Quoting the head of research of a foreign financial institution, one of Taiwan’s local newspapers this morning put forward the view that “the depreciation of the NT dollar has caused the sharp drop in the Taiwan stock index.” This report runs contrary to the truth. This statement has been issued to clear up any misunderstanding.

If a foreign investor wishes to invest in Taiwan’s stock market, he/she will have to remit the fund into Taiwan and convert it into NT dollars before buying stocks. Conversely, a foreign investor must first sell his/her stocks before using the NT dollar proceeds to purchase foreign currency in the foreign exchange market for outward remittance.

The sequence of events should be as follows.

When a foreign investor remits foreign currency fund
1. Foreign currency sold, NT dollar appreciates
2. Stocks bought, stock prices go up

When a foreign investor wishes to repatriate
1. Stocks sold, stock prices fall
2. Foreign currency bought, NT dollar depreciates

As shown by the above analysis, the head of research in question may have inadvertently misread the direction of causality.