Taiwan dollar close to overtaking Chinese yuan as top carry trade option in Asia

Taiwan dollar is about to overtake Chinese yuan as the most popular carry trade option in Asia due to lower risks of interest rate and exchange rate fluctuations.

On January 14, 2568, Bloomberg News reported that The Taiwan dollar is becoming a popular carry trade option in Asia due to its lower risk than the Chinese yuan in terms of interest rate and exchange rate fluctuations.

Carry Trade is an investment strategy in which investors borrow money in a currency with a low interest rate to invest in assets or currencies with a higher interest rate, hoping to profit from the interest rate difference between the two currencies.

Over the past month, borrowing Taiwan dollars to conduct carry trades has yielded the second-highest returns in Asia, after the Chinese yuan, according to the Sharpe ratio, which measures risk-adjusted returns.

Analysts say the Taiwan dollar could overtake the Chinese yuan as the region’s best carry trade tool as China seeks tighter control over the yuan. That could make borrowing costs more volatile, in contrast to Taiwan's relatively accommodative central bank, whose currency's depreciation boosts its export-reliant economy and attracts AI investment to the country's stock market.

Stephen Chiu, currency strategist at Bloomberg Intelligence said “The Taiwan dollar is a suitable currency for carrying trades in Asia, as is the offshore yuan, but the increased risk of yuan intervention makes the Taiwan dollar more attractive.”

Meanwhile, the Japanese yen is facing a rate hike cycle, while other regional currencies have higher shorting costs or are more volatile.

The Chinese yuan is losing popularity as a carry trade funding source as the People's Bank of China takes precautions ahead of Donald Trump-era tariff hikes. These measures, such as setting a stronger-than-realistic exchange rate and reducing liquidity in the system, have made the offshore yuan one of the most volatile currencies in Asia over the past month.

On the other hand, the Taiwan dollar has become more attractive after breaking through the psychological level of 33 US dollars to the Taiwan dollar for the first time in nearly 9 years and is likely to continue to weaken, like other regional currencies.

Joey Chiu, Head of Foreign Exchange Research at HSBC It said Trump's return could raise risks in international trade and potentially easing U.S. monetary policy, but Taiwan's economy remains strong enough to withstand short-term volatility, with the central bank less likely to make drastic currency interventions.

refer : bloomberg.com

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