From Apple to Super-Powers, Everything’s Against Taiwan’s Dollar

  • Central bank forecast to cut interest rate to lowest in region
  • That may leave island’s currency Asia’s worst by end of 2016

Caught between China on the one side and the U.S. on the other, Taiwan’s dollar is in danger of greater losses than any other emerging-market currency in Asia.

Strategists see the central bank cutting interest rates to the lowest in the region outside Japan to combat a shrinking economy, just as the Federal Reserve considers tightening monetary policy. Meanwhile, Taiwan’s new president has antagonized its neighbor -- and biggest export market -- by refusing to affirm the “One-China” principle. And falling sales at Apple Inc. are threatening to hurt some of the island’s biggest exporters.

To Scotiabank, the currency’s most-accurate forecaster in the latest Bloomberg rankings, this adds up to a 4 percent drop in the Taiwanese dollar by year-end to NT$34 per U.S. dollar. The median estimate of 23 strategists is for a 2.5 percent slide to NT$33.5 -- still more than the declines anticipated for any emerging-Asia peer.

“We are bearish on the Taiwan dollar,” said Qi Gao, a strategist in Hong Kong at Scotiabank. “Downside risks are the Fed’s potential tightening, Taiwan’s rate cuts and uncertainty relative to geopolitical issues across the strait.”

Landslide Victory

Taiwan’s currency has eked out a 1.2 percent gain in 2016 to NT$32.68 per dollar at the close on Monday, following three straight years of declines. The forecast losses show the vulnerability of an island which, despite having an economy bigger than Malaysia’s or Hong Kong’s, is reliant on exports for two thirds of its output. Taiwan’s $355 billion gross domestic product shrank for the past three quarters, and concern is building that President Tsai Ing-wen’s landslide election win in January only worsens its prospects.

The allure of Taiwanese assets will be further dented if the local central bank cuts and the U.S. raises rates in coming months. There’s now an almost 60 percent chance the Fed will tighten policy by its July meeting, up from 26 percent a month ago, according to futures prices. Goldman Sachs Asset Management LP has increased its short positions on some Asian currencies, including the Taiwan dollar, according to a May 27 note.

Seventeen of 22 analysts in a Bloomberg survey expect at least a 12.5 basis-point reduction in Taiwan’s discount rate by December after the benchmark was lowered for a third consecutive quarter in March to a near record-low 1.5 percent. The Central Bank of the Republic of China (Taiwan) next meets in late June.

Investing Overseas

Taiwanese residents will seek to invest more in higher-yielding assets abroad, said Scotiabank’s Gao.

The island’s life insurers have increased overseas investments to meet their liability costs. Overseas assets of Taiwanese insurers rose to NT$11 trillion ($337 billion) as of March 31, from NT$8.8 trillion a year earlier, data from the Financial Supervisory Commission show. Foreign funds pulled a net $2.7 billion from Taiwan’s stock market in May, paring this year’s net purchases to $3 billion, as of Friday in Taipei.

“The market is underpricing the hike by the U.S.,” said Irene Cheung, a foreign-exchange strategist in Singapore at Australia & New Zealand Banking Group Ltd., which sees the Taiwan currency ending 2016 at NT$34. “Taiwan continues to be quite volatile in terms of the portfolio flows. Economic numbers from Taiwan remain very weak.”

The island’s links to Apple may also weigh on the Taiwan dollar after the U.S. company reported its first quarterly sales decline in 13 years.

Local firms including Taiwan Semiconductor Manufacturing Co. and Hon Hai Precision Industry Co. build iPhones, helping explain the 0.7 monthly correlation between the island’s dollar and Apple’s share price in the past year, according to data compiled by Bloomberg. A reading of 1 would mean the two were moving in lockstep.

“This is something to watch,” said ANZ’s Cheung. “It’s quite a good tracking relationship.”

Taiwan’s exports shrank for a 15th straight month in April, the longest slump on record, with electrical equipment and machinery comprising half of all outbound shipments.

The economy has contracted on an annual basis over the last three quarters, the longest slump since 2009. Output fell a revised 0.68 percent year-on-year in the first quarter, the only major economy in Asia that started 2016 by shrinking. President Tsai, who took office on May 20, pledged to boost the island’s prospects through trade deals, upgrading industry and fostering innovation.

“Taiwan may soon be running out of options to shore up the economy and a weaker currency may ensue,” said Christy Tan, head of markets strategy in Hong Kong at National Australia Bank Ltd., whose forecast for the local dollar is in line with the median in Bloomberg’s survey. “Recent macro indicators have continued to show sluggish prospects and little boost impact from the rate cuts in the past three quarters.”

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