TAIPEI (Taiwan News) — The Taiwan dollar is reportedly poised to replace the Chinese yuan as the top funding currency in Asia.
The Sharpe ratio, a financial metric for risk-adjusted returns, shows that over the past month, strategies involving borrowing the Taiwan dollar and investing in higher-yielding assets ranked second among Asian currencies, just behind the Chinese yuan, per Bloomberg.
Transactions that seek to profit from the differing interest rates between currencies are referred to as carry trades. Investors use a low-interest-rate currency, referred to as the funding currency, to purchase higher-yielding assets based on currency with higher interest rates called the target currency, per the World Economic Forum.
Bloomberg cited analysts as predicting that the Taiwan dollar may soon surpass the yuan as Asia’s most popular carry trade currency. This is due to the potential for significant fluctuations in borrowing costs arising from Beijing’s efforts to support the yuan’s exchange rate.
However, Taiwan’s Central Bank has more flexibility in addressing the depreciation of the Taiwan dollar, as this ultimately benefits Taiwan’s export-driven economy and attracts capital inflows into Taiwanese stocks.
“The Taiwan dollar has been one of the better funding currencies in Asia along with the offshore yuan, but with recent intervention risks in the yuan placing bigger chances of a short squeeze, Taiwan dollar becomes much more attractive,” according to Bloomberg Intelligence chief Asia foreign-exchange and rates strategist Stephen Chiu (趙志軒).
He added that other Asian currencies, such as Japan’s yen, are affected by ongoing interest rate hike cycles, while other possible funding currencies either have higher shorting costs or greater volatility.
The yuan’s attractiveness as a funding currency is diminishing primarily because the People’s Bank of China has intensified efforts to defend the yuan’s exchange rate, especially as Trump may impose additional tariffs. At the same time, the Taiwan dollar‘s appeal has risen since it recently depreciated beyond the psychologically significant NT$33 per dollar level for the first time in nearly nine years.
Joey Chew (周淑芬), head of Asia foreign-exchange research at HSBC Holdings Plc., told Bloomberg that the Taiwan dollar and other Asian currencies could experience further depreciation amid increased trade challenges and risks from a potentially “less dovish US Federal Reserve” under Trump.
However, Chew added Taiwan’s economy is better positioned to weather short-term turbulence due to its strong fundamentals, and “a lower risk for aggressive currency intervention from the central bank.”