Taiwan Dollar Forwards Extend Decline as Interest Rates Lowered

  • A rate cut was predicted by 12 of 25 economists in survey
  • Greenback strengthened after Fed raised U.S. borrowing costs

Forward contracts on Taiwan’s dollar extended declines as the central bank lowered its policy rate for a second straight quarter, eroding the appeal of the currency as sliding exports hurt the economy.

The monetary authority lowered the benchmark discount rate by another 12.5 basis points to 1.625 percent. Twelve of 25 economists surveyed by Bloomberg had predicted a cut, while the remainder had expected the rate to be held after it was reduced in September for the first time since 2009. A gauge of U.S. dollar strength climbed after the Federal Reserve increased borrowing costs for the first time since 2006.

One-month non-deliverable forwards dropped 0.6 percent to NT$32.935 versus the greenback as of 5:14 p.m. in Taipei, after falling 0.3 percent on Wednesday, according to data compiled by Bloomberg. In the spot market, the Taiwan dollar closed 0.3 percent lower before the rate decision was announced, Taipei Forex Inc. prices show. This year’s 3.7 percent decline in the currency is the best performance in emerging markets after the Hong Kong dollar, which is pegged to the greenback.

“The central bank may cut rates again and prefer a weaker Taiwan dollar to support exports,” said Leon Chu, fund manager at Franklin Templeton SinoAm Securities Investment Management Inc. in Taipei. “The weak economic outlook is bad for stocks, which may deter foreign inflows also.”

Overseas shipments slumped 16.9 percent in November, the most since 2009, and the island’s economy shrank 0.6 percent in the last quarter. Growth for 2015 is forecast to be 1.3 percent, which would be the slowest in six years.

“The next move in interest rates in Taiwan will depend on how long it takes the economy to recover,” Gareth Leather and Andrew Wishart, Asia economists at Capital Economics, wrote in a note. “Provided the economy gains enough momentum over the coming months, today’s cut should mark the end of the current easing cycle.”

Government bonds were little changed in Thursday’s trading, with the yield on notes due 2025 at 1.176 percent, according to Taipei Exchange prices.

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