The central bank may allow the local currency to appreciate against the US dollar because of the rising cost of intervention, Royal Bank of Scotland Group Plc (RBS) said.
The New Taiwan dollar will strengthen 3.8 percent to NT$30.9 against the US dollar over the next three months as looser regulation of cross-strait expansion by financial companies attracts inflows, Chia Woon Khien, head of currency and interest rate strategy for Asia outside Japan, said in an e-mail.
The central bank is paying higher yields to drain excess cash from the financial system, RBS said in a research note yesterday.
“The market consensus view is that the Taiwan dollar is not only undervalued but has tremendous scope for appreciation,” Singapore-based Chia and strategist Pin Ru Tan wrote in the report.
“The rising intervention cost in the weak dollar environment will sooner or later force the central bank to slow down the pace of intervention,” they wrote.
The Financial Supervisory Commission earlier this month banned overseas investors from placing funds in time deposits to help counter currency speculation.
Monetary authorities will “maintain order in the foreign-exchange market,” central bank Governor Perng Fai-nan (彭淮南) said in a report to be delivered to lawmakers today.
The NT dollar’s exchange rate should “reflect economic conditions,” the central bank said on Sept. 30.
The central bank sells certificates of deposit to drain cash and has held the yield on the three-month securities at 0.61 percent since mid-February.
That’s higher than the 0.48 percent that local banks pay on three-month commercial paper, Bloomberg data shows.
For every US$1 drop in the spot rate, the central bank estimates it has about NT$10.5 billion in translation losses, RBS said in the report.
The bank has set aside NT$121 billion to cover such losses, the UK bank said.
In Taipei trading, the NT dollar fell for the first time in three days on concern the central bank will intervene to counter appreciation that may prolong a slump in exports.
The NT dollar fell 0.1 percent to NT$32.128 versus the greenback at the 4pm close, Taipei Forex Inc said. It reached NT$32.029 on Tuesday, the strongest level since Oct. 1.
“Some people are watching the market to see if the central bank will come in,” said Henry Lin, a foreign-exchange trader at Shin Kong Commercial Bank (新光銀行). “Some of the foreign banks are selling dollars in exchange for the Taiwan currency to buy stocks.”
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