Morgan Stanley predicted that the New Taiwan dollar would weaken even as the Chinese yuan strengthened because countries dependent on exports are the “most vulnerable” during a global economic slowdown.
The NT dollar will decline almost 5 percent to NT$35.3 versus the greenback this year, the lowest since 2002, Morgan Stanley forecast in a report published yesterday. The New York-based company recommended investors bet on yuan appreciation using three-month non-deliverable forwards.
“The Taiwan dollar’s fundamentals are undermined by a narrowing current account surplus at a time when the capital and financial account deficit deepens due to portfolio outflows,” wrote Stewart Newnham, a currency strategist based in Hong Kong. “These outflows may intensify if risks relating to sovereign credit downgrades and financial system concerns materialize.”
The NT dollar dropped to a three-year low of NT$33.79 on Jan. 21 after the government reported a record slide in exports, and Fitch Ratings cut the outlook on Taiwan’s local currency debt rating to negative from stable.
The local currency last traded at NT$33.57 on Jan. 23 in Taipei, before local markets closed for the Lunar New Year holiday. That’s 2.1 percent lower than at the start of the year and follows a 1.3 percent decline last year.
The median estimate of analysts surveyed by Bloomberg News is for the NT dollar to end the year 2.1 percent weaker at NT$34.30. Taiwan’s overseas sales last month plunged a record 42 percent from a year earlier and its current-account surplus narrowed to US$2.01 billion in the quarter ended Sept. 30, a three-year low.
Meanwhile, the Chinese currency would probably strengthen this year after US Treasury Secretary Timothy Geithner called for it to be allowed to trade more freely, Morgan Stanley said.
The yuan ended last week at 6.838 per dollar in Shanghai before the Lunar New Year holiday, down 0.2 percent since the start of the year, and forward contracts indicate the currency could weaken 1.1 percent to 6.9150 in the next three months.
Morgan Stanley forecast the currency would strengthen 2.8 percent this year to 6.65, after climbing 7 percent last year.
“While we are unlikely to see an aggressive follow-through, Geithner sent a meaningful signal that he will be highly attentive toward currency moves and pursue a broad range of policy options,” wrote Yilin Nie, a currency strategist at Morgan Stanley in New York.
Nie said this could push the yuan to “continue to trend down.”
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