Taiwan dollar fortunes change due to large outflows of foreign capital

(Bloomberg) – The Taiwan dollar is facing increasing headwinds linked to foreign capital outflows, after dominating the ranking of Asian currencies in the first nine months of the year.

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Robust exports and the trade surplus helped the Taiwan dollar overcome the strength of the greenback and outperform Asian currencies from January to September. It has now fallen behind some of its peers, with foreigners selling $ 2.3 billion in local stocks this month, up from $ 440 million in September.

“The stock exits this month are mainly due to the expectation of a Federal Reserve cut and an impending rate hike,” said I-kuang Chen, president of First Capital Management in Taipei. “The interest rate will determine where foreign investment goes and it’s unlikely to come back to Taiwan. “

The Taiwanese currency fell to its lowest level in six months earlier this month due to losses on equities after hitting a 24-year high in June. This was after Federal Reserve Chairman Jerome Powell said in late September that the central bank could start cutting asset purchases in November and rising inflation prompted traders to forecast a hike. rates from mid-2022.

While Taiwan has generally followed the Fed by raising rates, it may have to hold back if domestic growth weakens, which would weigh on the currency. The yield spread between Taiwanese two-year bonds and similar-grade T-bills has widened to a maximum since March 2020.

Data on Friday is expected to show the economy grew 4.05% in the third quarter from 7.43% in the three months ended June, according to a Bloomberg survey.

However, a weaker currency could further boost the country’s exports after orders hit an all-time high in September. It could also mitigate some of the risks associated with the energy crisis facing other manufacturers in the region.

Nevertheless, political risks could weigh on the currency. Taiwanese President Tsai Ing-Wen said on Oct. 10 that the island faced “unprecedented challenges” and that it would defend its sovereignty, pushing back after Chinese leader Xi Jinping said a day earlier that the unification would be achieved.

The Royal Bank of Canada sees three factors signaling a correction in the Taiwan dollar over the next three to 12 months. “Relatively weaker carry, overvalued against most other Asian currencies and the export boom expected to decline as the rest of the world” normalizes, “said Alvin Tan, head of foreign exchange strategy for Asia. at the Royal Bank of Canada in Hong Hong.

Here are the main Asian economic data expected this week:

  • Monday October 25: Taiwan industrial production, Singapore CPI

  • Tuesday October 26: South Korea’s third quarter GDP, Singapore industrial production

  • Wednesday October 27: Australia 3Q CPI, New Zealand Trade Balance and Business Confidence, China Industrial Profits

  • Thursday October 28: BOJ policy decision and retail sales in Japan, Malaysia’s trade balance

  • Friday October 29: Retail sales in Australia in Q3 excluding inflation and PPI, industrial production in Japan, New Zealand consumer confidence, industrial production and business surveys in South Korea, GDP in Taiwan in Q3, account balance current BoP in Thailand

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