In the last half-hour of currency trading almost every day in Taiwan, state-backed lenders have the market largely to themselves and set the closing exchange rate at a level determined by the central bank.
Such operations, described by five traders who asked not to be identified, explain why over the past three years, Taipei Forex Inc prices show the New Taiwan dollar fell in the hour before the 4pm close on all but three trading days.
Last month’s average drop of 0.6 percent was triple that for last year, a sign that policymakers are becoming more concerned about the NT dollar, which is Asia’s top performer this year, with a 2.6 percent gain.
The abrupt declines are part of the central bank’s arsenal of unofficial tools to keep currency speculators at bay and to support exporters. The authority manipulates the opening and closing prices, discourages trading in the final half-hour and limits daily remittances, traders said.
The actions, none of which are disclosed, help stem appreciation without the expense of buying US currency in the market.
“Why don’t they actually intervene? Because then they need to pay a cost,” said Wu Tsong-min (吳聰敏), an economics professor at National Taiwan University in Taipei, who sat on the authority’s board from 2002 to last year. “If they use a higher price to buy US dollars and the next day it returns to the original price, they are losing money every day.”
The central bank denies curtailing trading in the last half-hour of each day. It reiterated in a statement last month that it would maintain order in the currency market if large, rapid fund flows caused by diverging monetary policies in developed nations affect stability in local financial markets.
The NT dollar slid 0.6 percent in the last 34 minutes of trading yesterday to close at NT$31.100, down 0.1 percent on the day.
The traders said the bank told them in July 2013 to stop taking client orders to buy the currency after 3:30pm, a policy that reportedly has remained in place since.
The authority engineers sudden declines in the spot rate by having two of the eight state-backed banks, including Bank of Taiwan (臺灣銀行) and Mega International Commercial Bank (兆豐國際商銀), conduct trades under its instruction, they said.
It is “not true” that traders are kept out of the market between 3:30pm and 4pm as trading volumes are not low, central bank foreign-exchange department director-general Harry Yen (顏輝煌) said in an e-mail.
Taipei Forex releases data only for the morning and afternoon trading sessions, having scrapped reports covering 15-minute intervals in 2010.
The central bank stepped up intervention since March, as exports slumped and a Westpac Banking Corp index showed the nominal effective exchange rate surged to a 17-and-a-half-year high.
The currency appreciated as global funds boosted their holdings of the nation’s equities by US$6.3 billion so far this year.
On three days in the previous quarter, in addition to routine intervention before the close, the central bank also pushed down the currency by as much as 0.8 percent in the run-up to the noon trading break.
According to traders, on April 30, for instance, the authority telephoned banks and asked them to cancel orders for the local currency before a midday intervention.
Yen rejected claims that the central bank had made such a request later that day.
“These practices are part of a broader ‘moral suasion’ toolkit, with the general goal of reducing the cost and visibility of exchange-rate management,” Eduardo Levy-Yeyati, visiting professor of public policy at Harvard Kennedy School and former head of emerging-market strategy at Barclays PLC, said in an e-mail.
“These methods reduce foreign-exchange volatility, but introduce a new source of uncertainty: the central bank itself,” he added.
The central bank has been bringing forward its end-of-day intervention last quarter, with traders saying they have been sometimes called upon to avoid buying NT dollars for an entire hour before the market close.
The central bank also imposes an unofficial cap on daily inward remittances that is about US$30 million for most companies, four traders said.
The NT dollar is one of the steadiest across emerging markets, with a measure of expected price swings for the month ahead showing the fourth-lowest reading among 24 peers.
The local currency has strengthened by 4.7 percent in the past five years, compared with a 1 percent advance for the Bloomberg- JPMorgan Asia Dollar Index.
The central bank does not intervene to “engineer a turn in the trend,” said Khoon Goh, a strategist at Australia & New Zealand Banking Group Ltd, the exchange rate’s most-accurate forecaster for the first quarter in Bloomberg rankings. “It is more a case of trying to smooth the pace of moves in the currency.”
Over the past three months, Bank of Taiwan has bought and sold local currency in the retail market at a rate stronger than the official close on all but one day, Web site quotes show.
Most Taiwanese firms use rates cited by their banks when converting foreign earnings for their financial statements, Deloitte & Touche partner Shirley Chiang (江美艷) said in Taipei.
“Only the central bank trades at the closing price,” KGI Securities Co economist Andrew Tsai (蔡耀德) said. “It is more like a short-term guidance from the central bank.”
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