Hedge funds are ramping up bets in the options market that the won will mirror the New Taiwan dollar’s recent rally against the greenback.
US dollar-won option trading volume spiked to this year’s high last week, according to the Depository Trust & Clearing Corp’s (DTCC) data, as speculation grew that South Korea and the US discussed the won’s direction in their currency talks.
Barclays Bank PLC said there has been increased demand for put options from hedge funds.
Photo: Bloomberg
A surge in the NT dollar this month has reshaped market expectations for Asian currencies. Earlier yesterday, an index of Asian currencies climbed toward the highest level since October last year, as US President Donald Trump’s tariff threats and the risk of a widening US fiscal deficit diminish the appeal of the US dollar.
Investors see the won as a likely candidate for comparable gains, as South Korea’s trade surplus with the US adds pressure on Seoul to tolerate a stronger currency. The US last year placed South Korea on its foreign-exchange monitoring list — which already included Taiwan.
Demand for US dollar-won put options with notional sizes over US$60 million outpaced call options on DTCC by a 3:2 ratio on Wednesday last week, underscoring the bias for bearish bets on the pair. The premium to hedge US dollar-won downside over the next month compared with the upside, as measured by risk reversals, traded near a 21-year high last week.
The tariff talks between the US and its trading partners have raised speculation that the Trump administration is open to a weaker greenback. For many, the won is becoming a favored proxy for broader shifts in US-Asia trade dynamics and a key hedge against declining US dollar strength.
The NT dollar’s 7 percent surge against the US dollar this month has raised hedging costs for Taiwanese insurers, who are large holders of US-dollar assets.
That is making the won a major proxy for hedging, Bank of America Global Research said in a note on Wednesday last week.
The Taiwanese currency traded at NT$29.953 per US dollar at the close in Taipei trading yesterday, down 0.06 percent from Monday.
The NT dollar appreciated beyond the psychological NT$30 per US dollar level with minimal resistance, said Wee Khoon Chong (張偉勤), a senior Asia Pacific market strategist at BNY Mellon Corp in Hong Kong.
The move was “driven mainly by weakening US dollar pressure as well as reported increasing hedging demand by domestic lifers,” he said.
The Taiwanese central bank’s comment last week that authorities are not defending any particular level for the exchange rate has made room for further gains in the local currency.
“Thirty is not a line in the sand, especially with the trend of dollar declines,” Chong said.
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