Taiwan’s benign inflation outlook gives scope for further easing of monetary policy

In April, Taiwan’s CPI inflation slowed to 1.88% y/y from March’s revised 2.01%, despite food prices rising by 7.96%. The headline print came in more than market forecast of 1.5%. Many government and local private think tanks have recently revised their 2016 GDP growth forecasts downwards. The benign inflation outlook of Taiwan gives leeway to the central bank to further ease monetary policy despite onshore accommodative liquidity conditions shown by falling auction yields in the central bank’s 364-day NCDs, noted Scotiabank.

The number of mainland tourists coming to Taiwan has dropped in the past months since the opposition DPP won in legislative and presidential elections in January. Moreover, the new administration will talk about macro economy and FX issue with the central bank.

The Taiwanese dollar is one of the four emerging market Asian currencies that are most vulnerable to the yuan exchange rate because of the economies’ major trade exposure to the mainland China, according to Scotiabank. The USD/TWD pair is likely to trade between 32.10 and 33.00 in May.

“We stay with our short TWDKRW cross position with a target of 34.64”, added Scotiabank.

Moreover, Taiwan’s foreign reserves accumulation pace might decelerate due to continuous outflows of equity, said Scotiabank. The nation’s foreign reserves grew by USD 1.58bn on a month-on-month basis in April, following a rise of USD 2.78bn in March and USD 2.84bn in February.