When the menu loads, a menu item may be highlighted if it is “current”. By default, “current” status is determined by the menu hierarchy – meaning if a menu item or one of its descendants matches the current page, then it will be marked as current.
When this setting is enabled, then term menu items that are associated with the current page/post will be marked as current as well.
This mainly affects auto-populated term menus.
Example: you have a Product post type. You’ve created an auto-populated terms menu of Product Categories. On the Product page, associated Product Categories will be highlighted as current in the menu. So if you have a Product in the Product Category “Pants”, then “Pants” will be current in the menu when viewing the Product page.