Fed September Rate Hike Uncertainty Lingers! Central Bank's Forex Chief Highlights Key Indicator More Important Than Tonight's Non-Farm Payrolls

Whether the U.S. Federal Reserve (Fed) will raise interest rates in September has become the most pressing market concern recently. Although Fed Chair Jerome Powell delivered a hawkish message at the Jackson Hole global central banking symposium, Fed Governor Christopher Waller has recently signaled dovishness, highlighting the divergence among policymakers.

Tsai Jiong-min, Director of the Central Bank's Foreign Exchange Bureau, stated today that while the August non-farm payroll report to be released tonight is important, the August Consumer Price Index (CPI) to be announced next week is even more crucial—it is the key data influencing this month's interest rate policy.

Tsai pointed out on the 4th that although the non-farm payroll report is indeed significant, unless there is an 'exceptionally good or exceptionally bad' surprise, the market already has a certain level of expectation. External focus is on the inflation data to be released on September 11. Merely seeing cooling inflation is not enough; the market must observe 'how quickly it is cooling down.'

He noted that Waller himself holds a neutral-to-dovish stance, and his past policy judgments have been highly credible and less influenced by financial market volatility, focusing primarily on macroeconomic indicators such as job openings, unemployment rate, and inflation.

He said that if inflation continues to cool down at a pace consistent with expectations, the Fed should remain on hold. However, if the pace of disinflation slows or even stalls, Fed officials may perceive persistent inflationary pressures, and hawkish forces could gain strength.

Foreign Exchange Reserves Return to $600 Billion Milestone

The Central Bank announced today that foreign exchange reserves at the end of August reached $601.904 billion, an increase of $7.633 billion from the end of July—the largest single-month increase in nearly 15 months. Tsai stated that the significant rise in reserves was driven by higher foreign exchange interest income in August, exchange rate fluctuations of major international currencies against the U.S. dollar, and the central bank's market intervention through foreign exchange purchases.

According to statistics, as of the end of August, foreign investors' holdings of domestic stocks and bonds, valued at market prices and including New Taiwan dollar deposit balances, totaled $1.861 trillion—equivalent to approximately 309% of foreign exchange reserves.

Tsai noted that July and August are peak seasons for dividend and rights distributions in the Taiwan stock market, and the amount of funds repatriated overseas by foreign investors after receiving dividends is typically more pronounced. In August, foreign capital inflows amounted to approximately $13 billion, but after deducting dividend and earnings outflows, the actual net inflow was about $1.2 billion. This means that although many foreign investors do repatriate dividends and earnings during the ex-dividend season, a portion of the funds remains in the Taiwan market.

Sharp Volatility in Taiwan Stocks and Frequent 'U-Turns' in New Taiwan Dollar Exchange Rate

There is growing concern about the significantly widened intraday fluctuations in the New Taiwan dollar exchange rate in August, with frequent occurrences of 'morning appreciation, afternoon depreciation.' Tsai believes that the increased correlation between the stock market and foreign exchange market recently is one of the key reasons for the amplified intraday exchange rate movements.

He stated that Taiwan's stock market has experienced intensified intraday volatility recently—'the index may close up only 200 points, but the intraday swing could be as large as 800 points up or down.' Even if the index rises sharply, foreign investors may not necessarily buy heavily at the same time. Investors often have to wait until after trading hours, when transaction data is gradually released, to determine foreign investor behavior. Additionally, foreign investors use both T+0 and T+1 settlement methods, and the timing of actual capital flows into and out of the market also affects the supply and demand dynamics of the New Taiwan dollar during trading hours.

Tsai pointed out that the U.S. dollar's movement in the afternoon may also change recently, influencing market participants' trading decisions. Amid the interplay of stock market movements, U.S. dollar trends, and foreign investor trading timing, large amounts of capital may enter or exit within a short period, ultimately amplifying the volatility of the New Taiwan dollar exchange rate.

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