The central bank is taking a constructive approach to safeguarding the stability of the NT dollar rather than succumbing to demands by local exporters to join the regional currency depreciation race to boost orders.
The central bank demonstrated its hardline stance last week toward currency hedge funds by announcing that it detected an overseas fund trying to profit from speculative trades of the New Taiwan dollar. On Monday, the small-scale foreign hedge fund was expelled from the local financial market after breaking regulations by parking its capital in a local currency deposit account, rather than buying local stocks as required. Two days ago, the Taiwan Stock Exchange revoked the fund’s permission to invest in Taiwan.
These actions are the latest and toughest by the central bank and were jointly taken by the government’s financial agencies to fend off potential attack by global currency hedge funds. The most recent battle between central and global large-scale hedge funds occurred during the Asian financial crisis in 1997 when the government closed local non-delivery forward trading after the NT dollar along with other Asian currencies became targets of the US hedge fund management firm founded by George Soros. Taiwan was not as badly affected at the time as peers such as Indonesia, South Korea and Thailand.
This punishment showed the central bank’s determination to stop the local currency from overshooting and is also considered to be a warning to hedge funds to behave properly. It can also be seen as a precaution against a potential relapse into financial meltdown after the US Fed starts to taper its stimulus program, since Taiwan’s financial markets are small and vulnerable to volatility.
The central bank’s message seems to have been well-received and its impact is starting to be seen with the NT dollar depreciating 0.058 percent over the past two days to NT$29.472 against the greenback. The NT dollar had appreciated 1.8 percent in the two months since the currency broke the NT$30 mark versus the US dollar on Aug. 29.
The TAIEX has advanced 0.89 percent this week to 8,420.98 yesterday, with foreign investors slowing the pace at which they have been unloading local shares.
In response to exporters’ calls to depreciate the NT dollar, central bank Governor Perng Fai-nan (彭淮南) told legislators on Monday that the movement of the local currency was based on supply and demand. It would be unacceptable to see the depreciation of the NT dollar against the US dollar, when demand for US dollars weakened, Perng said. Foreign investors have wired US$3 billion into Taiwan this month, while demand from exporters fell to about US$2.7 billion a month on average, Perng said.
Shinkong Synthetic Fibers Corp chairman Wu Tong-sheng (吳東昇) urged the central bank to devalue the local currency to NT$31 versus the US dollar, while Eric Chuo (卓永財), CEO of the nation’s top machinery tool maker, Hiwin Technologies Corp, hoped the NT dollar would decline to NT$32, saying that the company was losing orders due to the depreciation of the South Korean won and Japanese yen.
The NT dollar seems to be depreciating faster than expected. Earlier this month, Taiwan Semiconductor Manufacturing Co, the world’s biggest chipmaker, gave its fourth-quarter business guidance based on an assumption that the NT dollar would be at NT$29.5 against the greenback. The currency’s closing price was NT$29.472 yesterday.
However, the central bank’s job is more complicated than exporters imagine. Depreciation of the NT dollar would drive up consumer prices, especially fuel prices and the prices of everyday necessities, as Taiwan imports many commodities from energy to wheat, sugar and milk powder. Besides, one of the central bank’s most important tasks is to keep financial markets stable. It is good to see the central bank did not succumb to pressure from local exporters by sacrificing the interests of the public.