Forex Investment and Currency Trading

TWD is poised to strengthen in Q2. Capital flows have improved modestly, as yield spreads narrow and foreigners turned into net equity buyers. Target is 30.00 by end-Q2.

Export growth bounced in early 2008. However, Lunar New Year distortions likely exaggerate the strength. Indeed, the RBS leading electronics export index remains in negative territory. Export orders from mainland Chinese manufactures are also softening, while exports from mainland China to the rest of the world are also weak.

Inflation will remain high. Headline inflation was 3.9%y/y in February, while the three-month ago change is also firm. Volatile food and energy prices are driving inflation higher. Indeed, import prices are rising near 17% y/y.

However, a stronger currency may help partly to offset the increase in energy prices. Food prices are also expected to stabilize after earlier supply-side shocks. The CBC is expected to remain on hold in Q3, faced with high, but stable, inflation and a weaker export outlook.

Capital flows are now modestly supportive of the currency. Taiwan-US 2Y IRS spreads are just -20bp versus -300bp the same time last year. This has helped steady portfolio outflows to USD8.1bn in Q4 versus a peak of USD17.1bn in Q2. Moreover, foreigners have been net equity buyers since February in anticipation of an improvement in cross-strait relations. However, One rules out a dramatic improvement in capital flows so long as the global economy continues to soften. Technology stocks remain under pressure. Taiwan’s March presidential elections resulted in the election of Nationalist Party candidate Ma Ying-jeou. Importantly, Ma supports an improvement in cross-strait relations. Expect direct transportation links to start in Q3 beginning with weekend chartered flights. However, more tangible improvement in relations may have to wait until 2009, or after negotiations with the mainland authorities. In this respect, Hong Kong’s gradualist approach to strengthening economic relations with mainland China through its Closer Economic Partnership Agreement (CEPA) is a useful model.