The Taiwan dollar moved through the 32 mark against the U.S. dollar, with USDTWD at 31.991 at press time, as foreign buying in Taiwanese equities and MSCI index changes combined to support demand for the local currency.
The rebound comes even as seasonal dividend-related outflows from corporates continue to weigh on the market. Still, participants have started positioning for a medium- to long-term recovery in the Taiwan dollar. Citigroup has seen a noticeable increase in client demand for structured USD-TWD options, with some contracts targeting 31.5. Support has also come from foreign-exchange intervention by other Asian central banks and expectations that the Federal Reserve will hold off on further rate hikes.
Foreign investors logged four straight sessions of net buying
According to the latest trading data for Taiwan’s three major institutional investor categories, foreign investors were net buyers of local equities for four consecutive trading days from Aug. 10 to Aug. 13. Net purchases over those four sessions totaled NT$160.786 billion.
From the start of August through the latest reading, cumulative net foreign buying reached NT$187.455 billion. That return of overseas capital to Taiwanese stocks has become a key source of spot demand behind the Taiwan dollar’s advance. Foreign-exchange banking sources said foreign investors were the main driver of the move on the day.
MSCI raised Taiwan’s weightings across three indexes
MSCI’s latest quarterly review increased Taiwan’s weighting in the MSCI Global Market Index, the MSCI Emerging Markets Index, and the MSCI Asia ex Japan Index, a result local market watchers described as a full three-index rise.
In the MSCI Emerging Markets Index, Taiwan’s weighting was raised from 26.60% to 26.85%, an increase of 0.25%. Because global passive funds tracking MSCI benchmarks must rebalance holdings in line with the new weights, the adjustment is expected to bring index-linked inflows into the market ahead of the effective date. ABMedia said those anticipated capital inflows are offering support to both the equity market and the foreign-exchange market.
Derivatives positioning shifted toward Taiwan dollar strength
The spot move follows a turn in derivatives markets that had already become visible by late July. After the Taiwan dollar weakened by more than 1.43% in July, Bloomberg reported, citing data compiled by DTCC, that traders built large put option positions on the U.S. dollar against the Taiwan dollar.
That activity pushed July notional derivatives turnover to nearly $8 billion and made it the first month this year in which put option volume exceeded call option volume. Citigroup’s head of FX options trading said clients had recently been positioning for a weaker U.S. dollar. Those trades included short-term hedges tied to U.S. inflation data as well as medium-term positions with targets as strong as 31.5.
Risk reversals and NDF pricing pointed to a rebound
Other market indicators also shifted in the same direction. Front-end risk reversals in USD-TWD turned negative and fell to their lowest level since May, showing that traders were willing to pay a higher premium for options protecting against a drop in the U.S. dollar.
At the same time, swap points in Taiwan dollar non-deliverable forwards, or NDFs, moved into discount territory across most maturities. That pricing signaled a market bias toward Taiwan dollar appreciation. As one-way bullish expectations for the U.S. dollar eased, corporate hedging and FX settlement strategies could also become more active, adding to real demand for the local currency.
Asian FX intervention and Fed expectations added support
External macro conditions also helped. The Japanese yen and the South Korean won have shown resilience after intervention by their respective central banks, helping stabilize broader Asian foreign-exchange markets. Strength in the won also fed through to the Taiwan dollar.
Another supportive factor has been the expectation that the Federal Reserve will pause its rate-hike cycle. With foreign funds returning to Taiwanese stocks, passive index-related demand building, and external macro support in place, the Taiwan dollar has shown firmer short-term rebound momentum.