USD: What the TWD is telling us - ING

The most notable development in FX over the past few days has been the exceptional rally in the Taiwanese dollar, and to a lesser extent in other Asian currencies (MYR, THB, KRW). The trigger has apparently been a widespread concern among Taiwan's USD-rich corporates and investors (life insurance, above all) that a trade deal with the US would include the request for a weaker USD/TWD. That has so far been ruled out by Taiwanese authorities. Thinner-than-usual liquidity may have contributed to the exacerbation of the move in the usually tightly managed TWD, which is now trading 7% above its end-of-April close, ING's FX analyst Francesco Pesole notes.

Short-term USD support is technical, not structural

"Speculation over a Taiwan-US FX deal may not be enough to justify the whole move, though. The recent decline in the USD means countries, like Taiwan, that have historically very high exposure to USD-denominated assets have taken an FX-led hit, and local players are now seeking greater USD hedging as well as starting to diversify away from US investments. This fits into a more worrying bearish narrative for the dollar, and opens up a risk that a period of supposedly USD-positive trade deals with Asian countries may turn into an opportunity for USD-rich Asian countries to reduce USD exposure. We'll be closely watching whether improved liquidity from today and indications from the CNY fixing suggest an acceleration, and whether the Treasury will be fine with any more broad-based USD declines before the inflationary hit from tariffs has been absorbed."

"In the US, this week is quieter in data terms, with tomorrow's FOMC rate announcement being the key highlight. We expect Chair Jerome Powell to keep resisting the pressure from the Trump administration to cut rates. Market pricing and consensus agree. Powell recently emphasised that the US cannot maintain a strong labour market without price stability, and our view is still that the first rate cut may only come in September, while markets currently price in 23bp for July."

"We don't expect this Fed meeting to have major implications for the dollar as markets appear aligned with Powell's recent rhetoric. A lot of the dollar recovery and stabilisation has been due to rebounding US equities, which have reduced demand for a USD premium. That premium hasn't disappeared though, as the dollar remains generally cheap relative to short-term rate differentials against major currencies. The new USD downside risks stemming from Asia shouldn't be downplayed, but might not all play out in the near term. Given residual short-term valuation and more room for speculative shorts to be unwound (especially against JPY and EUR), the dollar can keep regaining some ground as long as Trump continues to feed markets some positive headlines on trade."