Insights 
VT 
Taiwan’s central bank announced plans to inspect FX custodian banks following a sudden surge in the local currency. This move aims to restore market stability, with expectations of the Taiwanese dollar appreciating now largely diminished.
The USD/TWD rate stabilised after recent volatility, aided by central bank interventions and monitoring. Such actions often aim to manage market perception and maintain order. During the 2016 US election, similar chaos occurred, with significant local currency depreciation over a few days.
Bank Interventions and Market Impact
In response, the central bank restricted trades and advised banks on pricing, leading to market inactivity for hours. Banks were instructed to maintain previous day prices despite offshore market disparities, with the central bank settling end-of-day positions.
Foreign funds entering the country were subject to forced conversions into the local currency, which continued for years. Client contracts were affected, resulting in financial losses due to these enforced policies designed to control the market narrative.
Despite attempts to stabilise the situation, the long-term impact on the local currency was considerable. The currency faced potential exclusion from the MSCI basket, a challenge later circumvented by extending trading hours. Such measures left lasting effects on perceptions of the currency’s value.
Intervention Patterns and Trading Dynamics
In light of the recent measures undertaken by the central bank, we find ourselves revisiting a familiar pattern—one where direct interventions attempt to temper volatility through a combination of regulatory inspections and price guidance. The decision to examine FX custodians signals a renewed attempt to regain footing after the sharp upward swing in the local currency unsettled trading desks. While the outcome has led to some degree of stability for the USD/TWD pair, it’s clear this normalisation comes not from market forces alone, but from decisive policy efforts designed to anchor sentiment.
Back in 2016, similar tactics were deployed when rapid depreciation tested institutional limits. In that instance, everything from trade suspensions to pricing freezes were implemented to alleviate pressure and reassert order. Banks were not acting purely on market logic; instead, they were complying with instructions that overrode conventional price discovery. In practice, this meant holding prices unchanged despite clear cues from offshore markets, choking liquidity during key trading hours.
The introduction of compulsory conversions for incoming foreign investment further tilted the FX equation. Those buying into the country were forced into local currency holdings, often without the flexibility typically afforded in open systems. For those running hedged portfolios or relying on predictable contract execution, these shifts altered exposure mechanics and introduced unwelcome basis risks. Over time, such compulsory settlement rules reshaped how confidence and value were assigned, both locally and abroad.
Without explicitly altering policy frameworks, the central bank’s approach nonetheless created fixed boundaries around acceptable trading outcomes. This reset plumbing in the forward and swap space, where residual pricing imbalances quietly hinted at underlying constraints. That disruption was amplified for market makers, particularly in light of the currency almost being removed from a major index. The fix? Merely shifting trading hours to appear in line with global requirements, not necessarily creating transparency or depth.
So where does that leave traders today? Past patterns suggest that intervention-heavy periods result in temporary calm, but often at the cost of true market elasticity. When execution becomes subject not to bids and offers but to informal guidance, arbitrage and algo models must adjust or be paused outright. Implied vols, especially those tied to short tenor structures, are likely to misalign with actual realised price action. Traders should prepare for flares of inactivity, followed by forced price swings around central reference points.
What matters now isn’t direction but range integrity—and whether liquidity providers will continue to quote aggressively when policy overlays remain in place but unspoken. From our desks, hedging flows must factor in the possibility of non-economic settlement conditions. That includes the potential for back-end curve flattening if forward points settle through administered criteria. There are clear precedents for this.
Spreads between onshore and offshore contracts are being monitored more closely, perhaps not overtly, but in a way that curbs excessive divergence. To manage risk effectively, we assess both the stated and unstated — including whether current silence from regulators signals satisfaction or the prelude to another round of recalibration.
Traders should centre attention on positioning data embedded in central bank settlements, inferred changes in order flow, and how deeply market directional bets have retreated. Balance sheets, especially for those on the sell-side, are likely to be more defensive until clarity materialises. If past cycles are instructive, they will hold tight ranges and wait for the next shift—and that may not come from the market itself.
