Taiwan Dollar surges amid shifting US-China trade sentiment: implications for FX volatility

Recent developments in US-China trade discussions have prompted a reassessment of geopolitical and tariff risks—particularly in Taiwan. In response, the Taiwan Dollar (TWD) saw a sharp appreciation, strengthening by 8% against the US Dollar (USD) in the FX spot market over just two days at the start of the May holiday period in North Asia.

These developments have had a pronounced impact on FX volatility markets. One-month at-the-money (ATM) implied volatilities have more than doubled compared to pre-holiday levels, indicating increased uncertainty and heightened demand for TWD options.

Further evidence of changing sentiment can be seen in the shift in 25 Delta risk reversals. This trading strategy, which reflect the relative demand for upside versus downside protection on USD/TWD, moved from -0.95% to -2.65%—a notable departure from the -1% to 0% range that had held steady for several months. This shift signals a growing market bias toward further TWD strength.
The chart below compares the USD/TWD one-month volatility curves on April 29 and May 7. The increased skew (asymmetry) on May 7 reflects mounting expectations of continued TWD appreciation.

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