Taiwan's foreign equity inflows surged to USD 4.2b

Largest monthly hike in 4 years.

According to DBS, Taiwan's foreign equity inflows increased USD 4.2bn in September, the largest monthly rise over four years. 

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 This took the TAIEX to a four month high last week, and pushed the USD/TWD to an 8-month low of 29.3. Year-to-date, the TAIEX gained 8.6%, the best performing equity market in the Asia ex-Japan region; and the TWD ranks as the 4th best performing Asian currency after the CNY, HKD and KRW.

Investor sentiment should have been lifted due to the delay of US QE tapering, and importantly, the recent improvement in China’s trade and PMI data.

Export orders received by Taiwanese manufacturers have showed a modest increase of 1.2% on the MoM basis in August (seasonally adjusted), with demand from China leading the rise (3.0% MoM sa).

Still, given that China’s growth hovers at the 7% level and downside risks in US have increased recently due to the budget impasse, the outlook for Taiwan’s exports and the overall economy remains tepid and uncertain.

The rise of foreign capital inflows occurring at a time when Taiwan’s recovery prospect remains weak could be a concern for policymakers.

Should hot money continue to increase, it won’t be surprising to see the central bank reinforce interventions in the FX market in order to curb the TWD’s appreciation and maintain export competitiveness.

Meanwhile, we believe the central bank has the leeway to allow interest rates to stay low for at least another two quarters, as the underlying inflation pressure remains subdued due to a negative output gap in the economy.