USD/TWD has climbed for five straight sessions, up 0.1% to 31.68, as foreign equity outflows gathered pace during a global tech sell-off. On a net basis, foreign investors sold USD8.8bn of equities in the first three days of the week, while the TAIEX is down 4.1% so far this week. Against that backdrop, trade data remained strong: May exports jumped 51.7% year on year versus a Bloomberg consensus of 41.2% and 39.0% in April, extending a fifteenth consecutive month of double-digit growth. Integrated circuit exports rose 58.3%, up from 40.5% in April, and imports increased 54.9% against expectations of 40.3% after 29.2% previously, with capital goods imports up 54.7% versus 33.3% in April. The trade surplus widened to USD17.9bn, above the USD17.5bn consensus and up from USD14.4bn.

Inflation has also firmed. Headline inflation averaged 1.5% in the first five months, and the government projects 1.9% for this year, while May CPI printed at 2.2% year on year versus a 2.1% consensus and 1.7% in April, moving above the central bank’s 2% target for the first time since March 2025. Even so, the Central Bank of the Republic of China (CBC) is expected to leave its policy rate unchanged at 2% at its 18 June meeting. Year-to-date, the Taiwan dollar is down 0.8% versus the USD, compared with an average 2.8% decline for Asian currencies ex-Japan.

Short-Term Drivers: Equity Outflows and Monetary Policy

We see the USD/TWD pair continuing its upward trend, driven by significant outflows from Taiwanese equities. A global correction in technology stocks, with the NASDAQ Composite falling over 7% in the last two weeks, is prompting foreign investors to pull capital out of the region. This short-term sentiment is currently the dominant force in the market.

We do not expect any support for the TWD from the central bank meeting on June 18th. Despite May’s inflation hitting 2.2%, the CBC has signaled it will hold its policy rate at 2%, a level maintained for the past year. This dovish stance, prioritizing stability amid global uncertainty, suggests the bank will tolerate higher inflation for now.

Given this environment, we are looking at short-term derivative positions that favor continued TWD weakness. Buying USD/TWD call options with expirations in late June or July appears to be a prudent strategy. This allows us to profit from the ongoing upward momentum in the currency pair through the upcoming central bank decision.

Medium-Term Fundamentals: Export Strength and Market Opportunities

However, we must watch the fundamental picture, which tells a very different story of incredible strength. Taiwan’s exports are surging on AI-related demand, with recent data from the Ministry of Finance showing semiconductor exports now account for over 40% of the total. This underlying economic power, driven by a global AI infrastructure build-out, creates a strong floor for the TWD in the medium term.

We will be closely monitoring the TAIEX and foreign fund flow data for signs of stabilization. Historically, such tech-driven outflows can reverse quickly once global sentiment shifts, as seen in the sharp rebound following the 2022 downturn. A break below key support levels in the USD/TWD pair could be a signal to consider put options to position for a TWD recovery.