Taiwan Dollar to Slump, Sell Forwards, Standard Chartered Says

By Patricia Lui

Jan. 15 (Bloomberg) -- Taiwan’s dollar will slide more than other Asian currencies this year as its export-oriented economy bears the brunt of a slump in global demand, according to Standard Chartered Plc.

Investors should sell six-month Taiwan dollar offshore forward contracts as the central bank will favor a weaker currency to aid exports, which account for two-thirds of the island’s economy, Thomas Harr, a Singapore-based currency strategist for the U.K. bank, wrote in a research report. Shipments fell by a record last month and the economy probably entered a recession last quarter, according to the government.

“We have an underweight foreign exchange rating for the Taiwan dollar,” Harr wrote today. “Exports-to-GDP in Taiwan are around 67 percent. This makes the economy very vulnerable to the deep recession in the developed world and the much slower growth in Asia.”

Taiwan’s dollar may decline 2 percent to NT$34 against the U.S. currency, Harr forecast, without giving a timeframe. The currency traded 0.2 percent weaker from yesterday at NT$33.325 as of 12:41 p.m. local time, according to Taipei Forex Inc.

Six-month non-deliverable forwards traded at NT$33.26 against the U.S. dollar, Bloomberg data showed, indicating an appreciation.

Forwards are agreements in which assets are bought and sold at current prices for settlement at a later specified time and date. Non-deliverable forwards are settled in dollars rather than the underlying asset.

The local currency has slipped 1.4 percent this month, extending last year’s 1.3 percent decline, Bloomberg data show. That compares with an almost 8 percent drop in the South Korean won this year, following a 26 percent slide in 2008.

‘Potential Threat’

“Significant weakness in competitor currencies is a potential threat to Taiwanese exporter competitiveness,” Harr wrote. “Taiwan and South Korea compete directly with each other for export markets such as Eurozone and the U.S.”

A government report last week showed exports fell by a record 42 percent in December from a year earlier. The Taiwanese economy probably slipped into a recession in the fourth quarter and may shrink 0.31 percent in the January-March period, according to the statistics bureau.

“Taiwan’s dollar still has quite some way to catch up,” Harr wrote. “The central bank has been rumored to be buying U.S. dollars, which suggests it will tolerate moderate weakness of the Taiwan dollar.”

The median estimate of 23 analysts surveyed by Bloomberg News shows the currency will drop to NT$34.30 by end-June.

To contact the reporter on the story: Patricia Lui in Singapore at plui4@bloomberg.net