Yahoo Finance Carry Trades Offset AI Stock Inflows in Taiwan Dollar Tug-Of-War
(Bloomberg) -- Taiwan’s dollar is poised to retest an eight-year low against the greenback as carry trade forces overpower the currency’s equity inflows tailwind.
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The Taiwan dollar has slumped more than 5% this year and in April touched its weakest level in relation to the dollar since 2016. But the currency rebounded 0.4% in May, posting its first monthly gain this year.
The Asian currency has been caught between opposing forces. On one hand, gains have been fueled in recent times by capital inflows into Taiwan amid an AI boom. On the other, demand for the carry trade has put pressure on the Taiwan dollar as investors look to borrow the currency with the intent of investing it in higher-yielding assets abroad.
“Locals’ outbound investments continue to overtake trade surplus and equity inflows,” said Ju Wang, the Hong Kong-based head of greater China FX and rates strategy at BNP Paribas SA. The carry transaction “probably won’t change much until Fed starts the easing cycle,” she added, seeing the currency weakening toward 33 versus the greenback in coming weeks. The Taiwan dollar closed at 32.42 per dollar on Friday.
The carry trade is a popular transaction in foreign exchange markets, with investors trying to profit from differences in interest rates between countries. Investors borrow in low yielding currencies, such as Taiwan’s, and then buy higher yielding currencies such as dollars.
The Taiwan dollar snapped its monthly losing streak in May on an AI fueled tailwind as Nvidia Corp.’s earning results bolstered demand for tech related shares. Taiwan Semiconductor Manufacturing Co., the maker of Nvidia’s chips, touched a record high last month as foreign investors bought $2.7 billion worth of Taiwan’s equities in May.
Shortlived Fortunes
Still, the Taiwan dollar’s change of fortunes will likely prove to be shortlived, according to Bank of America Corp., which remains bearish on the currency, seeing the carry trade headwind prevailing.
Analysis “is telling us every week USD/TWD can be expected to rise by eight basis points regardless of the performance of The Bloomberg Dollar Spot Index and net equities flow,” wrote strategist Chun-him Cheung in a client note dated May 28. The note was referring to study of each relative contribution factor for the currency pair.
Currency traders will be monitoring Taiwan’s inflation data on Thursday with the central bank set to decide monetary policy next week. Prices are estimated to rise 2.1% in May compared to prior year, according to data compiled by Bloomberg. If the central bank keeps interest rates on hold, then carry trade demand should keep pressure on the Taiwan dollar to weaken further.
Here are the key Asian economic data this week:
Monday, June 3: China Caixin PMI’s, Japan 1Q capital spending, Indonesia CPI
Tuesday, June 4: Australia 1Q net exports of GDP, BoP current account balance, inventories and company operating profit, South Korea CPI
Wednesday, June 5: Australia 1Q GDP, Japan labor cash earnings, New Zealand 1Q terms of trade, South Korea 1Q GDP, Philippines CPI, Singapore retail sales, Thailand CPI
Thursday, June 6: Taiwan CPI, Australia trade balance
Friday, June 7: RBI interest rate decision, China trade balance, RBA’s Hauser speaks, New Zealand manufacturing activity volume, Taiwan trade balance
--With assistance from Betty Hou.
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