The CBC kept policy unchanged yesterday, and won't be in a rush to move in 2025. Growth will be slower, but the bank isn't particularly worried about either exports, or domestic demand. Optimism about consumption is partly because of expected wage hikes, which in turn will support inflation.

There's rarely much interest in Taiwan macro. But 2025 could be different: with post-2020 domestic economic lift-off, and the return of Trump, the circumstances that have kept the TWD undervalued for 20 years might be changing. This is a detailed chart pack looking at the issues involved.

In recent years, trade and FDI flows from Taiwan and Korea have clearly shifted from China to the US. That's what Trump One and Biden wanted, but Trump Two won't like the rising trade deficits, or the CHIPS and IRA subsidies. If he threatens tariffs, will Taiwan offer a stronger TWD in response?

There's a possibility that TSMC's success is pushing Taiwan into unchartered waters, where the CBC needs to sound hawkish, when the external imbalance is as big as it has ever been. If Taiwan's period of zero inflation has passed, there's a good chance TWD undervaluation will be challenged too.

Taiwan's CBC kept rates on hold yesterday, but hiked the RRR to control housing. More interesting was the bank's very benign outlook: growth neither fast nor slow, and inflation falling to just within its target range. Particularly regarding inflation, that doesn't allow much room for error.

While exports jumped in August, with signs that the semi upswing is losing steam, it still seems likely that the export peak is near. Pretty much all the growth is coming from the US, which is propelling a surge in the bilateral trade surplus. That makes Taiwan vulnerable if Trump wins re-election.

After faltering in 2023, wage growth is now back on the stronger trend that began in 2021. The recovery in the manufacturing cycle gives us confidence that this can at least be sustained, but we'd still like to see a clearer lift in exports.

The moderation in core CPI inflation in June likely won't be enough to keep the central bank on hold if exports rise anywhere near the extent that equities are signalling is possible.

The PMIs suggest that the regional export cycle is gaining momentum. The lift is strongest in Taiwan, where the non-mfg PMI also lifted in June.