Taiwan Dollar Slump Seen Ending on China Recovery, Chip Outlook

The worst may be over for the Taiwan dollar as China’s economic recovery and a rebound in the chip industry will support the beleaguered currency, according to analysts.

(Bloomberg) — The worst may be over for the Taiwan dollar as China’s economic recovery and a rebound in the chip industry will support the beleaguered currency, according to analysts.

The island’s dollar is on course to weaken for a sixth month, the longest stretch since 2006, after foreign funds turned sour on its technology sector and risk sentiment deteriorated on slower growth in China.

The tide seems to be turning now on nascent signs of stabilization in China’s economy — its biggest trading partner — following policy boosts. The yuan emerged as the best performing Asian currency last week, followed by the South Korean yen and the Taiwan dollar. 

The outlook for semiconductors may also provide tailwinds to the currency as the island is home to the world’s biggest chipmaker, Taiwan Semiconductor Manufacturing Co.

“Improved China economic prospects and a turnaround in the chip cycle should be positive for the Taiwan dollar,” said Eddie Cheung, senior emerging markets strategist at Credit Agricole CIB in Hong Kong. “The capping of the yuan and the pullback in the dollar should act to restrain Taiwan dollar weakness in the near term.”

He estimates the local currency to strengthen toward 31.1 per dollar by December. It dropped to a 10-month low this month, before paring losses to close at 31.928 last week.

Foreign inflows returned to Taiwan stocks last week following stimulus measures in China, which accounts for about a quarter of its total trade. Blockbuster earnings from US chipmaker Nvidia Corp. have also sparked hopes of a boom in the tech sector and Taiwan being the world’s largest chip exporter may benefit from it. 

But risks remain due to some skepticism over the chip industry’s rebound and geopolitical factors, with Taiwan warning China will ratchet up the military pressure. 

Investors will now be focused on the island’s central bank rate decision on Sept. 21 for any cues on the interest-rate path and further support for the currency. 

Technically, the Taiwan dollar has support at its 2022 low of 32.345 to help stem its decline. Bank of America Corp. doesn’t see it breaching that level and predicts the currency will end the year at 31.7 versus the dollar. 

“This forecast is largely a combination of moderating dollar strength as we approach the end of the Fed-hiking cycle and our expectation of more meaningful fiscal response by the mainland Chinese authorities to counter the trend of weakening growth,” said its strategist Cheung Chun Him.

Here are the key Asian economic data due this week:

  • Monday, Sept. 18: Singapore non-oil domestic exports, New Zealand performance services index
  • Tuesday, Sept. 19: RBA minutes, Malaysia trade balance, Philippine BoP overall
  • Wednesday, Sept. 20: China 1- and 5-year loan prime rate, Japan trade balance, New Zealand 2Q BP current account balance, South Korea PPI, Taiwan export orders
  • Thursday, Sept. 21: Taiwan central bank rate decision, Bank Indonesia rate decision, Philippine rate decision, New Zealand 2Q GDP, South Korea 20-day exports/imports
  • Friday, Sept. 22: BOJ policy decision, Japan CPI and PMI’s, New Zealand trade balance and 3Q consumer confidence, Malaysia CPI

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