Taiwan Dollar: Strong fundamentals but near-term pressure – Commerzbank

Taiwan's economic fundamentals appear robust, with GDP growth accelerating at a stronger-than-expected pace and inflation on the rise, suggesting a potential rate hike from the Central Bank of the Republic of China (CBC) in December. However, there are near-term pressures keeping the Taiwan dollar (TWD) near multi-year highs against the US dollar, hovering around 32.60.

Taiwan's Q3 GDP expanded by 14.4% year-over-year, surpassing the Bloomberg consensus estimate of 12.0%. This marks the fourth consecutive quarter of double-digit growth, the longest such expansion since 1986-87. The economy's seasonally adjusted growth further accelerated to 3.2% quarter-over-quarter from 1.4% in Q2.

Inflationary pressures are also on the rise, with headline inflation increasing to 2.7% year-over-year and core inflation at 2.5%. While these figures indicate underlying price pressures, they were partially driven by temporary factors such as food and seasonal fluctuations. The CBC's September meeting minutes revealed that two board members were in favor of raising rates, and a modest 12.5 basis points rate hike in December seems increasingly plausible.

However, the central bank may opt to wait for more definitive evidence of sustained inflationary pressures before acting.

Positive economic fundamentals, including Taiwan's substantial external surplus and heightened expectations of CBC tightening, support the TWD. Yet, these favorable factors have been eclipsed by substantial foreign portfolio outflows, estimated at USD54.3 billion from July to 21 October. Consequently, the TWD could remain under near-term pressure despite its solid economic foundations.

The USD, oil prices, and net foreign equity flows will continue to be the primary drivers for the TWD exchange rate. For USD/TWD, the dollar is currently near its yearly peak, and a supportive tone is expected in the near term.