Traders are bracing themselves for US House Speaker Nancy Pelosi’s scheduled arrival in Taipei on Tuesday, which is expected to escalate tensions with China. As a result, Asian markets are falling, while safe-haven assets such as the yen and Treasuries are rising.
The benchmark market index in Taiwan experienced a drop of up to 2.1 percent, Hong Kong and Chinese shares went down, and the value of the Japanese yen reached its highest point in two months. Yields on 10-year Treasuries have now fallen for five consecutive days and are getting closer to 2.5 percent, which is a level not seen since April. The value of the Taiwan dollar dropped to its lowest level since May of 2020.
The arrival of Representative Pelosi and the possibility of economic reprisal from China both increase pressure to Taiwan’s markets, which have already been experiencing the second-largest capital outflow in Asia so far this year after China. Pelosi would be the highest-ranking official from the United States to set foot on Taiwan in the last 25 years, and China, which considers Taiwan to be a part of its territory, has threatened “severe consequences” in the event that she makes the trip there.
According to Alvin Tan, head of Asia currency strategy at RBC Capital Markets in Hong Kong, “some economic response against Taiwan is unavoidable; otherwise, the loss of face for China after all the threats would be devastating.” The presence of Representative Pelosi in Taiwan poses an evident near-term risk to both the yuan and the Taiwan dollar.
Pelosi is leaving for Taiwan, as the Biden team is attempting to calm China’s anger.
The White House had made efforts to defuse the escalating tensions, stating unequivocally that there had been no shift in the United States’ position with regard to the island and asking Beijing not to respond in an aggressive manner. On Monday, John Kirby, a spokesperson for the United States National Security Council, provided an overview of an investigation that analysed the probable actions China may take, some of which include firing missiles into the Taiwan Strait and beginning new military operations.
“The market has to stay nimble on the danger of an inadvertent military confrontation between the United States and China,” said Qi Gao, a currency strategist at Scotiabank in Singapore. “The market needs to stay nimble on the risk of an unintentional military conflict between the United States and China.” We are keeping a careful check on Pelosi’s trip, and there is a possibility that the USD/CNH and USD/TWD exchange rates will increase.
The one-month risk-reversals on the dollar-Taiwan dollar, which is a barometer of projected direction over that time frame, have soared to the highest level they’ve been at since May, indicating that market participants are wagering the island’s currency would decline.
Nevertheless, in spite of the tensions, global risk markets have shown a surprisingly resilient streak. Tuesday saw relatively little movement in China’s offshore yuan. Futures on the S&P 500 index dropped by only 0.5 percent.
While Taiwan Semiconductor Manufacturing Co., the largest chipmaker in the world, had its share price drop by as much as 3.1 percent on Monday, the Philadelphia Semiconductor Index finished the day with a gain of 0.4 percent. This year, TSMC shares have dropped by almost 20 percent, with Taiwan’s benchmark stock index falling by approximately 19 percent.
Why Financial Markets Are Calm Despite Escalating Tensions Over Taiwan: China Today
According to persons with knowledge of the situation, it’s possible that Pelosi will arrive in Taipei as early as Tuesday. According to one source, a meeting between Pelosi and President Tsai Ing-wen is scheduled to take place on Wednesday. However, according to a second source, the details of such a meeting are still being worked out.
Her travel comes after a record of decades worth of pushing back against China for its record of human rights violations and growing weight on the global stage. Her travel to the democratically-governed island was an insult to Beijing because of her position as House Speaker, which places her second in line of succession to the presidency of the United States.
Beijing’s Anger over Pelosi’s Taiwan Trip Is Fueled by Her Legacy as a China Critic