Taiwan Dollar Forwards Fall for Third Week as Yield Gap Widens

Taiwan dollar forwards headed for a third weekly loss and government bonds fell on concern rising yields on U.S. assets will lure funds away from local markets.

The rate on 10-year Treasuries approached a three-month high today after the Federal Reserve said last week it will cut its debt purchases. The yield premium on the U.S. notes over like-maturity Taiwanese bonds widened to the most since July 2011 today, after the island’s central bank kept its benchmark interest rate unchanged for a 10th straight meeting yesterday.

“Treasury yields have been rising while there continues to be no incentive for Taiwan’s central bank to raise rates, which was confirmed yesterday,” said Samson Tu, a Taipei-based fund manager at Uni-President Assets Management Corp. “But the Taiwan dollar should stabilize after New Year’s Day.”

One-month non-deliverable forwards on Taiwan’s currency fell 0.14 percent this week to NT$29.923 per dollar as of 10:27 a.m. in Taipei, according to data compiled by Bloomberg. The contracts climbed 0.2 percent today.

In the spot market, Taiwan’s dollar was little changed this week at NT$29.976 against the greenback, prices from Taipei Forex Inc. show. The currency strengthened 0.2 percent today, after slipping 0.2 percent in the last 19 minutes of trading yesterday amid suspected central bank intervention.

The monetary authority will step into the foreign-exchange market in the event of any irregularities, Governor Perng Fai-nan said yesterday. The central bank 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.

Rate Outlook

Global funds bought $66 million more Taiwanese stocks than they sold this week through yesterday, taking net purchases in December to $950 million, exchange data show.

There will be little room to raise rates if economic growth is slow, and the central bank will maintain an “adequately loose” policy stance, Perng said yesterday. The rate decision was predicted by all 27 economists in a Bloomberg survey.

Government bonds declined from Dec. 20 after advancing in the last three weeks. The yield on the 1.25 percent notes due October 2018 increased two basis points, or 0.02 percentage point, this week to 1.0745 percent, according to Gretai Securities Market. The rate dropped one basis point today.

One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, decreased two basis point this week and four basis points today to 3.65 percent.

The overnight interbank lending rate was little changed this week and today at 0.389 percent, a weighted average compiled by the Taiwan Interbank Money Center showed.

To contact the reporter on this story: Justina Lee in Hong Kong at jlee1489@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net

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