Central bank rejects currency arbitrage report
By Ted Chen, The China Post
February 13, 2014, 12:02 am TWN
TAIPEI, Taiwan -- The Central Bank, R.O.C. yesterday refuted a report by an international news outlet suggesting that Taiwan's currency market is rapidly becoming a hotbed for foreign exchange arbitrage activities.
A recent report by Bloomberg indicated that amid the tightly controlled interest rate policies exercised by its peers among Asian developing markets, the Taiwan central bank's comparatively lax monetary policies have fostered a high concentration of foreign exchange arbitrage activities on the New Taiwan dollar. The report stated that projected arbitrage profitability on the local currency against a basket of Asian currencies including the Indonesian rupiah and the Chinese yuan yielded returns of 1.7 percent, while the same strategy deployed on the yen would result in losses of 3 percent. In addition, the report pointed to Taiwan's 10-year government bonds' 1.6-percent interest rate, a figure much lower than China's 4.5 percent, and India's 8.7 percent. According to the report, traders may yield maximum profits of 2.8 percent by conducting arbitrage on the New Taiwan dollar against the Indonesian rupiah, followed by the potential 2 percent against the Indian rupee. The report attributed its findings to the central bank's monetary policy of “moderate easing,” suggesting that as the U.S. tapers off quantitative easing measures, coupled with rising interest rates exacted by regulators in Turkey, South Africa, India, China and other developing nations, Taiwan's relatively lower interest rates have propelled the local market into a hotbed for foreign exchange arbitrage activities.
In response, Central Bank Governor Perng Fai-nan yesterday refuted the report, stating that Taiwan's one-year fixed deposit rate at 1.355 percent is considerably higher than figures observed in the West including the 0.58 percent of the U.S., the 0.95 percent of the UK, 0.554 percent found in Europe, the 0.25 percent of Singapore, and Hong Kong's 0.05 percent.
Relative to its immediate neighbors in Asia, Taiwan's interest rate also exceeds figures offered by Singapore, Japan and Hong Kong, added Perng. Therefore, in terms of interest rates Taiwan is not a hotbed for interest rate arbitrage, Perng firmly stated yesterday. Perng also mentioned as interest rates fluctuate frequently, one should not derive conclusions from a single month's worth of data. In addition, as foreign institutional investors are restricted from taking on large-scale short-term loans, conducting foreign exchange rate arbitrage in the Taiwan market would be “unfeasible,” according to Perng.