(Nov 3): The Taiwanese dollar’s rally is boxing in the island’s central bank, leaving it with limited room to intervene in order to avoid a “currency manipulator” label from the US.
Heavy interventions in the first half of the year have left the Central Bank of the Republic of China (CBC), as the institution is formally known, with a buffer of US$4.5 billion for such operations in the second half, according to Bloomberg calculations. That’s based on a US Treasury criteria that net purchases of foreign currency in interventions should be below 2% of gross domestic product over 12 months.
A smaller intervention cushion poses a challenge for the CBC, with its currency forecast to rally further by around 2% this quarter as the artificial intelligence boom drives up demand for local semiconductors. Constraints on intervention would also put investors on alert for abrupt moves like the one in May when the local dollar surged the most since the 1980s blindsiding local exporters and insurance firms.
However, breaching Treasury criteria risks putting Taiwan in the cross-hairs of US authorities and could lead to unfavorable outcomes for the island in trade negotiations. Some analysts therefore expect the CBC to use interventions sparingly into year end.
“Taiwan’s central bank would need to be more selective in when to step into the market and how much it intervenes to smooth out volatility,” said Khoon Goh, the head of Asia research at Australia & New Zealand Banking Group. “As a result, we could see greater fluctuations in the Taiwan dollar for the rest of the year.”
Taiwan’s dollar has risen over 6% so far this year to 30.75 per greenback and a Bloomberg survey shows it may advance further to 30.2 this quarter. The CBC already bought US$13.25 billion of the US currency to cap the local dollar’s gains from January to June, the most for a half year period since 2020.
See also: Chinese firms speed up dollar selling amid optimism towards yuan
Although its dollar purchases for the next Treasury review that cover the 12 months through June are below the US threshold, the central bank would need to rein in further operations this year to avoid the manipulator label. The previous US report showed Taiwan on the list of countries that the Treasury is closely monitoring.
Compounding the CBC’s challenge are broader market forces. The greenback’s decline this year amid US fiscal concerns is boosting major Asian currencies, providing another tailwind for the local dollar.
“Should Japanese yen and the Chinese yuan continue to strengthen, there could also be more room for Taiwan dollar to gain,” said Fiona Lim, a senior foreign-exchange analyst at Malayan Banking Bhd.
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One option for the CBC to avoid the ire of US authorities is to indirectly influence the exchange rate.
In June, the CBC asked lenders to delay dollar sales from exporters in a rare move, people familiar with the matter had said. The monetary authority also set tougher rules for foreign investors purchasing the local currency to buy stocks.
Regardless of the CBC’s actions, investors are likely to keep a close watch on Taiwan’s trade data on Friday after exports to the US rose sharply in September despite tariffs. Another stellar month will boost the market’s confidence in the local economy and lay the ground for a stronger Taiwanese dollar.
“This makes the central bank’s job more challenging amid the presence of the Treasury Report, which acts as a hindrance to the CBC’s intervention efforts,” Maybank’s Lim said.
The week’s main economic events:
- Monday, Nov 3: China's RatingDog PMI, Australia's household spending and building approvals, Indonesia's CPI and trade
- Tuesday, Nov 4: The RBA's rate decision, South Korea's CPI
- Wednesday, Nov 5: New Zealand's 3Q employment change, Indonesia's 3Q GDP, BOJ minutes of September meeting, the Philippine CPI, Singapore's retail sales, Thailand's CPI
- Thursday, Nov 6: Japan's labour cash earnings, Bank Negara Malaysia's rate decision, Australia's trade balance, Taiwan's CPI
- Friday, Nov 7: China's trade and forex reserves, Taiwan's trade, Malaysia's industrial production
Uploaded by Jason Ng
