BNP Paribas is suggesting Taiwanese corporates with U.S. dollar exposure buy three-month at-the-money U.S. dollar calls/Taiwan dollar puts because it anticipates an easing in monetary policy and increase in volatility caused by a weakening Taiwan dollar. Thio Chin Loo, currency analyst at BNP in Singapore, said, "We expect the engineering of weaker exchange rates [after the election]." She continued that after a general parliamentary election in early December the central bank will probably allow the Taiwan dollar to fall by TWD.50 to TWD35. The bank currently keeps the Taiwan dollar around TWD34.5.
The three-month timeframe was also selected due to an expected pick-up in volatility: "vols are cheap at this time," continued Thio. Three-month implied volatility was priced around 3.9% while three-month historical was at 1.09%, which Thio believes is bottoming and should rise in the coming weeks.
Thio added that to ensure confidence the central bank will likely refrain from the monetary easing until after the election. While exports have been reduced significantly due to the global slowdown, imports into Taiwan have fallen even further, prompting concern of an appreciating local currency. The central bank has actively intervened in the market, buying U.S. dollars in order to keep the Taiwan dollar competitive against regional currencies.
"There's also a U.S. dollar story," added Thio, which should contribute to the weaker Taiwan currency in the coming months. BNP believes that the U.S. will start recovering early next year. "The U.S. dollar should gain some ground," she said. BNP's three-month forecast for the currency pairing is TWD35.
