Taiwan\u2019s preliminary second-quarter data showed GDP growth easing to 12.9% year-on-year from 14.5% in the first quarter, while momentum on a QoQ saar basis stayed firm at 9.9% versus 6.9% previously. The composition shifted as net exports added 5.8ppt to headline growth, but domestic demand contributed 7.1ppt, the first time in five quarters that the latter outpaced the former. Forecasts for 2026 and 2027 GDP growth are held at 9.4% and 4.5%, respectively, with reference to a transition from AI-driven expansion towards a more normalised pace from 2H26 through 2027.<\/p>\n
The data are framed as consistent with a central bank move later in 2026, with CPI inflation projected to remain in a 2\u20132.5% year-on-year range through 2H26. A 12.5bp increase in 4Q would take the policy discount rate to 2.125%. Market conditions remain tight: the TAIEX is down 10% from its late-June peak, and foreign net selling of the TAIEX totalled USD23bn in July, against a backdrop that included volatility in the KOSPI.<\/p>\n
We believe derivative traders should prepare for continued volatility in Taiwan’s equity market by buying protective puts or shorting TAIEX futures. With foreign investors dumping a massive USD 23 billion of local equities in July alone, the index has already tumbled 10% from its June highs. This massive capital flight mirrors previous major tech corrections, suggesting further downside risk for Taiwan’s semiconductor-heavy index in the coming weeks.<\/p>\n
Given these heavy capital outflows, we recommend positioning for further weakness in the New Taiwan Dollar (TWD) using FX forwards or options. Historically, massive equity sell-offs of this scale put immense downward pressure on the currency, similar to the depreciation pressure seen during the global tech rout of 2022. Buying USD\/TWD call options provides an asymmetric way to play this currency strain as liquidity continues to tighten.<\/p>\n
In the fixed-income space, we suggest paying fixed on interest rate swaps or shorting Taiwan government bond futures. Strong domestic demand and sticky inflation, which is projected to hover between 2.0% and 2.5%, will likely force the central bank to hike rates by 12.5 basis points in the fourth quarter. Yields on the 10-year Taiwan government bond, which historically track monetary tightening closely, are poised to rise as the discount rate moves toward 2.125%.<\/p>\n\n\n\n