Taiwan central bank says will visit FX custodian banks to carry out inspections

• We feel the market has returned to a more stable situation today
• Expectations of the Taiwanese dollar appreciating have mostly gone

USD/TWD has been more well behaved today after all the warnings since yesterday. But when you have officials put in place and scrutinising every move, that sort of helps I guess. This calls for a bit of storytelling time..

When central banks act this way, it’s usually a case of damage control and trying to cook something up to appease the media/public. I’m not saying that is what is happening with Taiwan but there are cases around the world where these things do happen.

In my own experience, it was all the way back in 2016 when Trump pulled off a surprise to win the US election at the time. The dollar surged strongly against emerging market currencies and things really took off. I was on the trading floor and things turned quite chaotic in just a span of two to three days.

In just three sessions, we already saw the local currency depreciate by over 7% by the end of day close. And when we got to office early the next morning, the offshore market i.e. non-deliverable forwards were indicating a gap open with the currency set to fall by another 13% overnight.

An hour before the market opens, the central bank calls us and all the other banks up and tells us that we aren’t allowed to quote or do any trades until further notice. We’re also not allowed to perform any deals for/with clients. And they said they will be sending an officer to each bank as they think of a way to manage the situation.

For a good six hours, we had zero trades in the local market and zero transactions with clients. All incoming calls were just deflected by a case of “system issue”. Clients were of course mad but they sort of understood – at least the bigger corporates – when every single bank was refusing to offer a quote, even an indicative one. We weren’t even allowed to say anything about where the offshore market was trading.

If any trader or dealer made a quote in the market or to their clients, he/she was fired on the spot and placed “under investigation”. Not a joke by the way. It didn’t happen with my bank but it did happen to a friend of a friend unfortunately. And he never came back to work on the trading floor after.

I remember that lunch time, I stepped out and called my parents to just change whatever you can out of the local currency. It felt like that moment in the movie The Big Short.

So after six hours, we were told to quote everything at the previous day closing price. Mind you, this was some 15-20% away what the offshore market was still trading. We settled our transactions and come end of day, we were told that whatever positions we have at the end of the day will be squared directly with the central bank.

Then, the offshore market i.e. NDFs would not be recognised anymore and starting from the next day, all incoming foreign funds into the country will be forcefully converted into the local currency at a 75% notional amount minimum. This continued for quite a number of years.

We had clients with existing forward contracts and long-term FX contracts that had to be unwound because of these forced conversions. The central bank did not entertain any appeals for that and those clients lost millions on swaps. But in the end, it was a case of trying to control the narrative and put up a facade that the “market” was still working. On paper, it sort of looked like it did.

But even after nine years now, I always believe that the damage has already been done. If not through one way, then at least surely another. At one point, the local currency was even threatened to be kicked out of the MSCI basket. There was a lame workaround to circumvent that in the end though, something to do with extending trading hours.

But every time I look at the screen, all I can think of is this story. And when I look at the exchange rate itself, I know deep down that it doesn’t fully reflect how fundamentally flawed the currency really is. If this were a free-floating exchange rate system, things would’ve looked so, so much different. But alas, it was not the case.

So yeah, that’s my story for today.