Asia | Emerging Markets | FX | Monetary Policy & Inflation
The Taiwan dollar (TWD) has recently started to show some strength – it was up almost 1% against the dollar in the second half of July before giving back some gains in recent days. A weak GDP print likely caused some of the weakness. However, the focus could now shift to Taiwan likely being added to the US Treasury Monitor List of major trading partners that merit close attention to their currency practices and macroeconomic policies. Given recent CBC moderation of TWD strengthening, this may disincentivise continued FX intervention, as was the case after Taiwan was added to the list in 2016. As such, inclusion on the list, which could be released in coming weeks, portends continued TWD appreciation.
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The Taiwan dollar (TWD) has recently started to show some strength – it was up almost 1% against the dollar in the second half of July before giving back some gains in recent days. A weak GDP print likely caused some of the weakness. However, the focus could now shift to Taiwan likely being added to the US Treasury Monitor List of major trading partners that merit close attention to their currency practices and macroeconomic policies. Given recent CBC moderation of TWD strengthening, this may disincentivise continued FX intervention, as was the case after Taiwan was added to the list in 2016. As such, inclusion on the list, which could be released in coming weeks, portends continued TWD appreciation.
Taiwan’s Q2 GDP data was reported at a worse-than-expected -0.75% YoY, but the forecast miss was in fact smaller than in South Korea or Singapore and the contraction more modest (Chart 1). And with higher-frequency data such as the PMI now back in expansionary territory, and exports continuing to hold up better than elsewhere, the economy remains as one of the region’s least impacted from the COVID crisis. Taiwan also stands to benefit from redirected Chinese demand for technology products if the US bans technology companies from dealing with China.
However, whether TWD strength will endure is another question. Despite a relatively strong stock market, Taiwan has seen equity outflows (Chart 1). Meanwhile, the minutes from the July central bank policy meeting showed mounting concern over export competitiveness. Currency strength was also cited in the minutes as a possible reason to cut interest rates – though in the end, the decision to leave rates on hold at 1.125% was unanimous.
Therefore, we would no longer view TWD as funding currency and would rather expect TWD strength in coming weeks.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)