World’s most stable currency shields Taiwan’s vital exports

19-Sep-2020 Intellasia | Aljazeera | 6:02 AM Print This Post

As countries around the world struggle to shelter their economies from the effects of the coronavirus pandemic, Taiwan is seeing the opposite.

Its economy is projected to grow 1 percent this year, according to a Bloomberg survey of economist estimates, second only to China’s 2 percent among major economies.

Taiwan has benefited from companies shifting some of their manufacturing back home from China amid growing tensions between Beijing and Washington, as well as increased demand for its products from the US

While such good news would normally increase the allure of the local currencyand thereby reduce the attractiveness of Taiwan’s exports overseasthe central bank has taken aggressive action to limit gains.

The result is the currency has been the least volatile among 31 major exchange rates against the greenback in the past three months, after the pegged Hong Kong dollar.

Although Taiwan has regularly taken steps to curb strength in its currency before, which the central bank governor refers to as “smoothing,” such intervention can draw the attention of the US Treasury.

At its most extreme, being labeled a manipulator can presage sanctions. The recent tensions between Washington and Beijing may also be benefiting Taiwan.

“With Taiwan the safe bet is always that interventionor smoothingwill continue,” said Brad Setser, an economist with the Council on Foreign Relations.

“The only factor that in my view might induce Taiwan to change is external pressure, and the US Treasury has been quiet on this topic since January.”

The central bank didn’t immediately respond to calls for comment.

In January, Treasury noted in a report to Congress that Taiwan was “close to triggering key thresholds” for being labeled a currency manipulator and is “the only major economy in Asia that does not publish data on the full details of its international reserves consistent with IMF standards.”

It is often the case with Treasury reports and the two acts that guide currency manipulator designationone passed in 1988, the other in 2015that politics trump facts, said Stephen Chiu, a strategist for Bloomberg Intelligence.

Chiu said the Trump administration’s use of the 2015 act last year to declare China guilty was “pretty discretionary”, while adding that Taiwan may be in violation of the three criteria of the 1988 act.

The Treasury is expected to release its next report in October.

There are signs the central bank may be loosening its grip on the currency. After the Taiwan dollar failed to move more than 0.1 percent on a daily closing basis for almost six weeks, it climbed 0.4 percent on Tuesday.

The currency ended 0.25 percent higher at its strongest closing level since April 2018 on Wednesday.

Trade surplus

The moves are modest considering pressure on the currency to gain has only been increasing. Taiwan is enjoying an export boom, beating even the most optimistic forecasts in August. It shipped a record $31.2 billion in goods, a jump of 8.3 percent year-on-year.

In the first seven months of this year, Taiwan became the United States’ ninth-largest trading partner, exporting $33 billion in goods to its guarantor of security in the face of China’s threat, while running a 15.6 percent trade surplus.

It is unclear just how Taiwan’s central bank smooths its currency, but it is generally suspected that it is constantly buying greenbacks in order to prevent strengthening.

As Setser argued last October in a blog post for CFR, the bank could be hiding the actual amount of the dollars it buys by lending to insurers via swap trading, thus keeping it off its balance sheet.

The central bank can also send verbal messages. Last week it asked banks to limit the amount of dollars that could be sold in a single trade.

Trailing peers

The result has been a remarkably flat currency. In the past three months, it has gained 1.2 percent against the greenback, trailing 24 major currencies including the yuan, the won and the yen. in the same period the Bloomberg Dollar Spot Index has slumped more than 4%.

A scheduled interest rate decision by Taiwan’s central bank on Thursday afternoon is unlikely to change the picture for the currency, with analysts polled by Bloomberg unanimous that the benchmark rate will be kept unchanged at 1.125%.

It’s not just exporters the government needs to consider. Taiwan’s insurers, which sit on NT$30.2 trillion ($1 trillion) in assets, have sizable investments overseas, especially in US corporate bonds.

A rapidly strengthening currency would result in a valuation loss as well as force them to hedge their exposure abroad, according to Setser.

“Letting the Taiwan dollar appreciate would have a positive long-term impact on the risk management practices of Taiwan’s insurers,” Setser said.

Pressure for the central bank to restrain the currency is likely to grow next quarter because of iPhone orders and a possible shift in orders to Taiwan from China amid the US’s ban on Huawei Technologies Co. sales, according to Chiu. At the same time, Washington is unlikely to designate Taipei a currency manipulator.

“As long as Taiwan is a political ally of the US against China, it won’t be named,” Chiu said.

https://www.aljazeera.com/ajimpact/world-stable-currency-shields-taiwan-vital-exports-200917034041708.html

 


Category: Taiwan

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