Taiwanese central bank asks for smaller dollar trades

Taiwan’s central bank has told traders at commercial banks to sell the US dollar in smaller amounts, a spokesperson tells Central Banking.

The size of some banks’ dollar orders have had negative effects on the market, the central bank spokesperson says. They say the country’s foreign exchange market is not deep, and if dollar orders are too large it will affect the speed of FX transactions in the interbank market.

The central bank has suggested traders sell the dollar in orders smaller than $5 million in the interbank FX market, according to the head of global markets at a commercial bank in Taiwan.

Although the message is just a reminder, rather than a ban on large orders, it shows that the central bank is concerned about currency appreciation, the global markets head says.  

The central bank is not limiting the freedom of banks’ FX transactions and is merely maintaining market stability, the spokesperson says. Large amounts of US dollar orders have slowed transaction speeds and affected the market’s smooth functioning, they say.

The local currency has gained around 3% against the US dollar since the beginning of this year. It stood at 29.27 against the US dollar on September 25, its strongest level in more than two years.

Taiwan runs a managed floating FX regime, and the central bank has a mandate to actively maintain the stability of the currency. It does so by monitoring the Taiwan dollar’s multilateral exchange rate against its trading partner currencies, says Stephen Chiu, FX and rates strategist at Bloomberg Intelligence.

“Currency manipulator” status

The US Treasury announced in January that Taiwan is “close to triggering key thresholds” that would put the country back on the official US monitoring list of currency manipulators. Taiwan was removed from the list in 2017.

“We have been concerned by recent analytical work published by the Council of Foreign Relations suggesting that Taiwan may have engaged in substantial undisclosed foreign exchange intervention in the swap market,” a US Treasury report said.

“Brad Setser and STW estimate that Taiwan has conducted undisclosed foreign exchange intervention in the swap market totalling approximately $130 billion, and perhaps as much as $200 billion,” it added.

After the report was published, Taiwan’s central bank denied that it ever used swaps to intervene in the currency market.

The US Treasury has delayed publishing a subsequent FX report that was due in September. Countries that meet at least two of its three criteria – high levels of current account surpluses as a share of GDP, a relatively high bilateral trade surplus with the US, and regular interventions in the FX market during the past year – will be placed on the watch list.

Taiwan has already crossed the $20 billion trade surplus threshold that would place it on the monitoring list, according to analysis by UBS. There is a “non-negligible possibility” that Taiwan will again be mentioned in the next Treasury report, according to the Swiss bank.

“Taiwan is the only major economy in Asia that does not publish data on the full details of its international reserves consistent with IMF standards,” the US Treasury report said.

Taiwan had FX reserves of $484.52 billion as of May, the fourth-largest in the world. The figure is equal to roughly 80% of the country’s GDP.