The Taiwan dollar is rapidly emerging as Asia’s top choice for carry trades, potentially surpassing the yuan due to its lower risk of interest rate and currency volatility. A strategy that involves borrowing the Taiwan dollar to invest in higher-yielding assets has yielded the second-highest returns among Asian currencies in the past month, trailing only the yuan, according to the Sharpe ratio, a key metric for risk-adjusted returns.
Analysts suggest that Taiwan’s currency may soon replace the yuan as the region’s preferred carry-trade vehicle, citing the unpredictability of Beijing’s currency interventions. While China has been actively managing the yuan to support its value, these efforts have introduced significant volatility, especially in borrowing costs. In contrast, Taiwan’s central bank enjoys a more relaxed stance, as any depreciation of the Taiwan dollar benefits the island’s export-driven economy and attracts investments, particularly in the burgeoning artificial intelligence sector.
“The Taiwan dollar has emerged as one of the more stable funding currencies in Asia, alongside the offshore yuan,” said Stephen Chiu, Bloomberg Intelligence’s Chief Asia Foreign Exchange and Rates Strategist. “However, with the increasing risks of short squeezes due to yuan interventions, the Taiwan dollar has become much more attractive.”
Elsewhere in Asia, the yen faces rising interest rates, and other currencies have either higher borrowing costs or greater volatility, further strengthening the Taiwan dollar’s position.
The yuan’s appeal as a funding currency is weakening as the People’s Bank of China intensifies its efforts to stabilize the currency ahead of expected tariff increases under a potential second term for former President Donald Trump. These interventions, including setting a stronger reference rate and liquidity control measures, have made the offshore yuan one of Asia’s most volatile currencies over the past month.
Meanwhile, the Taiwan dollar has become even more appealing as a funding currency after recently surpassing a significant psychological threshold of 33 per dollar for the first time in nearly nine years.
Looking ahead, analysts predict the Taiwan dollar may continue to weaken along with other regional currencies, especially given the economic challenges posed by Trump’s potential return to the White House and a less dovish U.S. Federal Reserve. Despite this, Taiwan’s economy remains relatively strong and well-positioned to weather short-term volatility, with a low likelihood of aggressive currency interventions, according to Joey Chew, Head of Asia Foreign Exchange Research at HSBC Holdings.
“The fundamentals are solid, and Taiwan’s economy is poised to navigate through these challenges with minimal disruption,” Chew noted.
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