Strong NT dollar predicted: Citibank

Citigroup, the biggest US bank by assets, forecast the NT dollar to strengthen to less than NT$30 per US dollar by the end of the year, saying the local currency is still undervalued despite its recent gains against the greenback.

The NT dollar will trade at NT$30.576 to the US dollar by June 30, NT$30.275 by Sept. 30 and NT$29.8 by the end of this year, Cheng Cheng-mount (鄭貞茂) and Renee Chen (陳瑩若), economists at Citigroup Global Markets in Taipei, predicted in a client note issued on Friday.

"The stock market performance will likely remain a key factor driving near-term NT dollar movements," Cheng and Chen wrote in the note.

"But an undervalued NT dollar in REER [real effective exchange rate] suggests further room for NT dollar strengthening," they wrote.

The NT dollar closed 0.65 percent higher against the US dollar at NT$30.750 on Friday. The currency has risen 5.22 percent so far this year, on the back of continued capital inflows, the US dollar sell-off by exporters and the central bank's scaled-back intervention to help control inflation.

The local currency started to show clear signs of appreciation against the greenback in late January. Last month, foreign institutional investors bought a net NT$98.31 billion (US$3.2 billion) in Taiwan's stocks, following NT$34.42 billion net selling of local shares in January, Taiwan Stock Exchange's tallies showed.

For the first week of this month, foreign investors continued building up positions in local shares, buying a net NT$12.76 billion and prompting a 1.41-percent increase in the TAIEX, which closed at 8,531.38 on Friday, stock exchange data showed.

The 11.18 percent gain in the benchmark index since Feb. 1 and increased foreign inflows "have added momentum to the appreciation pressure on the NT dollar," Cheng and Chen wrote in the note.

The Citigroup economists said the central bank could be concerned with a sharp decrease in money supply growth since August last year, and therefore "content with a stronger NT dollar."

The latest inflation data released last week also supported their view that the NT dollar would be allowed further room for appreciation, they said.

The consumer price index (CPI) rose 3.89 percent last month year-on-year, up from a 2.96-percent growth in January, while the core CPI grew 2.65 percent last month to hover at near its nine-year high, the Directorate General of Budget, Accounting and Statistics reported last week.

Governor Perng Fai-nan (彭淮南) also said in a written report on Friday -- which will be submitted to the legislature's Finance Committee when he appears there today -- that the "NT dollar appreciation has helped ease imported inflation."

Barclays Capital economists Peter Redward and Puay Yeong Goh said in a report last week that the central bank is willing to tolerate NT dollar appreciation to cap imported inflation.

"In our view, the central bank would tolerate an appreciation in line with movement in the euro, Japanese yen and other regional currencies," Redward and Goh wrote in their report.

The central bank has reiterated several times recently that its stance toward the value of the NT dollar should be determined by market supply and demand.

Barclays Capital interpreted the central bank's market-decided stance as "allowing the NT dollar to continue to appreciate given the strong portfolio-inflows-driven demand for the NT dollar," Redward and Goh wrote.

Barclays Capital has revised their forecast for the NT dollar exchange rate to NT$30.0 from NT$31.5 against the US dollar by the end of the year, with "significant downside" if the NT$30 barrier is broken, they said.

While undervalued NT dollar implies upside potential in the near to medium-term, Citigroup economists said they didn't think the NT dollar appreciation would undercut the nation's export competitiveness.

"Modest appreciation of the NT dollar over time will unlikely dampen Taiwan's export competitiveness, particularly if Taiwan can do a better job of controlling inflation than its major trading partners," Cheng and Chen said.