Taiwan Officials Getting Serious about FX Speculation

Taiwan officials have tried to discourage speculation on its currency, but to little avail. The Taiwanese dollar rose to its best level against the US dollar since Q3 2008 yesterday before pulling back a bit, amid some scattered talk of possible central bank intervention.

Today the central bank announced that foreign investors have a week to use funds in Taiwanese dollar accounts that have been allocated for stocks to purchases shares. Local banks were reportedly instructed to execute currency trades as soon as clients place orders.

Reports also indicate that the central bank has turned over names of foreign investors with "excessive" Taiwanese dollar holdings to regulators to investigate. Foreign investors that are earmark funds for equity purchases should do so within a week, according to Taiwanese officials.

To be sure foreign investors have been buying Taiwanese shares. Through today, foreign investors have been net buyers of Taiwanese shares for 11 consecutive days. Last year, foreign investors bought an estimated $15.6 bln of Taiwanese shares, the most in three years. Taiwan's Taiex index rose almost 75% over the past 12 months and the key index now stands at its highest level since mid-2008.

Recall that in mid-Nov 2009, Taiwan barred foreign investors from using time deposits to park funds. Today's move is aimed at the same thing--deterring speculation in the Taiwanese dollar. The central bank indicated yesterday that recent inflows, which it monitors closely, exceeded the value of equity purchases by foreign investors.

These type of measures can be effective for a short-term and it would not be surprising to see the US dollar recover some recent ground lost against the Taiwanese dollar. However, Taiwan's increasing economic ties to China, including allowing mainland investors to buy Taiwanese shares and the general global economic recovery bodes well for Taiwan assets and currency.