Why isn't Unicode character REPLACEd in some cases?
This behavior is simply due to the fact that you are executing the query in a Database that has a pre-"100" series default Collation, in which case a great many characters do not have any sort weight. No sort weight means that they equate to empty string. They have a value of 0. So they always equal each other when nothing else having a sort weight is involved. They also equate to empty string. The version 100 Collations (starting in SQL Server 2008 which is version 10.0 or 100 without the decimal / minor version) added sort weights for most characters. So, just force the collation by adding COLLATE Latin1_General_100_CI_AS_SC. A binary Collation of any version (one ending in _BIN2, don't use Collations ending in just _BIN) also works as there are no such things as sort weights in binary Collations.

SELECT 1 WHERE NCHAR(1234) = '' COLLATE SQL_Latin1_General_CP1_CI_AS;
-- 1

SELECT 2 WHERE NCHAR(1234) = '' COLLATE Latin1_General_CI_AS;
-- 2

SELECT 3 WHERE NCHAR(1234) = '' COLLATE Latin1_General_100_CI_AS;
-- (no results)

SELECT 4 WHERE NCHAR(1234) = '' COLLATE Latin1_General_BIN2;
-- (no results)


Even multiple characters with no weight still equate to empty string (or any number of characters with no sort weight):

SELECT 5 WHERE NCHAR(1234) + NCHAR(1234) + NCHAR(1234)
       = N'' COLLATE Latin1_General_CS_AS_KS_WS;
-- 5


In this next test, NCHAR(1234) equates to itself only when using a version 100 (or newer) Collation. Pre-version 100 Collations assign no sort weight to NCHAR(1234) such that it doesn't equate to anything, hence it was previously not found in the first expression.

SELECT REPLACE(N'a' + NCHAR(1234) + N'a',
               NCHAR(1234) COLLATE Latin1_General_100_CI_AS,
               N'test');
-- atesta


Continuing example # 5 above, we can prove that 3 characters having no weight equate to 2 different characters that also have no weight:

SELECT 6 WHERE NCHAR(1234) + NCHAR(1234) + NCHAR(1234)
             = NCHAR(5342) + NCHAR(5342) COLLATE Latin1_General_CS_AS_KS_WS;
-- 6


But switching to a version 100 Collation changes that:

SELECT 7 WHERE NCHAR(1234) + NCHAR(1234) + NCHAR(1234)
             = NCHAR(5342) + NCHAR(5342) COLLATE Latin1_General_100_CS_AS_KS_WS;
-- (no results)

SELECT 8 WHERE NCHAR(1234) = NCHAR(5342) COLLATE Latin1_General_100_CS_AS_KS_WS;
-- (no results)




Please see the "Supplementary Characters" characters section of the following post of mine. In that section I show similar behavior as it relates to supplementary characters, and at the end of the section I show how many BMP characters (i.e. non-supplementary characters) match one of these "missing weights" characters per Collation version.

The Uni-Code: The Search for the True List of Valid Characters for T-SQL Identifiers, Part 3 of 2 (Delimited Identifiers)

For more info on working with Collations, please visit: Collations.info