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Taiwan Dollar's Steepest Drop in Three Years Is Just the Start

Taiwan Dollar's Steepest Drop in Three Years Is Just the Start

(Bloomberg) -- There’s no relief in sight for Taiwan’s currency after its worst month in more than three years.

Strategists predict foreigners will yank even more cash from the island’s stock market as the U.S-China trade war clouds the outlook for its tech heavyweights. Throw in seasonal dividend payments and a weak yuan, and the local dollar is about to face even more selling pressure.

Global equity investors have fled Taiwan faster than any other market in Asia this month, pulling out some $3.9 billion. Those outflows and a falling stock market have sent the local dollar down 2.3% in May to a two-year low. The Taiex gauge has slumped 4.3%, the most since October.

"The Taiwan dollar may not be out of the woods yet given the intensifying concern over China-U.S. trade tensions broadening to the technology field," said Ken Cheung, a senior FX strategist at Mizuho Bank Ltd. "Global investors will continue to trim tech exposure, which will pressure Taiwan stocks and hence hit the Taiwan dollar."

Taiwan Dollar's Steepest Drop in Three Years Is Just the Start

Taiwan is among Asia’s most vulnerable economies in the trade war as China and Hong Kong account for some 40% of its exports. A weakening yuan amid the escalating U.S.-China conflict also hurts currencies in the region.

The island’s economy will suffer a greater impact if the U.S. imposes more tariffs on Chinese imports, said Agnes Lin, a global market strategist at JPMorgan Asset Management Taiwan Ltd. Washington increased levies on $200 billion of Chinese imports this month, and has threatened additional tariffs on another $325 billion of goods.

"Foreign investors are still likely to net sell Taiwan stocks in June on tariff uncertainty, though at a potentially slower pace," Lin said.

The foreign outflow helped send the Taiwan dollar’s overnight rate to a three-year high this week as liquidity tightened.

Dividend Season

An annual dividend from Taiwan Semiconductor Manufacturing Co., the biggest company on the stock exchange, will also pressure the local dollar in the third quarter. The currency typically weakens during this period because foreigners -- who hold 78% of the firm’s shares -- tend to sell it after the payout.

Whether the Taiwan dollar will fall further depends on how the Group of 20 summit pans out, said Christopher Wong, a senior FX strategist at Malayan Banking Bhd, who sees the currency weakening to 31.8 per dollar at the end of the second and third quarters. President Donald Trump will meet Chinese leader Xi Jinping at the G-20 meeting in Japan at the end of June.

The Taiwan dollar could drop as low as 31.75 per greenback at the end of next month and might even approach 32 in the third quarter, according to Cliff Tan, East Asia head of global markets research at MUFG Bank Ltd. Global equity markets are vulnerable to a sell-off, which would affect Taiwan, he said.

The island’s benchmark gauge is two-fifths tech. The Taiwan dollar was little changed at 31.612 in Taipei Friday, the lowest close since January 2017.

To contact the reporters on this story: Cindy Wang in Taipei at hwang61@bloomberg.net;Chinmei Sung in Taipei at csung4@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Magdalene Fung, Philip Glamann

©2019 Bloomberg L.P.