TWD to remain stuck in range of 30.0-30.5, could face intermittent depreciation pressure in July or Q3: Scotiabank

The TWD has been trading in a range recently on rising 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 than inflows. The TWD is likely to remain stuck in its current trading range of 30.0-30.5 for now but could face intermittent depreciation pressure in July or Q3 given the abovementioned factors.

While the Fed is likely to take a pause in raising rates at September FOMC meeting, it could begin the process of shrinking its massive USD 4.5tn balance sheet at the September gathering according to latest comments from Fed top officials. Potential outward remittances of dividends could spur demand for dollars from time to time in July, depending on global market sentiment.

While part of the cash dividends will be reinvested, we stay cautious on US technology stocks and other risk factors that may swing market sentiment, particularly if the market gets more worried about the Fed starting to shrink its balance sheet. Last Thursday, the CBC committed to maintaining FX stability as massive portfolio inflows have boosted the TWD this year.

Earlier on May 31, the central bank said in its 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.

"We would like to sell USD/TWD if it breaks below the 30.0 support but to buy the pair if it rallies through the 30.5 mark. In addition, 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," Scotiabank commented in its latest research report.