USD/TWD likely to break above 32.2 in run-up to the U.S. Presidential Inauguration Day, says Scotiabank

USD/TWD is anticipated to break above 32.2 in the run-up to the U.S. Presidential Inauguration Day (January 20, 2017) on the back of potential equity outflows, given that the TWD is expensive in terms of NEER and REER.

Foreign investors have pulled total USD 2.73 billion out of Taiwan’s equity markets post-Donald Trump’s victory, along with surging U.S. inflation expectations. It weakened the TWD in the meantime. The TWD had been running a tight correlation with local shares since early 2015. Year-to-date, global funds added to their holdings in local stocks by USD 10.65 billion according to Bloomberg data.

In the months ahead, geopolitical uncertainty is likely to increase if Trump doesn't moderate his China rhetoric after his Friday telephone call with Tsai Ing-wen and two subsequent Twitter messages on China. As Trans Pacific Partnership (TPP) will be withdrawn by Trump, his protectionist views on trade policy will undermine some regional currencies of export-oriented economies such as the TWD. The Fed’s tightening pace remains a dominant factor as well.

Further, on the campaign trail, Donald Trump vowed to label China as currency manipulator and impose a 45 percent tariff on imports from China.

"We expect the CBC to leave its policy rate unchanged at 1.375 percent on December 22 after November CPI inflation accelerated to 1.97 percent y/y, from 1.7 percent a month ago on surging fruit and vegetable prices", Scotiabank commented in its latest research report.

Meanwhile, the USD/TWD is trading at 31.92, down 0.09 percent.