New Taiwan dollar forwards slumped the most in almost six months after a Chinese-language newspaper reported that the central bank was investigating suspected irregular trading in the market by foreign banks.
One-month non-deliverable forwards shed 0.9 percent to NT$32.15, the most since April 7. The Chinese-language United Daily News said the central bank was looking into whether the banks engaged in speculative trades involving sales of US dollars in the forwards market that weren’t covered by anticipated US dollar earnings in the future.
The contract, which allows investors to bet on the value of the currency in one month, rallied 3.5 percent last month as foreign investors snapped up Taiwanese stocks and exports to China increased. Central bank Governor Perng Fai-nan (彭淮南) told lawmakers this week he was prepared to step in to “maintain order” as inflows from abroad put pressure on the currency to appreciate.
“The central bank doesn’t want the Taiwan dollar to rise too fast,” said Michael Ding (丁予嘉), chairman and chief executive at Taipei-based brokerage Waterland Securities Co (國票證券). “The banks may unwind their short US dollar positions, just to show their cooperation.”
A short position is a bet that an asset will decline. Forwards are agreements to buy and sell assets at current prices for delivery at a specified time and date.
Non-deliverable contracts are conducted offshore and are settled in dollars. That leaves the central bank with limited ability to control such trades, Ding said.
The spot rate for the NT dollar gained as much as 0.3 percent, before reversing its advance on speculation that the central bank was intervening to curb appreciation. The NT dollar fell 0.1 percent to NT$32.35 per US dollar as of 4pm in Taipei. It reached NT$31.995 on Thursday, the strongest level since Oct. 1 last year.
“There’s hot money coming in in anticipation of further appreciation of the Taiwan dollar,” said Henry Lin, a currency trader at Shin Kong Commercial Bank (新光銀行). “The money is more or less being used to buy stocks.”
The central bank bought US dollars yesterday to slow the local currency’s rise, though it wasn’t as active as on Thursday, said three traders, asking not to be identified. Policymakers intervened on Thursday to drive the NT dollar down 0.4 percent, traders said.
The monetary authority said on Wednesday that it would “step in to maintain order” if excessive volatility is caused by “seasonal or irregular factors.”
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