Traders are still talking about Taiwan’s FX supernova

FX markets remain laser-focused on the explosive move in the Taiwan dollar (TWD), which has surged dramatically over recent sessions amid trade deal sweeteners.. The aggressive appreciation, now up nearly 7% since April, has reverberated across Asian FX driven by intense market speculation that a potential US-Taiwan trade pact could push for a weaker USD/TWD exchange rate. Though Taipei authorities swiftly denied these speculations, thinner liquidity conditions have exacerbated volatility, highlighting the currency's managed float limitations.

The scale of this FX move, however, hints at deeper structural shifts beyond mere speculation. Taiwan's corporates and life insurers, notably heavy holders of USD-denominated assets, appear to be aggressively recalibrating hedging strategies and diversifying away from dollar exposures in response to recent USD weakness. This dynamic could signal broader regional behaviour—US asset-heavy Asian nations, particularly long bonds, potentially reducing their reliance on USD assets, posing a medium-term bearish scenario for the greenback.

Meanwhile, the US Treasury’s tolerance for additional broad-based USD weakness remains uncertain, especially ahead of absorbing tariff-induced inflationary pressures.

On the US front, market eyes are set on the upcoming FOMC announcement, where Fed Chair Powell is widely expected to hold the line against political pressure for rate cuts from the Trump administration. Market consensus aligns with Powell’s data-dependent narrative, expecting no immediate moves until at least July—markets are pricing roughly 23bps of cuts by then. Recent US economic resilience, underscored by solid payroll figures and steady ISM services data, has slightly tempered rate cut expectations. However, this data-driven Fed stance is already baked into the market, suggesting limited immediate FX impact.

Though USD has found some stability from improved US equity market sentiment, short-term valuations and positioning suggest the dollar could regain further ground, especially if President Trump continues delivering positive trade headlines. Yet the emerging downside risks stemming from Asian currency recalibrations should not be ignored entirely—particularly if significant reserve diversification from Asian economies materializes.

EUR/USD remains tethered to broader USD moves, with few euro-specific catalysts this week apart from ECB speeches. ECB rhetoric remains dovish, keeping downward rate speculation intact near 1.50%. While the euro stands to benefit from any further reduction in USD reserves by Asian investors, its current overvaluation unrelated to short-term rates remains problematic for the ECB, potentially triggering further rate-cut considerations. EUR/USD anchored near 1.130 remains vulnerable, with 1.120 as a critical technical support level to watch closely.