The central bank has again warned of speculation by foreign institutional investors in the local foreign-exchange market, as it would further raise the value of the New Taiwan dollar against the US dollar.
In the past few sessions, foreign institutional investors have seemed keen to buy reverse exchange-traded funds (ETFs), which bet on the local equity market declining, as a way to reduce possible losses if the spot equity market moves lower, the central bank said.
In Taiwan, investors have to use NT dollar-denominated funds to buy ETFs, so foreign institutional investors have been remitting large amounts of US dollars and converting their funds into the local currency, boosting it.
Photo: CNA
However, foreign institutional investors could instead buy short position futures contracts as a hedging measure, placing a fraction of their foreign currency-denominated deposits in the futures contracts, the central bank said.
That way, they would only need to move a small amount of funds into Taiwan, which would not send ripples through the local forex market, it said.
The central bank said it suspected that foreign institutional investors were speculating in the local foreign exchange market by buying reversal ETFs rather than short-position equity futures contracts.
When the NT dollar rises further, these foreign institutional investors would simply sell their reversal ETFs and convert their funds into US dollars, which would allow them to receive more of the greenback, the central bank said.
Moreover, foreign institutional investors are likely to post additional gains in the equity market through their reversal ETFs when share prices fall, it added.
The NT dollar has moved higher against the US dollar in recent sessions. As of Friday, the NT dollar had risen more than 4 percent against the greenback this year, closing at NT$28.876.
When foreign institutional investors remit funds for investments in Taiwan, they have to invest up to 30 percent of their funds in financial instruments with a fixed income, such as bonds, and must place the remainder in the equity market as soon as possible.
By investing in reversal ETFs, they can get around the 30 percent ceiling imposed by financial authorities, the central bank said.
Foreign institutional investors had bought NT$48 billion (US$1.66 billion) worth of reversal ETFs as of the end of last month, it added.
The central bank said that it is determined to maintain market order and stabilize the local financial market, adding that it would meet with the Financial Supervisory Commission to create measures to solve the large purchases of reversal ETFs by foreign institutional investors.
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