Strongest Taiwan Dollar Since ‘97 Shows Central Bank Easing Grip

(Bloomberg) -- The Taiwan dollar closed at its highest level since 1997, and more gains are likely on the way as the central bank eases its grip on the currency.

The local dollar gained 0.5% to 28.521 per greenback at the close Friday, stronger than its 28.632 high in 2011. The currency rose 1% over the past five sessions, advancing for a fifth week, the longest run since July.

Surging inflows that have sent the local stock benchmark to a record high and the resilient economy are putting pressure on the currency to appreciate. One-month forwards on the Taiwan dollar are at an all-time low, signaling further gains ahead. Analysts also predict the currency will continue its ascent, climbing to 28.4 by the end of the first quarter of 2021, according to the median estimate in a Bloomberg survey.

“This could be the trigger point,” said Stephen Chiu, a strategist for Bloomberg Intelligence. “As long as broad U.S. dollar weakness continues and Taiwan’s multilateral exchange rates are still not overvalued in the eyes of Taiwan’s central bank, then the exchange rate may head further downward.”

After trading ended for the day, Yen Hui-huang, director of the Department of Foreign Exchange at the central bank, said there is “no so-called line of defense” for the currency. “The exchange rate is decided by the market’s supply and demand,” he added.

The central bank said in a statement after the close of trading that foreign exchange reserves rose $12.2 billion in November from a month earlier to $513.4 billion, due in part to its measures to “smooth” the currency market after large capital inflows caused forex volatility. The monthly increase was the biggest on record, according to central bank’s data going back to 2003.

The Taiwan dollar’s new high came after central bank governor Yang Chin-long this week promised lawmakers he would provide more information about efforts to curb the currency’s advance. Such intervention can draw the unwelcome attention of the U.S. Treasury.

On Thursday the local currency breached a key intraday resistance level that is closely watched in Taiwan. That level is at 28.5 and is called the “Perng Fai-nan line” after the central bank governor from 1998 to 2018. Perng is credited with mostly keeping the currency from appreciating past that mark from the Asian Financial Crisis to his last day on the job, primarily to protect exporters.

Recent stability in the local currency meant it’s fallen behind neighboring exporters. The South Korean won has now jumped 6% versus the Taiwan dollar in the past three months, while the Chinese yuan has rallied 1%.

Now the question for traders is where Perng’s successor and long-time deputy Yang will draw the next line in the sand -- and how long that will hold.

There are “very strong expectations” that Taiwan’s currency will advance, said Zhou Hao, senior emerging markets economist at Commerzbank AG. “It will be very difficult for there to be any significant retreat in the near term.”

©2020 Bloomberg L.P.