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We uphold longs in USDTWD 1m NDF at 30.777 with a target at 31.8 and a stop at 30.2. The 1m tenor is chosen because it has the highest annualized carry (positive carry of 32bp over a 1m horizon). The time horizon of the trade is 1-2 months.
Rationale:
The TWD has strengthened 4.5% in 2017 (the best performer in the region aside from the KRW) amid the unwinding of the short RMB trade and general dollar weakness. Ongoing improvement in domestic growth indicators (GDP, IP, exports) and stabilization in China’s growth picture has also helped sentiment.
However, a lot of the good news appears to be baked in the cake and taking the other side of the trade is looking increasingly attractive.
USDCNH has been edging higher, tail risks related to global trade tensions or geopolitics are underpriced in our opinion, TWD is very rich compared to rate differentials, and the expensive REER (highest since 2008) argues for gaining some short TWD exposure. EM growth and profitability is not sufficiently strong to warrant a bullish EM currency outlook, especially with China activity set to slow in the coming quarters.
With medium term positioning across EM probably close to neutral and speculative positioning likely in the short dollar camp, the risk of positioning-induced strengthening of the TWD is limited. The pair has broken through the August and early February lows but could face more formidable support above the May 2015 low (30.39).
The RSI is near levels that have generally indicated a bounce, however, momentum indicators are less favorable (50d moving average has just crossed below the 100d).
Risk profiling: Improving macro in Taiwan or China, along with Yellen Further improvement in domestic macroeconomic data, stability in China’s growth profile, reduction in overseas investment or higher hedging activity by onshore investors. Re-pricing of US rates from Yellen’s upcoming testimony would help the broad EM FX complex.
