Taiwanese exports to weigh on TWD in long term, CRBS keeps you tight hedged

Worse exports in Taiwan have continued to alternate between growth and contraction from month to month, reflecting a clear lack of confidence among producers - a mood also accentuated by high inventories.

We observed underwhelming exports in November plunged by 16.9% YoY (MoM 11.0% from previous 14.7%), marking the largest YoY contraction since August 2009.

On a MoM basis, shipments also shrank by 3.8% MoM, entirely offsetting the small 0.9% gain in October (Sep: -2.3%).

Overall, the underperformance was broad-based, accentuated by soft oil product prices that depressed mineral shipments.

However, even stripping out oil/commodity distortions, exports still fell by 15.1% YoY (Oct: -9.3%; Sep: -11.3%) - underscoring the weakness in external demand in all key markets, but especially in emerging markets.

Looking more closely on a MoM sa basis, PC and communication products were the silver lining, with exports expanding for two consecutive months (Nov: 5.4%; Oct: 4.0%; Sep: -4.9%), consistent with our view of stronger demand in consumer electronics ahead of the festive season.

However, this alone could not offset declines in other product segments. For instance, shipments of electronics products fell by 9.4% MoM sa this month (October: +9.1%).

Hence, TWD's weakness is anticipated in coming months, we recommend it is better to cover all your shorts and purchase 1 USDTWD ATM +0.51 delta call and (1%) OTM +0.32 delta call and simultaneously short 1 lots of ITM call with shorter expiry in the ratio of 2:1.

The lower strike short calls because it finances the purchase of the greater number of long calls (ATM calls are overpriced, so we chose 1% OTM calls as well) and the position is entered for no cost or a net credit.