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The Central Bank of the Republic of China (Taiwan) (CBC) is expected to leave its policy rate unchanged at 1.375 percent on Thursday after the United States Federal Reserve delivered a 25 basis points rate hike last week, given the island’s benign inflation outlook. Consumer prices are likely to rise at a slower pace in the months ahead and then sank into deflationary territory in Q4, according to an estimate, Scotiabank reported.
The CBC has raised the amount of a single 364-day NCD auction to TWD 170bn starting in May to absorb excess liquidity in the onshore markets that has persistently pulled down the NCD auction yields. It is attributable to continued equity inflows and rising foreign reserves. Foreign investors have poured total USD 2.63bn into local equity markets in the second quarter.
The central bank on May 31 said in the annual Financial Stability Report that short-term capital flows have affected the TWD and reiterated its stance to implement appropriate monetary, credit and FX policies in order to promote financial stability.
Further, the TWD has been trading in a range recently as its year-to-date strength has raised concern in local companies with massive FX losses. In the months ahead, the TWD is expected to respond to cross-border flows in an asymmetric manner, i.e. more susceptible to equity outflows possibly stemming from concern over the ECB tapering its QE programme and/or the Fed shrinking its balance sheet.
"The TWD is likely to remain stuck in its current trading range for now. We would like to sell USD/KRW if it breaks below the 30.0 support, but to buy the pair if it rallies through the 30.5 mark. We stay with our short TWD/INR cross position for a higher return on the so-called "carry trade" by taking into account limited downside risks to USD/TWD," the report commented.
