The record two-day rise in Taiwan’s currency comes as the US dollar is precariously perched relative to global currencies.
Foreign exchange is often the release valve through which global markets react to shifts in the policy environment.
That’s been on full display over the past few days with the move in the Taiwanese dollar.
The Taiwanese dollar has appreciated by more than 7% relative to the US dollar in the past two sessions, its biggest advance on record. The surge comes amid speculation that the nations’ exporters are converting their dollars back into domestic currency because they are optimistic about the prospects of reaching a trade deal with the US. Given that Taiwan’s currency has been notoriously undervalued for a very long time, in large part because of central bank intervention, the thinking is that any agreement would require some of this artificial weakness in the currency to be addressed.
But whichever actors started the move, it’s clear which ones will be feeling pressure to react to the sharp appreciation of the Taiwanese dollar. Good news on trade, if it leads to a stronger TWD, is bad news for the Taiwanese financial system.
It goes without saying that when foreign exchange moves, it takes everything with it. From the perspective of global investors, any changes in FX are immediately reflected in what a country’s bonds and stocks are worth in your domestic currency (unless, of course, those holdings are hedged).
For example, from an operating perspective, the 7% appreciation of the Taiwanese dollar shaves 2.8 percentage points off TSMC’s margins, the Taipei-based Central News Agency reported (citing the company).
But it’s the hedging practices of Taiwanese life insurers (or lack thereof) that give this currency appreciation such adverse consequences.
Taiwan has run massive trade surpluses, which entail a lot of US dollars flowing into the country. The logical end points of a big current account surplus is that either the central bank is building up a lot of foreign exchange reserves and/or private entities are recycling those holdings into foreign assets. The latter dynamic has been dominant for most of the past two decades, particularly for the aforementioned Taiwanese life insurance companies.
These entities have liabilities that are denominated in Taiwanese dollars (payouts to policyholders). But very low interest rates on Taiwanese bonds have meant they don’t really want to invest much in domestic bonds, and a dearth of domestic assets relative to the massive trade surplus meant they couldn’t even if they wanted to. As such, they’ve accumulated a tremendous amount of foreign bond exposure (often US dollar-denominated), a substantial amount of which is unhedged. When the US dollar is tanking relative to the Taiwanese dollar, insurers are staring at steep losses and face pressure to hedge more of that exposure, which can add to the upward pressure on the currency.
So a 1% move in the Taiwan dollar all else equal generates mark to market losses (tho not necessarily accounting losses) of around $2b/ a 10% move losses of more like $20b — big sums
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Taiwan’s experience is in stark contrast to the typical cause of pain for emerging markets — and Taiwan is still categorized as emerging, per MSCI.
When most emerging markets get into trouble, it’s because they’ve borrowed too many US dollars that they have difficulty paying back, particularly when the greenback is appreciating. That’s the so-called “original sin” of borrowing: when it’s done in a currency that you don’t have the ability to print yourself. (For example, see the 1994 tequila crisis or 1997 Asian currency crisis.)
Why do you need to care about Taiwanese life insurers? Well, the world of finance works in mysterious ways. Crazy enough, the specific investment decisions that Taiwanese life insurers made to reach for yield in the prepandemic cycle contributed to lower US mortgage rates than would have otherwise been the case in the prepandemic cycle, and did the exact opposite when US bond yields were soaring in 2022.
To zoom out: the current moves in Taiwan are at least in part linked to changes in the evolution of trade policy. While several justifications for the administration’s trade policy have been proffered, an overarching motif of President Donald Trump’s thoughts on the subject are that trade deficits are bad. The design of the reciprocal tariff system was based on how large a nation’s trade surplus was with the US. Currencies, obviously, play a role in determining the relative price of an export and the importer’s willingness to purchase it.
The initial “sell America” trade was equivalent to buying a put option on Trump’s trade policy, in part because success in slimming the trade deficit would mean that foreign countries would have fewer US dollars that they needed to recycle back into US dollar assets (including stocks). That was a clear valuation shock.
However, the swift bounce-back in US stocks after reciprocal tariffs were watered down, coupled with hyperscalers’ unwavering commitment to spending billions on chips, meant that the “sell America” trade was also selling a call on AI. If you don’t own US tech giants, you’re effectively passing up all the upside that could be priced into this potentially transformative technology.
The jump in the Taiwanese dollar, which has been echoed at a smaller scale across other Asian currencies, shifts the pendulum back toward the risks of staying invested in US assets (in unhedged terms, at least) rather than the fear of missing out.
Just as Taiwan’s currency appreciation is a Pyrrhic victory from the perspective of its domestic financial system, so might “success” on trade be negative for US assets.
To this end, it’s “time to reload short USD,” says Brent Donnelly, president of Spectra Markets. His thinking:
“The US equity rally has not generated USD demand. This makes me think that the rally is a short squeeze and it’s not foreign pension funds changing their minds. They continue to add to USD hedges and if they start selling US equities again, the impact should be USD-negative. The dollar trades asymmetrically to equities. Stocks up = USD flat. Stocks down = USD down.”
The timing is ominous: one measure of the US dollar now stands quite close to it multiyear lows. If global markets make another decisive step toward pricing in a regime change for the US dollar, that matters for everyone.
