The unexpected rise of the Taiwan dollar to the podium of currency appreciation in 2021

Despite?the wax and wane from the?global tech rout and the domestic virus outbreak, the New Taiwan dollar (NTD) has kept its crown as the best performing Asian currency so far in 2021 (+2% versus the USD). In this note, we analyze the evolution of key drivers behind the recent performance of the NTD.

There are several reasons for this. First, Taiwan has kept a relatively restrictive monetary policy compared to other Asian economies. The CBC has only cut policy rate by 25 basis point to 1.125% in March 2020.

Second, economic fundamentals remain strong with external demand and investment. Above all,?export has become a lifeboat for weaker consumption. This is reflected in the larger current account surplus, growing from 10.6% of GDP in 2019 to 15.3% as of June 2021. This means exporters have a larger pile of USD in hand and any conversion can quickly offset depreciation pressure. If global demand stays strong, Taiwan’s GDP growth is on track for our 6.4% prediction in 2021.

The strong external sector has raised demand for domestic investment. With supportive government policies and the quest to find shelters from the trade war and supply chain security, Taiwan’s investment has been expanding faster than its overall growth. Since August 2019, Taiwanese firms have repatriated USD 10 billion (1.3% of GDP) back home. And a stronger domestic focus could mean slower foreign investment. For example, net outward remittance has narrowed with Mainland China, the biggest destination for Taiwan’s outward direct investment in the past. The share of foreign investment in Taiwan’s lifers also peaked at 65% of total capital, drawing a contrast to Asian peers, such as Korea.

Third, foreign capital is another key factor. As of July 2021, an accumulated outflow of USD 17 billion is seen in equities, but the overall flow is positive at USD 7 billion this year. The divergence is a turning point comparing to the past, showing the foreign demand for the NTD.

The final reason is on exchange rate policy. With the outbreak of Covid-19 and hot money from quantitative easing, the CBC has used USD 39 billion (5.8% of GDP) in forex intervention in 2020. This year, the CBC has been much more hands-off especially with the potential designation of “currency manipulator” by the US. The CBC has indeed stopped the currency from excessive depreciation back in March 2021.

All in all, the stellar performance of the NTD is supported by a widened current account surplus, a relatively strict monetary policy stance and the renewed demand for domestic investment with capital being repatriated from overseas. While exchange rate is important for competitiveness, this is less the case today than in the past?as Taiwan moves up in the value chain.?While the FED will still be the dominant factor, the NTD should remain rather resilient among Asian currencies.

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