollar has come to a halt, as indicated by a key metric in the options market. This shift suggests a decrease in optimistic bets towards the Asian currency, influenced by the enduring strength of the US dollar.
An analysis of the options market reveals that the balance between bullish call options and bearish puts for the US dollar compared to the Taiwan dollar has leveled out. This adjustment follows a period of four months where the sentiment was largely negative, underscoring a change in trader expectations towards the Taiwan dollar amidst the US dollar's resilience.
The US economy's robust performance is causing traders to reconsider the timing of anticipated Federal Reserve rate cuts, thereby strengthening the position of the US dollar. Recent strong manufacturing data has played a significant role in this reassessment, favoring the US currency over its Taiwanese counterpart.
Christopher Wong, a foreign-exchange strategist, notes that a combination of factors including strong ISM manufacturing data, hawkish statements from the Federal Reserve, and weaknesses in the yuan and yen, are likely to continue pressuring the Taiwan dollar for some time. While intervention by policymakers may mitigate excessive fluctuations, a reversal of the current trend seems unlikely.
The risk reversals metric, which dipped below zero towards the end of last year due to a dovish pivot by the Fed, had previously indicated a more favorable outlook for the Taiwan dollar. This optimism was supported by a rally driven by artificial intelligence in the domestic stock market and political clarity following Taiwan's presidential election. However, the ongoing weakness in significant Asian currencies like the yuan and yen is negatively impacting regional sentiment.
Barclays Plc analysts suggest that the Taiwan dollar might remain weaker in the upcoming months until the Federal Reserve implements rate cuts and the situation with semiconductor-related exports sees improvement. The currency recently hit a four-month low against the US dollar.
Lemon Zhang from Barclays highlighted the potential for further depreciation in the Taiwan dollar, noting the significant interest rate differentials between the US and Taiwan, which persist despite initial rate cuts from the Fed.