It’s up 450% over the past 12 months and is the top S&P 500 stock in 2025.
The president says the move will save the US film industry from a “very fast death.”
Confirmation that China is open to trade talks with the US along with better-than-expected US job growth in April fueled another day of gains for stocks, with the S&P 500 up 1.5%, the Nasdaq 100 gaining 1.6%, and the Russell 2000 booking a 2.3% advance.
The S&P 500 has now reclaimed all of its losses since the April 2 reciprocal tariffs announcement.
It’s the first set of back-to-back weekly gains in excess of 2% for the benchmark index since October 2022. And the S&P 500 has now equaled its record stretch of consecutive gains while below the 200-day moving average with nine days, tying streaks seen in 1970, 1973, and 1981.
Every S&P 500 sector ETF rose at least 1% except for consumer staples and utilities, two more defensive pockets of the market. Financials led the way higher.
The big day for stocks came despite retreats from the two Magnificent 7 constituents that reported earnings after the close on Thursday.
Apple sank as its top- and bottom-line beat was overshadowed by weakness in its China business and worries that its strong iPhone sales were a one-off rush to beat potential tariffs. Amazon finished modestly lower after reporting solid Q1 earnings but a Q2 outlook that disappointed the Street.
Five Below was one of the major positive surprises of the day, raising its first-quarter guidance despite facing intense operational challenges linked to its supply chains in China. Shares jumped double digits.
AppLovin also rose double digits after Wedbush suggested the stock could be a huge beneficiary of a recent court order that stops Apple from collecting commissions on off-app purchases.
Strategy’s big earnings miss and light revenues didn’t stop traders from bidding up the stock.
Instacart rose on the heels of solid Q1 results that included impressive order growth.
Palantir shares finished just shy of a record closing high after reports that the White House is looking to boost defense spending.
Duolingo posted strong earnings and upped its full-year forecast, sending shares soaring.
On the other hand, Block was a big loser after the fintech firm did the opposite: missing on earnings and revenues while lowering its full-year guidance. Roku also slumped after issuing a cautious full-year outlook, while Take Two tanked after pushing back the release of “GTA 6” from the fall of this year to May 26, 2026.
Given Nvidia’s performance over the last year, CEO Jensen Huang would seem to deserve a raise. The company was the best performer of the Magnificent 7 in 2024, rising 171.2% and creating more than $2 trillion in market wealth for shareholders.
And a raise he got: Huang’s compensation rose likewise, according to Nvidia’s most recent proxy statement, filed on May 1.
Huang’s “summary compensation” in fiscal 2025 — Nvidia’s fiscal year ended in January — rose to $49.9 million, up 46% from the prior year. Summary compensation is the longstanding official line companies publish on what their CEOs make.
But critics have said the “summary compensation” number vastly understates the economic value of the restricted stock units, stock options, and equity grants that often account for the bulk of CEO compensation.
So a few years back, the SEC began requiring a separate disclosure, known as “compensation actually paid” or CAP, that attempts to capture the impact of annual stock price moves on equity-based compensation. By that measure, Huang made a cool $344.2 million in last fiscal year. For context, that’s more money than 738 companies in the Russell 2000 generated in revenue over the past 12 months, per Bloomberg data.
It’s not exactly on the level of what Palantir pays its CEO, but I’d take it.
Huang’s “summary compensation” in fiscal 2025 — Nvidia’s fiscal year ended in January — rose to $49.9 million, up 46% from the prior year. Summary compensation is the longstanding official line companies publish on what their CEOs make.
But critics have said the “summary compensation” number vastly understates the economic value of the restricted stock units, stock options, and equity grants that often account for the bulk of CEO compensation.
So a few years back, the SEC began requiring a separate disclosure, known as “compensation actually paid” or CAP, that attempts to capture the impact of annual stock price moves on equity-based compensation. By that measure, Huang made a cool $344.2 million in last fiscal year. For context, that’s more money than 738 companies in the Russell 2000 generated in revenue over the past 12 months, per Bloomberg data.
It’s not exactly on the level of what Palantir pays its CEO, but I’d take it.
Two retail favorites are massive beneficiaries of a federal court order this week telling Apple that it can no longer collect commissions on off-app purchases made in mobile games, per Wedbush Securities.
“This ruling is highly likely to have wide-ranging impacts across the app landscape with clear positives for developers and clear second order positives for companies such as AppLovin and Unity Software,” analyst Michael Pachter wrote.
This news is obviously a boon for game publishers, but also these two aforementioned companies that make money from ad sales and purchases made in games. Pachter has an “outperform” rating on both stocks, with a whopping $620 price target on AppLovin (more than double its current price) and $31.50 for Unity.
With game developers no longer having to fork over money to Apple, that means they can invest those savings in promoting their games — which is AppLovin and Unity’s bread and butter.
“We estimate customer ‘LTV’ (lifetime value) could rise by 60-100%, which should increase user acquisition spending by at least $5-10 billion annually, almost all of which is going to flow to in-app ads if developers maintain current LTV/CAC [customer acquisition cost] targets,” he added.
AppLovin is up double digits over the past two sessions, while Unity has made a much more modest advance.
