Taiwan Scales Back Currency Intervention Just as Inflows Rise

  • Island was put on U.S. Treasury’s currency watchlist in April
  • Currency’s end-of-day moves shrink as intervention is pared

Taiwan’s central bank has scaled back daily currency intervention since early April amid criticism from the U.S. Treasury Department, just as rising equity inflows drive up the exchange rate.

In a bid to boost the export-dependent economy, the monetary authority had been weakening the local exchange rate via state-backed bankers in the last hour of trading. Since the island was put on a U.S. watchlist for currency policies in April, Taiwan’s dollar has fallen by less than 0.11 percent during that hour every day, compared with an average daily 0.6 percent slide in the year through March 31.

The intervention tactic had allowed the central bank to set the closing rate at an artificially weak level, helping to counter equity inflows driving up the currency. In its report, the U.S. Treasury Department pointed to the end-of-day moves as evidence of efforts to curb appreciation. Being put on the list can lead to U.S.-imposed penalties for harming the country’s trade interests. Funds are entering the island again as investors push back expectations for tightening in the U.S.

"Taiwan’s central bank has been forced to reduce end-of-trading intervention under the U.S. Treasury Department’s watch," said Woods Chen, chief economist at Yuanta Securities Investment Consulting Co. in Taipei. "It will probably stop using this method to intervene in the future."

Stock Inflows

Harry Yen, head of foreign exchange at the Central Bank of the Republic of China (Taiwan), didn’t return a call seeking comment.

Taiwan’s exports fell for a 16th straight month in May as global demand for electronics shrank. The currency has gained 0.8 percent this month to NT$32.39 against the greenback as the island drew $1.6 billion of stock inflows, the most among eight Asian markets tracked by Bloomberg. The Federal Reserve hasn’t raised interest rates this year, making emerging-market assets like Taiwan’s more attractive.

It’s very likely the island will continue easing as it pares intervention, said Yuanta’s Chen. CBC will lower its policy rate for a fourth straight quarter at its June 30 meeting, according to 12 of 17 economists surveyed by Bloomberg. Central bank governor Perng Fai-nan said after March’s meeting that further reductions could be used to limit inflows, even if cuts may not be effective at boosting investment.

"Looking at domestic and overseas economic conditions, Taiwan is one of the places targeted by global hot money," said Lii Sheng-yann, associate professor at National Taipei University and former head of CBC’s banking department. "In order to curb hot money inflows, the central bank will ease monetary policy."