Considered the best currency performer in Asia for nine months in 2021, the Taiwan dollar faces headwinds as foreign outflow increases.
January to September saw robust exports and trade surplus, which helped the Taiwanese dollar overcome the greenback’s strength and become the best performing Asian currency. This month it has fallen behind its peer as foreign institutions sold equities worth $2.3 billion, up from $440 million in the previous month resulting in outflows.
As per I-Kaung Chen, the Chairman of First Capital Management in Taipei, “Equity outflow resulted from the anticipation of Federal Reserve’s tapering and increase in interest rates.” The interest rates will determine whether the foreign investment will come back to Taiwan, which is unlikely”, he said.
Taiwan’s currency slumped to its six-month lows in October as the equity rally ended after showing a 24 year high in June this year. In late September, Federal Reserve’s Chairman Jerome Powell had indicated that the central bank would scale down the asset purchases from November given rising inflation. This prompted Traders to factor in the interest rate hikes.
Taiwan’s track record of following the Federal Reserve rate hike may need to be held back this time if its domestic growth weakens, which will impact its currency. Its 2-year bond yield spread has widened more since march 2020 compared to similar tenor treasuries.
As per the Bloomberg survey, Data is projected to show economic growth of 4.05% in the third quarter compared to 7.43 % in the June quarter.
However, if Taiwan’s currency weakens, it will boost exports as it was seen that in September, orders climbed to an all-time high. This could offset some of the risks arising from the energy crunch that is affecting other manufacturers in the region.
According to Bloomberg News, Chinese president Xu Jinping has declared that unification between China and Taiwan will be achieved. The political risks can cause the currency as Taiwan faces challenges defending its sovereignty as per President Tsai Ing-Wen’s statement on October 10.
As per the Royal Bank of Canada (RBC), three factors indicate a correction in the Taiwanese dollar in the next three months to 12 months. “The overvaluation of Taiwanese dollar compared to other Asian currencies, lower carry over and decline in exports as the world normalize,” said Alvin Tan, the head of RBC foreign exchange strategy in Hong Kong.
Some key economic data is expected this week:
- Singapore CPI and Taiwan industrial production on October 25.
- Singapore industrial production and South Korea Qtr GDP on October 26.
- China industrial profits, New Zealand trade balance, and business confidence, and Australia QTR 3 on October 27
- BOJ policy decision, Malaysian trade balance, and Japan retail sales on October 28
- Japan and South Korea industrial production, Taiwan 3Q GDP, Australia 3Q retail sales ex-inflation and PPI, New Zealand consumer confidence, and Thailand BoP current account balance on October 29.
