Taiwan's short-term growth cycle bottoming out but no significant turnaround in sight

There are more evidences that the short-term growth cycle is bottoming out. Exports shrank 11.0% (YoY) in Oct15, a smaller rate of decline compared to -13.9% on average in 3Q15. The improvement was primarily driven by electronics products (-4.0% in Oct, vs. -7.7% in 3Q), confirming that the electronics sector is entering a seasonal upturn on the back of the release of new smartphones. 

Meanwhile, trade surplus widened to a record high of USD 6.1bn in Oct15, thanks to falling imports of raw materials and capital goods. Note that the contraction in net exports was a main drag to GDP growth in the past two quarters. From the technical perspective, the re-widening of trade surplus carries positive implications for the 4Q GDP. 

A significant growth turnaround is not yet in sight, however. Exports, export orders and industrial production have continued to contract on the YoY basis. It is also worth pointing out that exports failed to rise proportionately with export orders. The gap between the two will likely remain in place for a long time, given that Taiwan's overseas production ratio is high as a result of manufacturing relocation to China and other emerging markets. Taking into account these structural constraints and lingering uncertainties in global demand outlook, recovery ahead could be modest and fragile. 

With the key data only showing signs of bottoming instead of a significant turnaround, speculations for another rate cut would remain in the bond market and short-term yields would continue to hover at low levels. The USD/TWD rate has the potential to rise further, not only due to weakness in domestic data, but also the external backdrop that the Fed is poised to hike rates at December's meeting.