05.29.2001
The NT$ dead set on decline - down another 3.0%

• After dropping 1.5% last week to NT$33.5/US$1, the local currency shed another 3.0% yesterday to test NT$34.5, as Taiwan's Central Bank (CBC) let the currency weaken in order to boost domestic demand and exports. Turnover reached US$2.0b, up from US$587m in the previous session, pointing to heavy intervention from the CBC. In early trading today, however, the local currency trended up, gaining 1.2% to reach NT$34.07/US$1 from yesterday's low.

• With yesterday's weakening, the local currency has already reached our NT$34.0/US$1 target for 2Q01. We forecast the NT$ will continue to trade around NT$34.5/US$1 as the government runs out of policy options to boost GDP growth this year. Last Friday, the government announced that 1Q01 GDP grew only 1.1%, well below market expectations. The government also revised its 2001 full-year growth forecast down to 4.0% from 5.3%. We maintain that a 2001 GDP growth forecast of 4.0% is too optimistic and likely to prove unachievable. We are currently reviewing our own forecast, and hold that GDP growth will come in well under 3.0% this year. The April index of leading economic indicators released yesterday further supports our argument. The index, which was down 0.5% MoM, points to a sustained downturn at least through the first half of 2H01.

• VB Primasia Opinion: As such, we expect the local currency to depreciate further as GDP growth continues to wane. However, we continue to believe that a sharp depreciation is unlikely as falling interest rates in the US should put a cap on the weakening of the NT$. We expect the NT$ to start appreciating only once there is sufficient evidence of a sustained recovery in GDP growth, which we do not expect to witness until late 2H01 at the earliest.

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