N.T. Dollar and Stock Market Rally on Influx of Hot Money

Taipei, May 9, 2006 (CENS)--Along with the comprehensive upturn of Asian currencies, a result of the massive flow of hot money from the U.S. back to the region, the New Taiwan dollar jumped NT$0.266 against the U.S. dollar yesterday (May 8), breaking the US$1=NT$31.4 mark and closing at US$1=NT$31.38, the highest in the recent 10 months.

The strong performance of both the forex and stock markets on the massive influx of hot money has kept the Central Bank of China (CBC) on high alert.

A forex-department head of a local bank attributed the steep rise of the N.T. dollar recently to the influx of hot money and overall trend of the region' s currencies, in addition to the non-intervention on the part of the CBC. He didn' t rule out the possibility for the local currency to test the level of US$1=NT$31.2 in short term, or even the record high level of US$1=NT$30.67 last year.

Over the past one month, the N.T. dollar has revalued against the U.S. dollar by an accumulated scale of NT$1.152, or 3.54%.

Insiders noted that the CBC has refrained from intervening in the forex market so far, as the current round of the N.T. dollar' s revaluation reflects the weak performance of the U.S. dollar in the international market, with major Asian currencies, including Japanese yen and Korean won, and the euro all staging strong revaluation against the U.S. dollar recently. The CBC, however, is watching closely whether the current revaluation of the N.T. dollar will foster excessive expectation, boosting the N.T. dollar to excessively high level.

A government official in charge noted that the ferocious influx of hot money into the island recently has constituted a stronger impact on the forex market, as Taiwan' s economy is a small and open one and the market belongs to a shallow-dish type. Moreover, half of the island' s forex reserves of US$250 billion have come from the influx of short-term foreign capital for stock investments. The rapid entry and exit of the foreign capital is bound to impact the stability of the forex and stock markets. As a result, the CBC is monitoring closely the movement of the hot money.

Due to higher expectation of the suspension of the U.S. interest hikes following the release of the latest employment figures in the U.S., Asian currencies rose higher against the U.S. dollar yesterday, mostly by 1%. A forex trader at a large forex-designated bank remarked that if the Japanese yen continue to rise above the mark of US$1=NT$111, the NT dollar may rise to US$1=NT$31.2, or even US$1=NT$30.8.

The trader pointed out the mark of US$1=NT$31.5, regarded by many as a strong barrier, was easily broken shortly after the opening of the market yesterday, underscoring the strong expectation of the revaluation of the N.T. dollar in the market. Therefore, the currency may test the record level of US$1=NT$30.67 last year in its current round of revaluation.

Kung Min-hsing, vice president of Taiwan Institute of Economic Research, noted that the island' s economic growth and trade surplus cannot justify the currency' s strong revaluation recently, but the association between Asian currencies and the movement of short-term capital turn out to have greater influence on exchange rate.

In a related story, Taiex Index jumped 103 points, closing at 7,474 yesterday, the highest since September 2000. Foreign investors continued to overbuy stocks for the 29th session running, the second longest record from October last year, boosting the market value of foreign investors' total shareholdings to over NT$6 trillion, 33.4% of the total, both record highs.

During the past 29 trading sessions since March 27, foreign investors have overbought NT$257.9 billion worth of Taiwanese stocks. A trading-department head of an American-invested securities firm noted that the expectation of the suspension of the U.S. dollar interest rate hike has promoted hot money to look for new investment targets worldwide. He expected that another NT$1 trillion of foreign capital will continue to flow into Taiwan, as performance of Taiwan' s stock market still lags behind neighboring markets on the long-term comparison basis from 2005.

Foreign investors overbought NT$13.6 billion of Taiwanese stocks yesterday, while domestic fund managers and stock traders oversold small amount of stocks. Outstanding amount of margin-trading loans increased, for the 17th session running, NT$4.1 billion to NT$265.3 billion.