The Taiwan is continuing is surge against the U.S. Dollar to reach levels not seen since 2014. Equity inflows and comments from the country’s central bank have helped drive Taiwan’s Dollar up.
The TWD advanced 8% last year which represents a problem for Taiwan’s exporters as a stronger currency decreases a company’s profits through foreign exchange effects. Taiwan’s stock market is mainly comprised of exporters that generate an average of 48% of their revenue offshore.
With Taiwanese companies becoming more important in the global electronics value chain, we recommend Taiwanese stocks with exposure to electronics rising in 2018 along with petro-chemical stocks thereby lifting inflows of the TWD. As mentioned above, although a rising TWD will hurt company earnings, it won’t necessary hurt Taiwan’s competitiveness as other Asian currencies are expected to strengthen throughout 2018 (see previous HXL Research Notes). In addition, comments from Taiwan’s Central Bank governor stating gains in the TWD are “not too much” eased speculation of currency intervention by the Central Bank to curtail further gains.
The USD tends to weaken when the global economy improves and we expect the nation’s GDP to dip slightly to 2.3% this year before recovering to 2.4% in 2019. The TWD will likely continue to strengthen against the USD but with relatively lower volatility and stay below the USDTWD$30 resistance level in the short-term.