Taiwan and the dollar

So it hasn’t been reported much, but crazy happenings in FX trade with Taiwan. Their currency has gained 10 percent against the USD in a few days, which is essentially unheard of. Literally the odds are put at a 19 standard deviation event. Anyone who knows anything about math knows that’s basically the odds of firing an arrow across the galaxy and hitting a bullseye target.
It’s driven by a confluence of things (as these always are), including an assumption of a US slowdown because of tariffs, rumors that the US demanded their currency not be devalued and be at fair market price (both sides deny it), a flight from the US dollar generally in the current world and what’s now an accelerating long term trend, and then, Silicon Valley Bank style, no one there is hedged with holdings largely in US dollars and treasuries so the trend is self accelerating.
Normally their central bank steps in, but speculation is that they want a stronger exchange rate as part of trade negotiations, meanwhile, their insurance industry in particular is getting crushed, because their reserves are in USD. Their tech companies (that we still rely on for chips in particular and will now in the future with recent admin decisions) is getting hit because costs in the US will go up.

I have no idea if this is the start of something larger for their economy, Asia, the dollar, US bonds (they are one of the largest holders) etc….or this will die down over the next few days and just be a small tremor, but it’s absolutely an object lesson in why sudden drastic pronouncements and declarations are dangerous.

 

I am in a finance related job, but currency isn’t at all my space, so I am not an expert on this. Bond rates, overall interest rates, and macroeconomic effects are though, which is how this came on my radar. The mechanics of the quick breakdown are really interesting, but the overriding concern here is the dollar and what I assume EE was referring to. You can’t be a safe haven if no one knows your policy one day to next.
Here is a good article that summarizes the US impact longer term if the dollar trend continues. It doesn't account for what this shock means for Asia and the broader global bond and currency markets if it snowballs, but so far that’s been contained. But keep in mind this is just one small potential example. Taiwan is one relatively small (though wealthy) country.

The other basic rub here is that the currency rates become a self fulfilling prophecy. Taiwan as an example sells goods to the US, gets US dollars back. They buy US denominated bonds (public and private) which keeps the dollar strong, keeps imports to the US cheap (because their currency is weak so Americans have buying power), and the cycle self perpetuates. If that cycle gets blown up, who knows where it lands, and the fear is that this is the first cannon shot in that process.
Anyway, enough nerding from me. It’s something to watch.

 

Like I said it’s a larger trend, Taiwan is the biggest and most serious example as of now. But Hong Kong for example had their central bank sell a chunk of their currency to (6 billion or something?) to try to stay pegged to the dollar.

 

Yeah, I just meant it’s both an olive branch and a way to take away Trump’s steam before any settlement is reached. His history is if you give him a small win he treats it as the greatest negotiating win in history, takes his victory lap and moves on. It will lower their negotiating burden substantially.