Export Optimism Boosts Taiwan Dollar (TWD) Forwards

on Oct 29, 2012
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On October 29, Bloomberg reported that Taiwan dollar forwards reached their strongest level in almost two weeks, boosted by optimism surrounding the island’s positive export data. Analysts, however, see limited room for appreciation, with the economic outlook still uncertain.

**Taiwan Dollar Forwards Touch Two-Week High**
One-month non-deliverable forwards touched NT$29.086 per dollar, the strongest level observed since October 17. In addition, data from Taipei Forex Inc showed that Taiwan’s dollar advanced to NT$29.292 in the spot market compared with NT$29.300 at the end of the previous week, when the currency declined on speculation that the central bank was selling the currency as it approached a five-month high. One-month implied volatility, which measures exchange-rate swings used to price options, declined 21 basis points to 3.34 percent.

The advance of Taiwan’s currency was mostly due to optimism that the island’s exports were rebounding. Orders, which are considered as an indication of demand for shipments, rose 1.9 percent in September, relative to a year earlier. In addition, the rise in orders is the first since February. On October 31, Taiwan is expected to report quarterly economy growth of 1.55 percent, according to a median estimate of Bloomberg-surveyed economists. The island’s economy contracted 0.18 percent in the previous quarter of 2012.

Earlier in October, the Ministry of Economic Affairs reported that industrial output had increased by three percent in September from a year earlier, following a 1.4 percent increase observed in August. The rise in industrial output, however, was smaller than economists had forecast in September.
!m[Currency Expected To Weaken Toward Year-End ](/uploads/story/663/thumbs/pic1_inline.png)In addition to the Taiwan dollar, other Asian currencies such as the South Korean won and Malaysia’s ringgit also strengthened on October 29, after US and Chinese economic data indicated that global growth was picking up, boosting investors’ appetite for riskier assets. The South Korean won reached a 13-month high against the US dollar, whereas the ringgit neared a one-week high.

**Currency Outlook**
Despite Taiwan’s positive economic data, however, analysts forecast depreciation for the Taiwan dollar. Bloomberg quotes Tarsicio Tong, currency trader at Union Bank of Taiwan (TPE:2838), as seeing limited appreciation for Taiwan’s currency. “Exports will be a key determinant of the Taiwan dollar looking forward,” noted Mr Tong. “But we’re seeing limited room for more appreciation. The Taiwan dollar might weaken slightly towards year-end as the economic outlook isn’t certain yet.” Mr Tong forecasts that the currency will drop to NT$29.500 by the end of the year.

**Central Bank Monetary Policy**
Gains posted by the Taiwan dollar may also be tempered by policy makers wishing to slow the currency appreciation. Sacha Tihanyi, a Scotiabank strategist, notes that the Taiwan dollar has advanced significantly since the beginning of September, with the currency appreciation likely to hurt exports. “Given that Taiwan remains under significant pressure on the external accounts, one has to assume that the authority is going to resist further significant appreciation,” notes Mr Tihanyi, as quoted by Bloomberg.
Taiwan’s central bank is said to have intervened to halt currency advances in the final minutes of trading on most days in the last five months. Monetary authorities can intervene in currency markets by arranging foreign exchange sales or purchases.

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