The New Taiwan dollar, which is on track for its first quarterly gain in a year, may face renewed pressure as the US currency strengthens and local companies boost dividend payouts to a record.
Domestic firms are set to pay out more than NT$2.5 trillion (US$78.5 billion) in cash dividends this year, according to data from the Taiwan Stock Exchange, the largest amount ever in Bloomberg-compiled data going back to 1990. Foreign-exchange conversions by overseas investors repatriating the funds are expected to add to near-term volatility in the local currency.
“The Taiwan dollar could hit a rough patch in the coming weeks, with a move toward the 32-per-dollar area seen as a near-term resistance zone,” Oversea-Chinese Banking Corp strategist Christopher Wong (黃經隆) said in Singapore. “Its weakness would be more likely if Fed rhetoric remains hawkish, dollar pressure builds, and dividend-related concerns become more prominent.”
Photo: CNA
The NT dollar gained 0.45 percent in the second quarter to close at 31.837 per US dollar yesterday.
The local currency faces a key test as Taiwan enters its peak dividend season this month. Heavy foreign ownership of the island’s semiconductor sector is likely to amplify US dollar conversions, weighing on the local currency.
“The dividend payment will be higher this year due to increased profits by Taiwanese companies, and therefore, it may weigh more heavily on the currency than equity inflows,” BNP Paribas SA strategist Chandresh Jain said. “We expect the USD/TWD to marginally increase on the back of this.”
The Financial Supervisory Commission said in April it would allow overseas investors to receive cash dividends in foreign currencies directly into offshore accounts. That may help smooth seasonal currency fluctuations once the system comes into effect.
The potential outflows may coincide with a less favorable global backdrop. A rally in the US dollar, buoyed by bets that the Federal Reserve may hike interest rates this year, will also likely pressure regional currencies, including that of Taiwan.
Bank of America Corp strategists predict the Fed will make three 25 basis-point rate increases this year, which is likely to put more depreciation pressure on low-yielding currencies such as the NT dollar.
“Volatility profile also makes it an attractive funding currency for carry trades,” the strategists wrote in a note published on Thursday last week. “We therefore revise our year-end USD/TWD forecast higher to 32.0, from 30.8.”
