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Initiate long in USDTWD at spot reference 31.75 entered via 3m NDF with a stop target of 33.14 (+4.3%) and a stop slightly below the recent low at 30.99 (-2.3%).
The trade horizon would be 3-4 months. With negative forward points, carry in the 3m tenor is positive at 19bp/month.
Risk reward profile: US activity data, China growth, dollar cycle.
The above trade with targets at 33.14 and stop loss at 30.99 carries attractive risk reward ratio of almost 2:1.
Fundamental driving forces of this trade: Weak US data, especially the upcoming unemployment claims on Thursday which is forecasted to rise at 262K from the previous 259K, while retail sales figure is likely to have reduced from the previous 0.0% to -0.1% that causes a significant reduction in fed rate hike probabilities. A period of stabilization of Chinese growth dynamics or additional debt-indices stimulus. Resumption of the dollar sell off would strengthen the TWD.
The base case for an increase in the fed funds rate has strengthened in recent time that boosts dollar strength. Fed chair Janet Yellen had already signalled that at the meeting of central bankers in Jackson Hole in late August. And since then many of her FOMC colleagues have confirmed her view.
