Buoyed by booming exports, the New Taiwan dollar is rallying in another attempt to crack a level that has held for almost 25 years. It could face stiff resistance.
Taiwan’s policymakers could slow the currency’s gains as it approaches NT$27.501 per US dollar, a level it last reached in March 1997. An impending lift-off in US interest rates might also curb the local dollar’s advance.
The currency’s rise could put Taiwanese bulls on a collision course with the central bank, which frowns on excessive gains that could hurt exports. The authorities have started intervening again after refraining since March last year, with state-backed banks buying the US dollar at the end of last year and earlier this week, Taipei-based traders said.
“While policymakers have allowed for market forces to play a greater part in the Taiwan dollar’s levels, they will step in if they find excess volatility,” said Christopher Wong (黃經隆), senior foreign-exchange strategist at Malayan Banking Bhd in Singapore.
The central bank only “smooths” currency volatility when there is a large move, and foreign inflows have helped drive the local dollar’s strength this week, Eugene Tsai, the monetary authority’s director general of the Department of Foreign Exchange, said on Wednesday.
The NT dollar slipped NT$0.1 percent to about NT$27.7 on Friday after registering its strongest close since April 1997 on Wednesday. Maybank expects it to drop to NT$28 by the end of this year, while Australia & New Zealand Banking Group Ltd (ANZ) predicts that it could weaken to NT$27.8 by March 31.
Still, others said that the central bank might tread lightly in the run-up to the release of the US Treasury Department’s foreign-exchange policy report.
“We will see in the first quarter whether central bank officials can keep up their ‘no intervention’ practice since last March before the US Treasury report, which will be out in April,” Bloomberg Intelligence strategist Stephen Chiu (趙志軒) said. “Taiwan will not want to be named a manipulator, so they will want to stay quiet.”
Taiwan, along with Switzerland and Vietnam, dodged the currency manipulator label in the US Treasury Department’s FX report released in April last year, even though the three economies met the criteria.
The local dollar could take its next cue from a report due on Friday, which is forecast to show that Taiwanese exports grew 26.4 percent last month from one year earlier, after rising 30.2 percent the previous month.
Intervention aside, the NT dollar also faces external pressure. Demand for risk assets is likely to wane after minutes from the US Federal Reserve’s meeting last month pointed to an aggressive pace of tightening.
“With the Fed expected to lift rates this year, the higher US yields could lead to greater volatility and impact equity flows into Taiwan, affecting the currency,” ANZ Singapore head of Asia research Khoon Goh said.
After the US raises borrowing costs, the Taiwan dollar is likely to return to the NT$28 level by the end of this year, said Cathay United Bank chief economist Eupho Lin.
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