Taiwan's Dollar at Five-Month Low Despite Strengthening Fundamentals; Central Bank Move Watched

The Central Bank of the Republic of China (Taiwan), Taiwan's central bank, is scheduled to announce its policy rates on Thursday, and the market is keen to know if it is the time of a hike as many recent data points showed an upbeat economic recovery in the country.

Among major emerging Asian economies, Taiwan has the lowest policy rate at 1.875%. It compares to India's 8%, China's 6% and on the other end, Thailand's 2% and South Korea's 2.25%.

Taiwan's economy is growing fast, inflation is quickening and unemployment rate is falling of late increasing the pressure on the central bank to hike rates.

However, at least the Taiwan dollar is not reflecting the likelihood of a rate hike. It has been declining over the past few weeks weighed down by the broad dollar rally and has weakened more than 1% so far in September.

It also means that if the central bank hikes, there is scope for a sharp bounce back in the Taiwan dollar, which is trading at a five-month low of 30.30 per US dollar.

At the same time, the fact that the local dollar has not moved much away from the multi-year high of 28.50 touched in May 2011, shows the inherent strength of the Taiwanese economy.

The local dollar had shown some strength on Wednesday as easing geopolitical tensions reduced the safe haven demand of the US currency.

Moody's Investors Service said earlier in August that the outlook on the Taiwan banking system remains stable, reflecting the rating agency's expectation of higher economic growth in the country over the next 12-18 months.

Taiwan has been rated 'Aa3' at Moody's with 'stable' outlook. The rating agency said it expects the economy to expand 3.3% in 2014 and 3.5% in 2015, up from 2.1% in 2013.

Data Points

As per the 15 August data, Taiwan's GDP growth rose to 3.74% from a year earlier in the second quarter from 3.14% in the previous quarter.

The inflation rate is also on the rise in the country. It has risen to 1.75% in July from 1.64% in the previous month and quickened to 2.07% in August, as per the latest data.

The HSBC manufacturing PMI hasn't fallen below the 50 mark for several years. It has been rising since May when it touched a seven-month low of 52.3 and has hit a multi-year high of 56.1 as per the September data.

Taiwan's unemployment rate is declining, indicating the strong footing of the economy. From a high of 4.18% in October last year, the rate has fallen to 3.94% by August.

USD/TWD Technical Analysis

The pair has touched a five-month low of 30.32 on Wednesday before the dollar rally pulled it back near the day's low of 30.17.

On the higher side, the next target should be 30.36, the April high, and then 30.44. Next will be a retest of this year's high of 30.71.

On the downside, the pair will first aim 30.06 although 30.14 might see some mild support. The next important level will be 29.90 ahead of a retest of this year's low at 29.80.