MyStratWeekly – May 20th 2025

Topic of the week: Taiwan Dollar: The Time Bomb of a New Type of Financial Crisis

• Like a butterfly, panic spread through Taiwanese business circles, prompting them to massively sell dollars, leading to a sudden appreciation of the Taiwan dollar;
• Although the causes remain unclear, it has highlighted the colossal amount of foreign financial assets accumulated by Taiwan, totaling $1 trillion, which is 200% of its GDP!
• Life insurance companies hold more than $700 billion, primarily in U.S. bonds (Treasuries and investment-grade corporate bonds);
• Their hedging needs are met by the Central Bank of China, which provides them with dollars from its substantial foreign exchange reserves through currency swaps;
• Over the years, life insurance companies became lax, accumulating risks: $200 billion in foreign bonds are uncovered, representing 25% of Taiwan's GDP;
• Their solvency relied on a fragile balance, particularly the belief that the Central Bank of China would never allow the Taiwan dollar to appreciate;
• Life insurers have recorded significant potential losses, which may worsen if U.S. interest rates continue to rise and the greenback weakens.

Market review: Back to square One

• The Geneva agreement with China amplifies the powerful market rebound, but uncertainties remain;
• United States: activity likely at an inflection point;
• Markets will have to cope with the resurgence of U.S. budgetary risk, as Moody’s cuts rating to Aa1;
• Sovereign and credit spreads supported by the search for yield.

(Listen to) Axel Botte’s & Zouhoure Bousbih's podcast:

• Review of the week – Big Beautiful Bill, a BBB budget and the loss of the AAA;
• Theme – Taiwan Dollar: The Time Bomb of a New Type of Financial Crisis.

Chart of the week

Strong rebound in Eurozone exports to the United States in March (60% YoY growth), reflecting stockpiling activities in anticipation of new U.S. tariffs.

Detailed by country, the increase is more pronounced for Ireland, suggesting strong American demand for European pharmaceutical products