The Taiwan dollar gave up most of its early gains on Monday after the central bank tightened limits on trading in non-deliverable forwards (NDF), while other emerging Asian currencies consolidated in subdued year-end trading. Currency dealers told Reuters that under the new rules NDF trades would be capped at one fifth of a bank's total foreign exchange trading, down from one third previously.
The impact of the rule change would be limited as it only affected banks based in Taiwan, dealers and analysts said. "Most local banks are not actively engaged in NDF trading, so the market impact is manageable," said Pin Ru Tan, Emerging Markets FX and Rates Strategist at the Royal Bank of Scotland in Singapore.
Several Asian economies have been struggling to contain the upward pressure on their currencies and asset markets from rising capital inflows attracted by the region's better growth prospects and higher potential returns than in major developed economies. Other emerging Asian currencies showed muted reactions to China's interest rate hike on Saturday as Asian shares edged up as investors bet China's latest interest rate hike would not change the optimistic outlook for the global economy in 2011.
China's central bank raised interest rates on Saturday for the second time in just over two months as it stepped up its battle to rein in stubbornly high inflation. Earlier, the Taiwan dollar jumped as much as 3.4 percent to hit 29.481 per dollar, the strongest since October 1997.
A central bank deputy governor said the central bank would not force the Taiwan dollar to stay on the weaker side T$30 per dollar following recent gains. "We've been expecting the Taiwan dollar to rise further and the comments just helped boost sentiment, forcing market players to sell US dollars," said one dealer at a foreign bank in Taipei. Taiwan's central bank has been intervening in recent trading to push the Taiwan dollar lower and prevent its gains from hurting local exporters.
The South Korean won edged up on exporters' demand for settlements and as foreign investors kept buying local stocks and bond futures. But trading was thin with dollar/won spot trading volume sliding to $3.02 billion, the lowest in 2010, according to data from Seoul Money Brokerage Services Ltd and Korea Money Broker Corp. "I saw some exporters' end-month demand while it was hard to find speculative trading. So, the market almost ignored China's rate hike," said a local bank dealer in Seoul.
Foreign investors bought a net 218.7 billion won ($189.9 million) worth of three-year treasury bond futures and a net 160.8 billion won in stocks, respectively. They have purchased a combined net 564.6 billion won in shares during the previous three consecutive sessions and a 2.19 trillion won in total during the prior four sessions in a row.
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