Taiwan Dollar: Commerzbank Assesses CBC Intervention and Inflation Risks

Taiwan’s October CPI eased to 2.33% year-on-year. Commerzbank strategists note that the reading undershot expectations but remained above the Central Bank of the Republic of China’s (CBC) 2% alert threshold. A 19.7% surge in PPI fuelled concerns about future pressure on consumer prices. With heavy foreign equity outflows weighing on the Taiwan Dollar (TWD), the CBC intervened to support the currency. Foreign exchange reserves declined to USD596.4bn.

19.7% PPI surge contrasts with softer CPI

"October consumer price index (CPI) rose 2.33% yoy (Bloomberg consensus: 2.60%) vs an upwardly revised 2.74% in September. Core CPI came in at 2.23% yoy, also below the 2.30% consensus. The softer headline print offers some near-term relief on the inflation front, though it marks the sixth consecutive month that CPI has remained above the Central Bank of the Republic of China’s (CBC) 2% alert threshold, keeping the policy debate alive."

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"The lower CPI reading was led by softer food and energy price pressures. However, the producer price index told a starkly different story, surging 19.7% yoy in October, the fastest pace on record. The disconnect between softening consumer prices and surging upstream costs suggests that margin compression at the producer level remains acute. As such, pass-through to final consumer prices cannot be ruled out in the months ahead."

"Compounding the inflation picture, Taiwan’s foreign exchange reserves fell USD4.3bn to USD596.4bn at end-October, as the CBC confirmed it intervened in the currency market to cushion the TWD against heavy foreign equity outflows. The CBC’s FX department reported a net foreign outflow of approximately USD28bn for the month. The central bank also disclosed it used USD proceeds from the swap market to purchase US Treasuries in October, a mechanism that helped limit the drawdown in reserves."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)