It’d be a mistake, I think, to write off what happened with the Taiwan dollar on Monday as an idiosyncratic, ignorable event — as a rumor that tipped a few dominos on a day when liquidity was hopelessly thin. Don’t get me wrong: It was that. But it was a lot more than that too.
If nothing else, the sheer scope of the move’s worth however much coverage the story receives. The two-session (i.e., Friday-Monday) rally in TWD was a near 20-standard-deviation event. So, not just a statistical anomaly, but rather a statistical impossibility.
But more importantly, and as discussed at some length in “What Just Happened In Taiwan?“, it seems quite obvious that Donald Trump’s using Taiwan as a test case for the kind of geostrategic-financial arrangements the administration’s attempting to inaugurate in a bid to square all the circles inherent in Trump’s at times conflicting policy program.
As it turns out, I’m not the only person to see that in the TWD fireworks. In a Monday missive, Jefferies’ David Zervos weighed in with some color which I think’s pretty on-point, even as I don’t agree with his sometimes sanguine view of the Trump administration’s tariffs.
Zervos first addressed what I described as a ridiculous assertion on the part of Taiwan’s central bank that they weren’t countenancing the move. “If officials had wanted to stop this sharp appreciation,” they could’ve, Zervos wrote. “After all, fighting currency strength is not a particularly complicated activity when you print your own fiat!!” he added.
That’s obviously correct, and it raises an obvious question: Why would you, as an export-oriented economy with a currency that’s normally very stable, sit on your hands during a 10% two-session appreciation event? The answer, plainly, is that you’re in on it.
“If there is one country that is looking to get into the good graces of the US administration quickly during trade talks, it’s Taiwan,” Zervos said, noting, as I did, that the island “sit[s] in a uniquely vulnerable economic and geopolitical position.”
He went on to wonder if the currency move constitutes “an offering from Taiwan to the US” or even “a policy move the US suggested they execute.” And if so, whether it might be a blueprint Trump can point to during other bilateral trade negotiations. His answers (Zervos’s answers) were “YES,” “YES” and “YES.”
I agree, with one important caveat: As detailed extensively in the “neon swan” article linked above, Taiwan’s playing with fire here to the extent the island’s insurers and exporters are now on the wrong side of a 20-sigma FX move. That’s — umm — risky, and it’s probably pissed some people off.
Taiwanese lifers and exporters were, conceptually speaking, stopped out of de facto dollar longs. The onshore USD-selling flows were “from effectively ‘trapped positions,'” as Nomura’s Charlie McElligott put it, noting that Taiwanese lifers are “suffering under USD asset price declines while getting hit with the USD currency move lower at the same time,” forcing them to sell USD to manage up their hedge ratios.
Meanwhile, Nomura’s FX team estimated Taiwanese exporters had “hoarded” a substantial amount of unhedged USD revenues. They would’ve been panicked on Monday too, presumably.
So, sure, “any country in a trade negotiation with the US that resets the competitive landscape via currency strength” will likely be rewarded by Trump, and “as such, Taiwan is just showing a clearer pathway forward,” as Zervos put it, but this isn’t going to be a painless experience. To quote myself one more time, we’ll probably “see more of these black swan events as Trump’s bid to rewrite the rules upends legacy imbalances from the ‘old’ status quo.”
Zervos couldn’t help but politicize his otherwise incisive Monday missive. “The beginning of a Plaza-style competitive revaluation in the USD will bring out all the usual haters who have recently been so vocally cheering for US failure,” he wrote. “It’s sad to watch so many good investors succumb to TDS-induced drawdowns.”
The irony of using the word “haters” and the term “TDS” in a client note chiding his peers for being unprofessionally political was apparently lost on David, God bless him.
Very interesting about taiwan lifers’ long usd positions. The other thing about them is that they are also ultra-short interest rates. You might be thinking that’s always the case with lifers, but this is different.Their liabilities are the longest (probably) in the world, it’s unmatcheable with any asset, (especially local assets) and Long UST is just the closest thing.
There’s much nuance here, which probably makes it difficult to extrapolate to a larger set of countries.
Doctor AI suggests that “TSMC is often jokingly referred to in Taiwan as a “Sacred Guardian Mountain” (????) or “Silicon Shield” (??).” This is because successive governments in Taipei have recognized that western dependence on Taiwanese chip producers, mainly TSMC, is their only guarantee that the US will come to their aid if China moves to reclaim the island.
So the government has actively supported TSMC because it has been seen as their “Guardian Mountain”, protecting them along with being the national champion of their tech industry. Part of that effort has been to actively discourage TSMC from building fabs overseas, as in the USA. And when pressure dictated some sort of concession on that, the government would strongly pressure TSMC not to equip overseas fabs to produce their most cutting edge chips offshore. The latest and lowest nanometer producing fab processing was left on the island.
It was “OK, we’ll produce some chips using yesterday’s production technologies on US soil, but our best stuff will only be produced here.” (Followed by smirks at how the US was so stupidly gullible to fall for that.)
