We think the Taiwanese dollar is well positioned to appreciate further in the coming quarters thanks to the improving global economy and strong demand for Taiwanese exports. Furthermore, Taiwan’s external buffers are very strong and public debt is low (by law, public debt cannot exceed 50% of GDP), which limits the vulnerability of the Taiwanese dollar to external shocks.
Like the Taiwanese dollar, the Korean won’s exposure to the improving global economic cycle, its high-tech equipment exports and inherently defensive characteristics all make it attractive. To sum up, our medium-term scenario of a weaker US dollar and gradual reopening of economies should provide a supportive environment for the Korean won.
The won, a low-yielding currency, shares many similarities with the Taiwanese dollar: they are both supported by large trade balance surpluses, their economies are highly reliant on exports (with a specialisation in high-tech electronic equipment) and fiscal discipline in both economies is particularly strict. That said, the Korean economy is more mature and it has a more highly developed financial market and diversified industrial sector. The Korean won is also perceived as somewhat overvalued, whereas the Taiwanese dollar looks at best as being fairly valued.
Therefore, while we think that the won should perform well in the months ahead given the high global demand for computer chips, we think it could underperform the Taiwanese dollar, given that Korean exports are more diversified. Indeed, chip shortages could come to hurt Korean car production and exports. The Taiwanese dollar could perform better than the won if Taiwanese equities continue to outperform their Korean peers.
The Bank of Korea is likely to raise rates before the Central Bank of Taiwan, with the recent rise in core inflation and strong economic momentum possibly leading to a rate hike before 2022. However, rate differentials are not a key driver for the Korean won.