We encourage longs in USDTWD on its attractive carry and China exposure sentiment toward EM currencies could be in the procedure of shifting and we prefer to focus on regional low yielders in expressing a bullish dollar view. The slew of hawkish commentary from Fed officials in recent weeks as put the possibility of a rate hike back in play for H2.
Chinese growth should be biased to downward surprises as the year progresses. Markets have been complacent to these growing risks and short dollar positioning could start to shift to a more neutral exposure.
Taiwan trade surplus widened to USD 3.98 billion in August of 2016 from USD 3.57 billion a year earlier, while China reported a USD 52.05 billion trade surplus in August of 2016, compared to a USD 59.68 billion surplus a year earlier and below market estimates. Exports increased 1 pct year-on-year to USD 24.6 billion, second straight gain after 17 months of falls. Shipments of electronic products jumped 14.8 pct, accounting for 34 pct of total sales.
In contrast, exports fell for base metals and articles of base metal (-0.8 pct); machinery (-6.3 pct) and plastics and rubber and articles thereof (-2.9 pct). Imports shrank 0.8 pct to USD 20.6 billion, 21st straight month of declines, due to falls in purchases of mineral products (-14.9 pct), namely petroleum (-11.7 pct) and chemicals (-5.1 pct).
In Emerging Asia, USDTWD longs look more appealing on both the Fed and China angles. The TWD is a rate-sensitive currency given the dominance of local life insurance companies in deciding to allocate to local or foreign bonds.
During August, the TWD strengthened more than rate differentials would have suggested so it is prone to realignment on this front. Taiwan is also the most impacted country from China’s growth slowdown (direct and re-exports to China is the highest in EM). While a repeat of the stresses experienced in 2015 are unlikely (investors are better conditioned to the known risks), risk-reward is starting to favour long dollar positions to fade the EM rally.