The first Phoenix fab was supposed to follow that blueprint until Tim Cook met with the CEO and pretty much laid down the law on this. Apple was the customer which propelled the whole “fabless chip company” craze on Wall Street which so many US chip producers followed. Firms which hesitated to drink the Kool Aide were punished until they did. So his voice carried weight especially as TSMC was forced by US pressure to stop producing chips for Huawei which had been their largest client.
Give credit to Trump here – when TSMC announced that they would accelerate their buildouts of the fabs that Sea Turtle remarked upon, they once again would not promise to produce chips using their latest 2nm process technology until 2029, three years after it was rolled out on the island. Thanks to Trump, that timeline has been pulled forward.
I guess they are hoping to buy some time with that and the revaluation after watching how the US has treated Ukraine. It was probably a good short-term bet. Like two years, maybe.
That said, how many other nations are so vulnerable??
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Unless there’s a quick rebound, one would think there’s going to be a “price to pay” and the Taiwanese economy is immediately facing domestic demand destruction and massive layoffs are sure to follow. And all this at a time when the largest consumer group (US Consumers) is not really buying anything.
So if H is right (and his argument is strong) about this being a blue print for the rest of the world, we’ll be in a global depression probably by the end of the year. I’ve been expecting the MAGA Nazi movement to collapse the global economy since trump was re-elected. I think we now have a better understanding of the mechanics of how it will play out.
Cutting to the chase: TSMC is a leader in ASIC production. This is important because their customers don’t typically have ready alternatives. This means that in the short run, a weak dollar is likely to be inflationary for US TSMC customers.
To the degree that TSMC longer-term invests heavily in the US in order to avoid the practical problems associated with repatriating US profits into a strong TWD, the capital investment will require higher returns in the US. This is also likely to be inflationary to the US.
TSMC’s local Taiwan foundries have a geopolitical and economic incentive to find non-US (European) customers who become more invested in Taiwan”s independence and whose currencies are relatively stronger than the USD relative to TWD and therefore less costly to repatriate in TWD. This will potentially bid up the cost of TSMC capacity, and therefore become inflationary to the US economy.
Taiwan exports to the US roughly 2.5X what it imports from the US. Therefore, a weaker USD penalizes US imports far more than benefits US exports.
Shrewd strategy for America…if you’re a moron.
My thoughts on immediate impacts are that the TSMC foundries in Taiwan are likely contracting in USD (at least for US customers). I believe H pointed towards this in his original note on the subject. So US companies would not necessarily be impacted immediately.
Knock on effects (as you’ve noted) will likely be inflationary if the global economy doesn’t collapse first.
The only quibble I have is that countries other than the US lack enough fabless semi names to take up much TSMC capacity and lack military capability in the South China sea. Taiwan could arm itself to the teeth with enough European weapons to defeat an invasion, but without naval power it can be strangled by a blockade. Shipping to/fr Taiwan is easily in range of Chinese shore-based missiles. Then again, the US Navy has proven unable to suppress Houthi attacks on shipping, so I doubt it will be able to suppress Chinese attacks on shipping. Taiwan’s days are numbered, and so are TSMC’s Taiwan fabs.
This looks like a Plaza accord set up. I was there – but the first crack – a giant one – was on February 25. It was the best trade of my life – but I was only a trader so I don’t know why there was a 1200-1700 point Swiss and German range. The CBs were on both sides and the market was crazy for 2 weeks and then collapsed about 25% very erratically into the summer, The market was totally crazy all year, and then it climbed sharply again into September. – hinting new highs The Plaza Accord was forced by the US.
Back then the economies were all strong with the US suffering the rust belt phenomenon. China and Russia were floundering. Japan was king and no one seemed hurt by the deal (japan was later) Now Trump has blamed Biden for the US strengh\th and the rust. US is sick but a U.S. deval beats the hell out of tariffs. Thanks to Trump the whole world is sick.
My life has been comprised of a series of bounces, mostly lucky, from one interesting chance encounter to another. One of my earliest bounces sent me off to a college I’d never seen or heard of where I would later meet my late wife, be introduced to my life’s work as a professor, and be introduced to four individuals that would change me in ways I could never imagine. One of these people was a Chinese gentleman, an economics professor who taught me International Economics, Money and Banking, and two semesters of Accounting. It turns out that this gentleman was a young citizen of the ROC, who fled to Formosa with the rabble of refugees from Mao’s Long March in 1949. It turned out that this fellow was a sort of Chinese Renaissance Man. He was an accomplished actor from the traditional Chinese classical theater, a skilled martial artist, an economist, a Chartered Accountant, and most importantly for me, in 1949, the first head of the ROC Central Bank. He didn’t stay in that position for long. His youth and the needs of the position eventually called for someone more connected to the world. He, however, did gain a wealth of critical experience. Soon, he emigrated to the US, became a CPA, and quickly completed a PhD in econ. As his student and friend, he recounted many of his experiences to me and helped me immensely to understand the machinations of the world and embrace my eventual calling. In my senior year he also taught my wife-to-be, who eventually became my life-long colleague.
Anyone brave enough to speculate, after Taiwan , which country is next ? India perhaps