(MENAFN- Gulf Times) In the last half-hour of currency trading almost every day in Taiwan, state-backed lenders have the market largely to themselves and set the closing exchange rate at a level determined by the central bank.
Such operations, described by five traders who asked not to be identified, explain why over the past three years Taipei Forex prices show Taiwan's dollar fell in the hour before the 4 pm close on all but three trading days. June's average drop of 0.6% was triple that for 2014, a sign policy makers are becoming more concerned about the local dollar, which is Asia's top performer this year with a 2.4% gain.
The abrupt declines are part of the central bank's arsenal of unofficial tools to keep currency speculators at bay and support exporters. The authority manipulates the opening and closing prices, discourages trading in the final half hour and limits daily remittances, according to traders. The actions, none of which are disclosed, help stem appreciation without the expense of buying US currency in the market.
"Why don't they actually intervene? Because then they need to pay a cost," said Wu Tsong-Min, an economics professor at National Taiwan University in Taipei, who sat on the authority's board from 2002 to 2014. "If they use a higher price to buy US dollars, and the next day it returns to the original price, they're losing money every day."
The Central Bank of the Republic of China (Taiwan), known as CBC, denies curtailing trading in the last half hour of each day.
It reiterated in a June statement that the authority will maintain order in the currency market if large, rapid fund flows caused by diverging monetary policies in developed nations affect stability in local financial markets.
Taiwan's dollar slid 0.6% in the last 34 minutes of trading yesterday to close at NT$31.100, down 0.1% on the day.
The traders said CBC told them in July 2013 to stop taking client orders to buy the currency after 3:30 pm, a policy that has remained in place since. The authority engineers sudden declines in the spot rate by having two of the eight state- backed banks conduct trades under its instruction, they said.
It is "not true" that traders are kept out of the market between 3:30 pm and 4 pm as trading volumes aren't low, Harry Yen, director-general at CBC's foreign-exchange department, said in an e-mail.
Taipei Forex only releases data for the morning and afternoon trading sessions, having scrapped reports covering 15-minute intervals in 2010.
The biggest state-backed lender by assets, Bank of Taiwan, didn't immediately respond to an e-mail and two calls regarding the exchange rate. Mega International Commercial Bank, the second-largest, declined to comment.
The central bank stepped up intervention since March as exports slumped and a Westpac Banking Corp index showed the nominal effective exchange rate surged to a 17 1/2-year high. The currency appreciated as global funds boosted their holdings of the nation's equities by $6.3bn so far in 2015.
On three days last quarter, in addition to routine intervention before the close, CBC also pushed down the currency by as much as 0.8% in the run-up to the noon trading break.
On April 30, for instance, the authority phoned banks and asked them to cancel orders for the local dollar before a midday intervention, traders said. Yen denied the central bank had made such a request later that day.
"These practices are part of a broader 'moral suasion' toolkit, with the general goal of reducing the cost and visibility of exchange-rate management," Eduardo Levy-Yeyati, visiting professor of public policy at Harvard Kennedy School and former head of emerging-market strategy at Barclays Plc, said in an e-mail. "These methods reduce foreign-exchange volatility but introduce a new source of uncertainty: the central bank itself."
CBC has been bringing forward its end-of-day intervention last quarter, with traders saying they've been sometimes called upon to avoid buying Taiwan dollars for a whole hour before the market close. The authority regulates foreign-exchange activities on the island, including the approval of licences.
The central bank also imposes an unofficial cap on daily inward remittances that is about $30mn for most companies, according to four traders. A limit does exist, said Elizabeth Sun, a spokeswoman at Taiwan Semiconductor Manufacturing Co, who declined to give the figure. TSMC is the world's biggest contract chipmaker.
CBC Governor Perng Fai-nan, who took office during the Asian financial crisis in 1998, said in March the exchange rate has a "far bigger" impact on the economy than interest rates.
Taiwan's currency is one of the steadiest across emerging markets, with a measure of expected price swings for the month ahead showing the fourth-lowest reading among 24 peers. The local dollar has strengthened 4.7% in the past five years, compared with a 1% advance for the Bloomberg- JPMorgan Asia Dollar Index.
CBC doesn't intervene to "engineer a turn in the trend," said Khoon Goh, a strategist at Australia & New Zealand Banking Group, the exchange rate's most-accurate forecaster for the first quarter in Bloomberg rankings. "It's more a case of trying to smooth the pace of moves in the currency."
The local dollar typically strengthens in the morning as it recovers ground lost in the previous day's intervention. Just one out of six traders said they used the closing price on Taipei Forex to record their own mark-to-market positions.
All of the traders that spoke to Bloomberg News asked not to be identified
because they are not permitted to speak publicly.
Over the past three months, Bank of Taiwan has bought and sold local
currency in the retail market at a rate stronger than the official close on all but one day, website quotes show.
Most Taiwanese firms use rates cited by their banks when converting foreign earnings for their financial statements, said Shirley Chiang, a partner at Deloitte & Touche in Taipei. "Only the central bank trades at the closing price," said Andrew Tsai, an economist at KGI Securities Co. "It's more like a short-term guidance from CBC."
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