(Bloomberg) -- Taiwan’s weakening economic outlook could spell the end of a rally for the island’s currency as investors reassess optimistic wagers on China’s reopening and a recovery in global demand for semiconductors.

The island’s dollar is near its strongest level since late June after rallying along with emerging-market peers on signs that global interest rates are reaching their peak. But Taiwan’s darkening economic outlook and mounting tension between the US and China threaten to cap further gains, analysts said.

“Taiwan’s economic outlook remains weak and while it has seen equity inflows recently, the tech cycle is yet to turn and geopolitics will continue to weigh,” said Eddie Cheung, senior emerging markets strategist at Credit Agricole in Hong Kong. He said the currency is likely to weaken past 30 per dollar in the coming weeks as traders pare optimistic bets on China’s reopening. The Taiwan dollar traded at 29.90 per dollar on Saturday.

The headwinds for the Taiwan dollar are mirrored by challenges facing other regional peers, boosting the chance the greenback can mount a comeback in Asia. South Korea’s won will also be affected by falling demand from semiconductors, while pressure on current-account deficits look set to weigh on India’s rupee and the Philippine peso.

The rally has already taken Taiwan’s currency into overbought territory versus the greenback, according to slow stochastics, a technical momentum indicator, indicating it may struggle to make further near-term gains. Technical resistance around 29.02 per dollar, the May 31 high, is also poised to cap any advance.

Taiwan — where chipmakers including Taiwan Semiconductor Manufacturing Co. are major contributors to the economy — benefited from the pandemic-fueled surge in demand for electronics. But orders for the island’s cutting-edge technology have since waned, and TSMC rival Samsung Electronics Co. recently warned that a recovery for the chip sector will be delayed until the second half of 2023. 

Investors will get their latest reading on the health of the island’s economy when Taiwan releases trade data on Tuesday, with economists expecting January exports to slump 20.3% from a year earlier, according to estimates compiled by Bloomberg.

Taiwan’s dollar benefited from “a catch-up rally amid favorable circumstances to overall emerging currencies,” said Kiyong Seong, lead Asia macro strategist at Societe Generale in Hong Kong. Seong expects a pullback in emerging-market currencies in the second quarter as slowing global growth replaces China’s reopening as the dominant theme.

“Taiwan macro continues to trend weaker in this semiconductor downcycle, and destocking may not be over in the first half,” keeping the currency under pressure, said Stephen Chiu, chief Asia FX & rates strategist at Bloomberg Intelligence. 

Here are the key Asian economic data due this week:

  • Monday, Feb 6: Australia Retail Sales Ex Inflation, Thailand CPI, Indonesian GDP
  • Tuesday, Feb 7: Japan Household Spending, Australia Exports, RBA Decision, Malaysia Industrial Output, Taiwan Exports
  • Wednesday, Feb 8: South Korea BoP, Japan BoP, Philippine Unemployment Rate, RBI Decision
  • Thursday, Feb 9: Taiwan CPI/PPI
  • Friday, Feb 10: Japan PPI, China CPI/PPI, Malaysia GDP

--With assistance from David Finnerty and Betty Hou.

©2023 Bloomberg L.P.