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From an economic perspective, there is an appreciation bias in TWD as the country runs a huge trade surplus of more than 10% GDP. As such, Taiwan is also on the watch list of the US currency manipulation report. The strong capital inflows into the domestic equity market could ease concerns about countermeasures.
Official Xinhua News Agency reported that the Communist Party of China’s (CPC) Central Committee Friday proposed writing “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era” into the Constitution.
Major theoretical achievements, principles and policies adopted at the 19th CPC National Congress should be incorporated into a revision to the Constitution, according to a communique issued after the second entire session of the 19th CPC Central Committee held in Beijing on Thursday and Friday. The People's Republic of China enacted its first Constitution in 1954. In 1982, the fifth National People's Congress adopted the present Constitution, which underwent four amendments in 1988, 1993, 1999 and 2004. Clearly, the proposed amendments wound further cemented President Xi Jingping’s “core” position in CPC.
As a result, TWD gained 0.6% against USD this morning, with USDTWD touching five-year low at 29.13 mark. Strong equity inflows are the driver of recent TWD strength. Data compiled by Bloomberg suggest that foreign investors bought a net USD1.3bn of Taiwan’s equities last week, the most since last March.
Stay long in CNHTWD 3m NDFs: China’s capital account has been in surplus in 2017 due to measures limiting outward FDI and a resumption of net cross-border banking inflows. Tail risks of currency depreciation are minimal, and CNH is better positioned as a relative value carry trade.
Pairing off CNH with a short positing in TWD is attractive for two reasons.
First, the short TWD leg adds substantial carry benefits (17bp/month).
Second, USDTWD is near the recent lows, increasing the likelihood that the CBC becomes more active and keeps the cross above the trend line support around 29.10. The overall position has the positive carry of 38bp/month.
