TWD under deflationary pressure

The TWD depreciated 2.8% against the USD in three weeks and weakened against the CNY by about 0.5%. 

"A c.2.2% appreciation in the TWD against the CNY in the coming 12 months is expected. Holding other currency pairs unchanged, this is expected to boost the trade-weighted TWD by 1% in nominal terms", estimates Societe Generale.

However, none of these forecast measures of TWD appreciation are significant compared with the currency's movements over the past 12 months. The TWD weakened against the CNY by 5% over the past year. The expected 2.2% appreciation in the TWD against the CNY would reverse less than half of the depreciation. And the expected 1% boost to the TWD NEER is one-quarter of its 4% increase in the past 12 months.

"As a rule of thumb, a 10% rise in the trade-weighted TWD will probably lead to a 1pp decline in CPI inflation. This means that even if the TWD strengthens sharply, deflationary pressure is likely to be moderate. That said, in our central scenario, the TWD appreciates only mildly and deflationary pressure is negligible", argues SocGen.