The New Taiwan Dollar (TWD) has recently shown strong performance, briefly breaking the NT$30 barrier. Although it stabilized around NT$30 today (June 6), UBS and Singapore Bank have warned that short positions on the TWD still face further liquidation risks, and there may still be room for appreciation in the exchange rate.

According to UBS's report, this wave of currency fluctuation is not due to a single factor, but rather the result of large-scale hedging operations by insurance companies and corporations to manage foreign exchange risks, compounded by stop-losses triggered in previous TWD financing arbitrage trades. The Taiwanese life insurance industry has long held dollar-denominated assets, but the insufficient foreign exchange hedging positions, in light of the USD depreciation trend, could lead insurers to panic-adjust their positions, causing a chain reaction in the market.

On May 2, the exchange rate of TWD against USD recorded its largest single-day gain in 40 years, surging by 5% in just one day. UBS noted that such abnormal volatility is difficult to explain by traditional economic indicators, highlighting market doubts about the effectiveness of intervention by Taiwan's central bank.

UBS estimates that if insurance companies and exporters return their foreign exchange hedging and deposit positions to previous trend levels, they could release up to US$100 billion (approximately NT$3 trillion) in dollar selling, which would represent about 14% of Taiwan's GDP, making the impact on the currency market significant.

Furthermore, Taiwan's net international investment position (NIIP) stands at 165% of GDP, far exceeding the average of 0% in emerging Asian countries, making the TWD highly sensitive to currency fluctuations. Moreover, with a substantial accumulation of TWD arbitrage positions in recent years, the current situation is increasing pressure for short-position liquidation, potentially triggering larger-scale technical reactions if further rebounds occur.

Singapore Bank believes that with optimistic expectations for trade negotiations in the market, Taiwanese exporters continue selling US dollars while insurance companies increase their hedging efforts, jointly strengthening the TWD. The bank also pointed out that this appreciation of the TWD is not only a phenomenon of the currency market but also reflects trends in capital flows and decreased interest in US dollar assets.

Looking forward, UBS predicts that the TWD still has upward potential. If the trade-weighted exchange rate index (TWI) rises by about 3% more, it will reach the upper limits of Taiwan's central bank's tolerance, prompting possible increased intervention to smooth out volatility. However, before this, the market may still face demand suppression for dollars due to hedging from insurers and corporations.

Additionally, as insurance companies use regional currencies as hedging instruments, the appreciation of the TWD could cause spillover effects on other Asian currencies, including the Korean won, Singapore dollar, Malaysian ringgit, and Thai baht. UBS estimates that the volatility of the Korean won may even reach 3 standard deviations, while the Singapore dollar could potentially hit new highs.

However, UBS also cautions that the future movements of regional currencies will still need to be observed in light of US-China relations, shifts in US policy, and intervention dynamics from Asian central banks. For countries on the foreign exchange watchlist, such as South Korea, Thailand, and Malaysia, stabilizing policies may become a new variable.

In conclusion, UBS states that although the current surge in the TWD is rapid, the appreciation trend has not yet ended. Investors should refrain from premature counter-trading and pay attention to the potential for increased volatility as the market seeks a new balance between hedging demands and policy interventions.