05.22.2001
Is the government letting the NT$ slip?

• The local currency dropped a steep 1.5% to NT$33.456/US$1 yesterday. Reports over the weekend point to the Taiwan Research Institute (TRI) as having suggested that the local currency should be allowed to fall to NT$38 - 40 against the greenback in order to maintain export competitiveness. This led to strong selling of the NT$ yesterday. Although it is reported that the Central Bank of China (CBC) allowed the currency to fall freely, turnover of US$878m in yesterday's trading (up from US$294m in the previous session) suggests that the CBC stepped in with a heavy hand to defend the local currency.

• TRI has denied it made such a suggestion. The CBC also announced that it does not expect the NT$ to depreciate further and urged local importers and traders "not to listen to market rumours".

• Yesterday's weakening in the NT$ is in line with our expectations that the currency would fall 3 - 5% by year-end from the NT$32.9/US$1 level that it has been trading at in recent months. We expect the local currency to depreciate another 1.5% by the end of 2Q01 to test the NT$34/US$1 level, and subsequently to test the NT$34.5/US$1 level before the year is out to sustain the island's export competitiveness.

• As of early May, the NT$ had only depreciated 1.5%, compared to 6.0% depreciation in the Japanese yen and 4.0% in the Korean won in the same period. Taiwan, Korea and Japan compete directly in the same export markets.

• VB Primasia Opinion: Despite falling domestic interest rates, we expect the weakening of the NT$ to be limited by lower interest rates in the US.

IrmakSurenkok@Primasia.com +886-[0]2-2547-8873