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Kiwi Starts The Week On The Back Foot


RBA Minutes In Focus

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After a small but conspicuous bounce into the close yesterday. USD/TWD is lower today, last at 27.878. The closed at 27.897 yesterday, the second consecutive sub-28.00 close after not finishing below the level since 1997. USD/TWD 25-delta risk reversals briefly fell below 0.00 yesterday, indicating higher demand for puts, and as it stands are at 0.05, the lowest since mid-March.

  • Bank of America are bullish on TWD, they say they expect USD/TWD to decline further after breaching 28.00. They cite a more benign US policy response, a sharper sell off in US rates, and significantly higher oil prices as fundamental rationale for TWD to be undervalued.
  • They note "Taiwan's total imports remain quite sensitive to the spot price of crude oil. It (Fig 7) shows, oil as a share of Taiwan's total import, is almost perfectly correlated with the spot price of Brent. This implies, the fluctuation in global oil price is responsible for the largest share of the variance in Taiwan's import account. When we elevate this observation to the overall trade balance, we see that in the post-GFC years, Taiwan's trade balance was inversely correlated to oil prices and oil as a share of total imports"
  • Fig.1 (labelled Exhibit 7) Taiwan Oil Imports and Brent Crude

Source: Bank of America