(Bloomberg) — Currency traders are stepping up bullish options bets on the Taiwan dollar, signaling a shift in sentiment after the currency suffered its worst July since 2015.
Demand for dollar-Taiwan dollar put options, which profit when the US currency falls against the Taiwan dollar, surged during the final two trading days of July. That pushed the monthly notional volume for these contracts to nearly $8 billion, outstripping call options for the first time this year, according to Depository Trust & Clearing Corporation data compiled by Bloomberg. Early August numbers indicate a continuation of this trend.
The shift in derivatives positioning indicates that some investors are looking past seasonal dividend repatriation headwinds as they prepare for a broader recovery in the currency. Official interventions to support the Japanese yen and South Korean won, alongside the Federal Reserve’s rate pause, are providing a tailwind for Taiwan’s currency even as the greenback remains firm.
Citigroup Inc. has seen a pickup in demand from clients for dollar-Taiwan dollar options that gain in value if the pair weakens further.
“Client interest has picked up since late last week and is predominantly for downside,” said Patrick Green, London-based global head of FX options trading at the firm. He noted that contract tenors span both short-term horizons to navigate upcoming US inflation data to ones “targeting 31.5 in the next month.”
The Taiwan dollar has gained 0.2% so far this month to around 32.231, after falling 1.43% in July.
Other market indicators are also signaling a Taiwan dollar recovery.
Front-end risk reversals for dollar-Taiwan dollar, a gauge of demand for dollar-Taiwan dollar calls compared to put options, turned negative and fell to its lowest level since May. This indicates that, at least in the short run, traders are paying a higher premium for options that benefit from dollar weakness against the Taiwan dollar than those betting on further greenback gains.
Non-deliverable forward swap points for the Taiwan dollar fell into discount territory across most tenors at the end of July, further reflecting market views of currency appreciation. That shift in market pricing could soon spill over into the spot market as corporate treasuries react to the changing tide.
“As expectations for the dollar become less one-sided, some firms may be more inclined to increase conversion or hedging activity,” said Christopher Wong, strategist at Oversea-Chinese Banking Corp. “Even a modest shift in behaviour could create meaningful local-currency demand, with the won appearing to lead the move and the Taiwan dollar beginning to catch up.”
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