Taiwan Dollar Rally Seen Ending on Intervention: Market Reversal
Trading patterns suggest the rally that drove the Taiwan dollar to an eight-month high will end on speculation that central bank Governor Perng Fai-nan will step up intervention to support exporters.
The currency’s 0.7 percent advance since the Federal Reserve unexpectedly maintained its bond-purchase program on Sept. 18 pushed the 14-day relative strength index to 29 on Oct. 4, below the 30 threshold that typically signals a reversal, according to data compiled by Bloomberg. The Taiwan dollar’s commodity channel index stayed below minus 100 in the last four trading days, which some technical analysts interpret as meaning the U.S. currency was oversold.
Taiwan’s dollar strengthened against the greenback in each of the last six weeks, the longest winning streak in a year, as overseas investors pumped $5.4 billion into Taiwanese stocks. September’s net purchases of $4.2 billion were the highest in four years, according to exchange data. Policy makers will “step in to maintain an orderly market” should irregular factors such as large short-term capital flows lead to “excess volatility,” the central bank said in a Sept. 26 statement.
“From a technical point of view, it’s reasonable to see the Taiwan dollar’s appreciation ending,” Koji Fukaya, chief executive officer and currency strategist at FPG Securities Co. in Tokyo, said in a phone interview on Oct. 4. “The pace of gains was quite fast and it’s possible to see intensifying intervention. It may not reverse the trend, but at least it will see some correction from the recent sharp strength.”
The island’s dollar declined today for the first time in a week. It lost 0.1 percent to NT$29.536 versus the greenback, after a 0.5 percent gain last week, Taipei Forex Inc. prices show. The currency dropped 0.4 percent in the final 19 minutes of trading today on suspected intervention by the central bank.
The monetary authority has sold the local dollar in the run-up to the close on most days since March 2012, according to traders who asked not to be identified. The central bank’s stance on the exchange rate is unchanged from its Sept. 26 statement and the level is determined by market forces, Harry Yen, deputy director-general of the central bank’s foreign exchange department, said in an Oct. 4 phone interview.
Taiwan’s authority started on Oct. 4 inspecting major currency-trading banks to warn against speculation, Taipei-based Commercial Times reported today, citing unidentified traders. Banks are told to use fund inflows for declared purposes such as stock purchases, the report said.
Trade data today showed exports fell 7 percent from a year earlier in September, compared with the median estimate in a Bloomberg survey of a 1.2 percent slide. That was the first decline since April. Reports last month showed export orders rose less than forecast in August and industrial production unexpectedly contracted.
HTC Corp. (2498), Taiwan’s biggest smartphone maker, reported on Oct. 4 a third-quarter loss that exceeded analyst estimates as its handsets lost market share to devices from Suwon, South Korea-based Samsung Electronics Co. and Apple Inc. of Cupertino, California.
South Korea’s central bank likely intervened on Oct. 4 as the won strengthened beyond 1,070 per dollar for the first time since January, according to Han Sung Min, a currency trader at Busan Bank in Seoul. Jung Ho Seok, the head of the foreign-exchange market team at the Bank of Korea, declined to comment on whether the bank bought U.S. currency that day.
The won strengthened 6.6 percent against the U.S. dollar in the past three months, the best performance among Asian currencies tracked by Bloomberg. That compares with a 2.3 percent gain for Taiwan’s dollar.
Taiwan’s central bank “wants to minimize volatility,” Eric Hsing, a Taipei-based fixed-income trader at First Securities Inc., said in an Oct. 4 interview. “If the Taiwan dollar appreciates much more than the Korean won, the central bank will act more aggressively.”
Taiwan’s dollar reached NT$29.29 versus the greenback on Oct. 4, the highest level since January, as a U.S. budget impasse forced a partial shutdown of the government in the world’s biggest economy. The Bloomberg U.S. Dollar Index, which tracks the greenback against 10 major currencies, fell in each of the last five weeks.
“Foreign institutional investment inflows have sustained and with the U.S. government shut, the U.S. dollar has been weaker, so there are forces pushing the Taiwan dollar up,” Andrew Tsai, an economist at KGI Securities in Taipei, said in an Oct. 4 interview. “Appreciation may not end so soon.”
The Taiwan dollar’s commodity channel index dropped to minus 207 on Oct. 4, the least since Sept. 3, and stood at negative 141 today, Bloomberg data show. The currency’s daily trading range breached the lower end of its Bollinger band since Aug. 30, indicating gains may be unsustainable. When this last happened in May, the island’s dollar weakened 3.3 percent from a May 9 high of NT$29.341 to a June 25 low of NT$30.355.
Bollinger bands, developed by John Bollinger in the 1980s, are used by technical analysts to identify the turning point in an asset’s trajectory. The limits represent two standard deviations from the 20-day moving average, implying that the likelihood of a currency moving outside the band is rare.
Technical analysis, popularized by Charles Dow, creator of the Dow Jones Industrial Average in 1896, is based on the theory that a chart of the price of financial assets contains clues to future movements.
The Taiwan dollar will weaken 1.5 percent to NT$30 against the U.S. currency by the end of December, according to the median estimate of analysts surveyed by Bloomberg. The currency’s one-month implied volatility, a measure of expected swings in the exchange rate used to price options, dropped 202 basis points, or 2.02 percentage points, to 4.04 percent from this year’s peak of 6.06 percent reached on June 26.
“The authorities will intervene as of course they want to avoid any damage to exports from the rising currency,” Tsutomu Soma, the manager of the fixed-income business unit at Rakuten Securities Inc. in Tokyo, said in an interview on Oct. 4. “From a technical perspective, the currency is trading at a very crucial stage” and appreciation may halt, he said.