The New Taiwan dollar is a favourite of HSBC’s for appreciation and could be seen as a useful proxy to the renminbi this year, HSBC FX strategists believe.
“Given our expectation of a stronger renminbi this year and how undervalued the NT$ is relative to peers, the Taiwan dollar’s appreciation pace should start picking up,” HSBC said in its 2011 currency outlook
The Taiwan dollar has certainly been appreciating aggressively against the US dollar in recent months. Since August last year it has strengthened from roughly NT$32 to the US dollar to NT$29 in three months.
Recent effort to re-start the Trade and investment Framework Agreement negotiations—a mechanism to resolve bilateral trade issues—and further engagement with China to improve relations will be positive for the Taiwan dollar.
“The past obstacle for the New Taiwan dollar has been FX policy. However since the de-peg of the renminbi to the US dollar in June, the Taiwanese authorities have allowed the [currency] to appreciate more, suggesting perhaps a shift in focus for FX policy t0wards the renminbi and away from the US$,”
Saying that, there is evidence the Taiwanese government has a clearly defined ceiling for the currency which it will protect.
Last week, the New Taiwan dollar retreated from a 13-year high on speculation the central bank intervened minutes before the close of trading to counteract the gains made. It is assumed the intervention was designed to protect exporters from an overly strong currency.
The currency earlier reached its strongest level since 1997 based on optimism that the continuing anxiety over a number of European countries debt burden will juice up appetite for emerging-market assets, according to a Bloomberg article.
The article was based on local news reports that Taiwan’s central bank intervened in the foreign-exchange market on January 12 because of large scale foreign-fund inflows. It was believed around US$500 million was purchased.
It is considered quite common for Taiwan’s central bank to intervene late in the day if it feels the country’s currency is becoming too strong against the US dollar.