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Why Is the Taiwan Dollar Weakening as the Economy Shrinks?

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Taiwan dollar depreciates as GDP contracts

The Taiwan dollar continued to fall against the US dollar for the third consecutive session on February 17, 2016. Reports came in that the economy shrank by 0.52% in 4Q15. There was also negative growth in the previous quarter when the GDP (gross domestic product) fell by 0.8%. The Taiwanese economy grew by 0.75% in full-year 2015. Other than fragile domestic demand, exports fell due to the sluggish demand and slowdown in manufacturing hubs like China. The GDP growth forecast for 2016 was reduced from 2.3% to 1.5%. The inflation rate in Taiwan stood at 0.81% on an annual basis in January—the highest level since November 2014. It weighed on the value of the Taiwan dollar. It remains to be seen whether the fiscal subsidies announced by the government to boost consumer spending help lift the confidence and increase domestic demand.

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More pressure on policymakers to cut rates

Taiwan’s central bank cut interest rates twice in 2015 to accommodate the recessionary pressure on the economy with the current benchmark rate standing at 1.6%. With GDP continuing to contract in 4Q15, the pressure increased to ease the monetary policy more. Export growth remains slow. This led to a sell-off by investors in the Taiwan dollar. The trade surplus released at 116.3 billion Taiwan dollars in January. This was lower from a surplus of 136 billion Taiwan dollars in the previous month. The next round of the interest rate decision is scheduled for March 26, 2016.

Impact on the market

Now, let’s look at the performance of ETFs on February 17, 2016. The iShares MSCI Taiwan ETF (EWT) ended on a higher note. It rose by 0.87%. On the other hand, the iShares MSCI Emerging Markets ETF (EEM) also rose on the day by 2.0%.

Taiwanese ADRs (American depositary receipts) were also trading on a positive note. Himax Technologies (HIMX) was trading higher by 2.3% on February 17. On the other hand, Siliconware Precision Industries (SPIL) and Taiwan Semiconductor Manufacturing (TSM) ended on a positive trajectory. They rose by 1.7% and 1.3%, respectively.

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