The latest economic data released last week suggested that the nation’s external trade remains in good shape and domestic inflation is under control. However, the local stock market opened the first week of the year with a fall of 2.12 percent and the New Taiwan dollar passed the key NT$30 per US dollar level at the close of trading on Friday, for the first time in 13 years.
The question is why this positive economic data have not translated into bullish market sentiment. Is foreign capital being pulled out of local equities? Has the central bank become more accepting of a stronger NT dollar?
There are no simple answers to these questions. Instead, the current situation reflects the fact that, regardless of how positive the economic data, the business climate and market sentiment can change with unexpected speed.
On Friday, the Ministry of Finance reported that exports last month grew at a pace of 19.1 percent year-on-year to US$23.8 billion, the 14th straight monthly increase, while imports grew 21.4 percent to US$22.2 billion. For the whole of last year, exports expanded 34.8 percent to a record US$274.64 billion and imports at an even more rapid pace of 44.2 percent to US$251.4 billion, also a record.
Last year’s external trade figures were impressive in terms of both exports and imports. However, that recovery is a thing of the past. The recent heavy snowstorms in the US and Europe as well as rising wages in China and efforts to damp down the overheating Chinese economy have now emerged as new worries for Taiwanese exporters.
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As local shares rose 9.58 percent last year, it would not be unreasonable to expect a short-term market correction, but nothing has changed the central bank’s position on “hot money” inflows and the appreciation of the NT dollar, as long as the extra-loose monetary policy adopted in Western countries remains in place.
As such, the central bank’s decision on Friday — to allow the NT dollar to close the session at NT$29.8 against the US dollar, a level not seen since Oct. 20, 1997 — was unusual. Indeed, although the greenback has recently gained in strength against most Asian currencies and the euro, the NT dollar was one of only two Asian currencies to trade higher against the US dollar on Friday. The other was the New Zealand dollar.
Some argue that the central bank is willing to tolerate a stronger NT dollar because Taiwanese exporters have learned how to hedge foreign exchange losses. Others suggest this is essentially an effort by the central bank to pre-empt inflation driven by rising import material prices.
Perhaps the central bank has come to realize that its alleged interventions in late trading sessions over the past few months has so far failed to ease market expectations of further currency appreciation.
Given that the closing prices of the NT dollar over the past few months has become a reference mark rather than a real price, it is reasonable to assume that the central bank is looking for different ways to deal with the currency issue.
Naturally, the bank is not going to announce what that will be, but it has now sent a clear message to the market that it would accept an NT dollar rise to above the NT$30 level. People must now learn to deal with a stronger NT dollar and exporters especiallyneed to be aware of the possible consequences.
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