The New Taiwan dollar may reverse last year's drop after political tension with China eases and on growing inflows as investors bet higher yields will boost returns, Standard Chartered Ltd's Callum Henderson said.
President Chen Shui-bian (陳水扁) on Feb. 27 announced that the National Unification Council -- aimed at reunifying Taiwan with China -- would "cease to function." China called it a "dangerous step," stoking cross-strait tension and pushing down the currency last month after a three-month rally. Quickening exports that contributed to a larger current-account surplus would help boost demand, Henderson said.
"The Taiwan dollar is extremely undervalued," Henderson, head of currency strategy at Standard Chartered in Singapore, said in an interview on Wednesday. "Once short-term political distractions have dissipated, people will refocus on what is a pretty positive story."
The NT dollar closed little changed at NT$32.513 against the US dollar at 4pm yesterday, a gain of 1 percent this year, according to Taipei Forex Inc. It fell 3.3 percent last year, the first annual slide since 2001. It may rise to NT$31.60 by the end of June and NT$30.90 by the year's close, Henderson said.
The nation's current-account gap jumped to a record US$9.22 billion in the fourth quarter from US$1.73 billion a year ago and a revised US$993 million in the third, according to the central bank's statistics. Exports rose 26 percent from a year ago to US$15.5 billion last month, according to Ministry of Finance data.
The current account, the broadest measure of trade as it includes income from services and investment, "is really starting to improve in a big way, so that should be supportive" for the currency, Henderson said.
Political tension between Taiwan and China may keep some investors at bay, Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong, said on March 1.
The financial account, which measures investment flows, showed a deficit of US$6.86 billion in the fourth quarter after a US$1.46 billion deficit in the same period of 2004, the central bank said last month. Direct investment showed a net outflow of US$1.92 billion and portfolio investment had a net inflow of US$2.86 billion.
"When we look at investment, it appears to be structurally too low," Maguire said. "The political tension will hold down the Taiwan dollar too."
Expectations that the central bank will keep raising interest rates may keep investor money coming in, Henderson said.
The central bank on Dec. 22 lifted its rate on 10-day loans to banks for a sixth consecutive quarter to a four-year high of 2.25 percent to keep inflation in check.
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