Barclays expects the Taiwan dollar to remain relatively steady in the coming months, with the currency having traded within a 31-32 range against the U.S. dollar over the past six months since the Middle East conflict began. The bank highlights a combination of strong technology-sector export performance and central bank behavior as elements supporting this outlook.
The Central Bank of China (CBC) appears comfortable with the current USDTWD trading band but may act to resist further TWD weakness in order to limit pressures from imported inflation. So far this year, the CBC has engaged in two-way foreign exchange intervention with the stated aim of smoothing the TWD’s path.
Taiwan is benefiting from a boom in the technology sector, with record export volumes expected this year. Barclays points out that these elevated export flows are contributing to a growing current account surplus and are supportive of the macro growth outlook.
Notably, exporters have not increased conversions of their dollar proceeds to local currency. Much of the current account surplus is being recycled overseas rather than being converted into TWD, a dynamic that has implications for local foreign exchange demand.
Foreign equity outflows accelerated in June, adding another variable for currency movements. Barclays says further direction for the TWD will in part depend on whether technology stocks continue their gains, which could influence capital flows and exchange-rate behavior.
Regulatory and accounting changes have also affected domestic financial-sector behavior. Taiwan life insurance companies saw their hedge ratios drop to around 44.3% at the end of April, following regulatory adjustments and the implementation of IFRS 17 accounting rules. Barclays notes that these lower hedge ratios are reducing upward pressure on the TWD.
Since the Middle East conflict began, the TWD has outperformed most of its Asian currency peers. Barclays observes that the central bank may be biased against TWD weakness as a means to manage the risk of rising imported inflation.
Data and drivers to watch: the pace of technology export volumes, continued CBC two-way intervention, the evolution of foreign equity flows and the trajectory of insurer hedge ratios under IFRS 17.