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The resolution of uncertainty after last week's referendum opens the door for a relief rally in the short term, but medium term concerns remain; stay MW TRY in the GBI-EM Model Portfolio. The Turkish referendum last weekend was in line with our expectations. The package of constitutional amendments was approved by a weak “yes” (51.4% approval vs 48.6% reject, according to the latest available data from unofficial results).
Despite TWD’s outperformance (+6% in spot terms and close to 4% in NEER terms year to date), the currency is still undervalued based on our preferred metrics (refer above figure). The ratio of productivity in the manufacturing to nonmanufacturing sectors is also supportive of higher levels of the REER (refer above figure).
FX markets: For well over a decade, Taiwan’s REER has traded in the lower half of the so-called ‘dynamic stability corridor’ (description of the corridor below, refer above figure).
Insurance companies to potentially adjust hedges on offshore investments another potential source of support for the TWD could come from the hedging behavior of local life insurance companies.
It was reported at the end of last week that the financial regulator in Taiwan had asked local insurers to adjust their FX hedging to reduce the impact of the firmer TWD. The allocation towards offshore investments has risen rapidly over the past decade (refer above figure).
At the end of 2016, offshore investments stood at just below USD400bn, of which around 70% is believed to be hedged.
