NT dollar faces risks amid Chinese yuan’s fall
The New Taiwan dollar is faced with downside risks at a time when the Chinese yuan is expected to continue a downtrend after a recent sharp fall against the U.S. dollar, according to Swiss banking group UBS. Teck Leng Tan, an analyst with UBS’s wealth management operations, said that although the People’s Bank of China (PBOC), the Chinese central bank, repeatedly said that the recent dramatic depreciation of the yuan against the greenback was a one-time adjustment, the Chinese yuan is likely to move lower in the future.
On Tuesday, the PBOC cut the yuan’s reference rate against the U.S. dollar by almost 1.9 percent, catching the global financial markets off guard and sparking a currency depreciation competition in the region.
The Chinese central bank continued to cut the yuan’s reference rate on Wednesday and Thursday by 1.6 percent and 1.1 percent, respectively, making global traders nervous. During the three sessions, the yuan fell more than 3 percent against the U.S. dollar before it rebounded on Friday.
As a result, the New Taiwan dollar dropped over 1.9 percent against the U.S. dollar in the past four trading sessions to a new fiveyear low. In addition to the yuan’s fall, intervention by Taiwan’s central bank to prop up the greenback also could be attributed to the weakness of the New Taiwan dollar; the bank was trying to keep the local currency cheaper to protect Taiwanese exporters.
Although the PBOC tried to calm the global financial markets by saying the yuan has no basis to depreciate as the China economy remained sound, some currency traders have even speculated that the PBOC could allow the yuan to fall another 5 percent.
Tan said that China’s economy, the second largest in the world, has shown signs of slowing down, and the U.S. Federal Reserve is likely to launch an interest rate hike later in the year, so the PBOC could continue to lead the yuan to depreciate.
A UBS research report said that the yuan could remain weak and suffer more losses over the next six months as China is eager to take advantage of a falling yuan to make China’s exports more competitive in the world market.
Tan said that China’s gross domestic product (GDP) accounted for 43 percent of the total created by the economies in the Asian Pacific region, so there is no doubt that other regional currencies will follow the yuan to move lower, while the magnitude of the falls in different currencies will vary.
Tan said that Taiwan, in particular, has close business ties with China so it is unlikely for the New Taiwan dollar to escape the impact resulting from the yuan’s depreciation. In the first seven months of this year, China and Hong Kong accounted for 38.9 percent of Taiwan’s total exports.
Tan said that other regional currencies, in particular the South Korea won and the Singapore dollar, also face similar downside risks.