Risk-on sentiment likely to continue during rest of September on hopes of US-China talks achieving a breakthrough, says Scotiabank

Risk-on sentiment is likely to continue during the rest of September on hopes for the US-China Washington talks achieving a breakthrough, according to the latest research report from Scotiabank.

It was widely reported that Taiwan’s financial regulator, the Financial Supervisory Commission (FSC), plans to impose an extra currency-risk capital charge of 6.1 percent on the bond ETFs denominated in the TWD but tracking foreign assets such as US corporate bonds.

The move is aimed at curbing Taiwanese life insurers’ heavy positions in the bond ETFs that surged to TWD900.3 billion as at end-July, accounting for 96 percent of the total. The existing rules allow local lifers to allocate up to 10 percent of their total capital of TWD25.5 trillion (i.e. TWD2.55 trillion) in ETF products, suggesting there is still room for them to buy more bond ETFs.

As the total amount of debt with yields below zero is now standing at around USD15.3 trillion around the world, despite recent rises in the bond yields, Taiwan’s life insurers are expected to keep purchasing bond ETFs for higher returns, the report added.

In the meantime, the planned extra capital requirements for currency risk will prompt local lifers to raise their hedging ratios, which will impose downward pressure on USD/TWD DF and NDF points in the months ahead.

"We also keep a close watch on the US-China trade talks as a concrete progress could sustain the renewed equity inflows throughout the remainder of the month, and then prop up the TWD with USD/TWD DF and NDF points falling at a faster pace and with a flattening trend. We would like to sell USD/TWD at 31.2 now, with a target of 31.0 and a stop of 31.3," Scotiabank further commented in the report.