Shadow FX intervention in Taiwan: Mercantilism, excessive private FX risks & the hedging backstop

This is the sixth and concluding chapter in a series on Taiwan’s life insurers and their private & sovereign FX hedging counterparties. It’s the product of a collaboration with Brad Setser of the Council on Foreign Relations.

Chapter VI. connects the rather abstract previous five chapters with the real world by laying out their implications in a variety of dimensions:

  • The impact of far larger than previously known FX interventions by Taiwan’s central bank on the U.S. Treasury’s currency policy.
  • The CBC’s (deliberate?) influence in incentivizing private sector institutions in Taiwan to assume FX risks worth almost USD 500bn (~80% of GDP). Previous Balance of Payment turmoil usually followed FX mismatches originating from the liability side of a nation’s balance sheet – is Taiwan the first case the asset side is the driver?
  • The CBC’s dominant influence in the pricing of X-CCY basis markets in Taiwan. Would lifers’ overseas investments be even profitable without the central banks off-market FX swaps?

A quick personal end note, I can return to markets professionally next year, but details are not yet finally set. Should you find the thinking in these pages helpful, feel free to get in touch.

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Shadow FX intervention in Taiwan: Mercantilism, excessive private FX risks & the hedging backstop

Shadow FX intervention in Taiwan: the CBC’s USD 130+ bn FX swap book

This is the fifth chapter in a series on Taiwan’s life insurers and their private & sovereign FX hedging counterparties. It’s the product of a collaboration with Brad Setser of the Council on Foreign Relations.

Chapter V. forms the core of the essays and seeks to answer how and to what degree the Central Bank of the Republic of China (CBC) is active in TWD FX derivative markets.

Taiwan’s central bank, unusually, does not disclose its position in FX derivative markets, and thus its true foreign exchange exposures. But its true exposures can be estimated using similar statistical techniques applied in evaluating an investment fund’s underlying positions from its profit and loss statements. Based on profits and losses which Taiwan’s central bank does disclose, it appears that its true FX exposures exceed its disclosed foreign exchange reserves by USD 130bn, and perhaps as much as USD 200bn.

Chapter V. has four broad sections:

  • An analysis of the CBC’s own statements about its activities in FX derivative markets.
  • The peculiarities in accounting for FX swaps on a central bank’s balance sheet.
  • A general method to estimate FX derivative exposures a central bank takes based on its published PnL.
  • The application of this model to Taiwan.

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Shadow FX intervention in Taiwan: the CBC’s USD 130+ bn FX swap book

Shadow FX intervention in Taiwan: Counterparties I

This is the fourth chapter in a series on Taiwan’s life insurers and their private & sovereign FX hedging counterparties. It’s the product of a collaboration with Brad Setser of the Council on Foreign Relations.

Given life insurers’ USD 250bn FX hedging needs, chapter IV. examines potential counterparties to these positions by private sector actors. Overseas investors, Taiwanese banks and Taiwanese non-financial corporates are all long USD in FX forward markets – but nowhere near matching lifers’ requirements.

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Shadow FX intervention in Taiwan: Counterparties I

Shadow FX intervention in Taiwan – Current Account surpluses & the Rise of Life Insurers

This is the second and third chapter in a series on Taiwan’s life insurers and their private & sovereign FX hedging counterparties. It’s the product of a collaboration with Brad Setser of the Council on Foreign Relations.

Chapter II. focuses on Taiwan’s Balance of Payments and the transition from the central bank to the life insurance industry recycling the country’s large current account surpluses. A deep dive of lifers’ management of their vast overseas fixed income books follows, with a special eye on the FX risk they lay off in FX derivative markets.

Chapter III. is a quick primer on the instruments most commonly used by institutional investors to manage FX risk, ahead of more technical chapters next week.

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Shadow FX intervention in Taiwan – Current Account surpluses & the Rise of Life Insurers

U.S. repo markets & the ‘Inverted Supply’ response of the Fed’s Foreign Repo Pool

After more than a decade without appearing in major news headlines, U.S. repo markets did their best last week to catch up and highlight what may happen in money markets in an environment of lesser reserve abundance than previously.

The general story has been told extensively in other places and the deeper final causes are yet to be established. In brief, U.S. Treasury repo rates began climbing broadly last Monday, before spiking notably on Tuesday to, in some segments, levels not seen for decades. Spillovers extended into adjacent markets, the Effective Federal Funds Rate traded far above IOER and its policy band, highly rated overnight financial Commercial Paper rates increased by 25 bps, while its less liquid companions in the non-financial and asset-backed realm increased by more than 200 bps at their peak.

Although slow to heed calls for a standing repo facility to address potential bottlenecks to date, the NY Fed was, after initial technical difficulties, in markets, offering up to USD 75bn in an overnight repurchase agreement operation with primary dealers. USD 53bn was pulled on Tuesday, and the full amounts offered of USD 75bn for the remainder of the week, in repeats of Tuesday’s operation.

As a result, temporary stress in repo (and adjacent) markets has receded, while the NY Fed upped its schedule of liquidity provisions by announcing it “will offer daily overnight repo operations for an aggregate amount of at least $75 billion each, until Thursday, October 10, 2019” and “will offer three 14-day term repo operations for an aggregate amount of at least $30 billion each” this week.

Coincidentally, the size of to date conducted overnight repos of USD 75bn almost mirrors the increase in the Federal Reserve’s foreign repo pool since the start of the year. Since a series on said pool was published three years ago in these pages, it seems an opportune moment to update developments surrounding it and its, at minimum indirect, effects on the repo stress last week.

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U.S. repo markets & the ‘Inverted Supply’ response of the Fed’s Foreign Repo Pool

Introduction of a new & market-oriented section to the blog

In the last couple of years, this blog has served as an occasional notepad in an attempt to stay on top of some of the larger cross-border capital flows of the post-crisis era.

These observations will (hopefully) continue in the future, despite some personal changes recently.

As a result of these changes, a new & more market-oriented section will be added to the blog going forward. The new section can be found here and will require an invitation*. This design is not intended as an entry barrier (just shoot me an e-mail** including your name and affiliation in case of interest), but rather as a way to communicate somewhat safely in a semi-public fashion.

Continue reading “Introduction of a new & market-oriented section to the blog”
Introduction of a new & market-oriented section to the blog