beyondbrics

With Taiwan’s exports booming and the economy steadily recovering over the past year, the big question regarding the Taiwan dollar was simply how much the central bank would intervene to keep appreciation in check.

It turned out Taiwan’s central bank governor Perng Fai-nan was happy to allow the currency to gradually rise over a period of months, from around T$32 to the US dollar, to below T$29. But with that process having now reversed strongly in the last month, the question of where next for the Taiwan dollar is far from simple.

Since the end of August, the Taiwan dollar has weakened 4.5 per cent against the US dollar. This is less than the fall of other emerging market currencies such as the Korean won or the Brazilian real. But it has been a big enough fall to cause concern among Taiwanese investors, as shares of domestic retail companies (who are hurt by a weaker Taiwan dollar) have fallen.

There are two reasons driving the Taiwan dollar’s weakness. As Credit Suisse analyst Christiaan Tuntono pointed out, the Taiwan dollar “is the currency most at risk in Asia from outright weakness given its very high macro exposure to weaker US and EU growth.”

The other reason, as Standard Chartered analysts noted, is that “Flow momentum remains negative for [the Taiwan dollar], with foreign investors continuing to sell equities.”

Indeed both of these factors are already being played out. Growth in Taiwan’s export orders have started to slow, indicating tougher times ahead for the island’s export-oriented economy. There has also been such a big sell-off in Taiwan-listed shares by foreign investors that local media have started calling some highly liquid stocks ‘ATM machines for foreign investors’.

But ultimately the direction of the Taiwan dollar depends on the actions of the central bank. It is worth noting that, when Mr Perng appeared before legislators on Friday, he rejected the idea that a sharp depreciation was just the tonic needed for Taiwan’s slowing export sector.

But as for what actions the central bank may take, Mr Perng remained ellusive as always, sticking to his official line that the Taiwan dollar exchange rate floats freely and the central bank would only take action in the event of “excessive volatility due to seasonal or irregular factors”.

Related reading:
Taiwan’s two lines of currency defence, beyondbrics
Taiwan: export growth slows sharply, beyondbrics
David Pilling: Why Taiwan still rattles Beijing and Washington, FT