Dive into the Baht’s recovery – ฺBangkok Post | Omd Cialis


Foreigners exchange money at a stall. (Photo: Somchai Poomlard)

The currency of Southeast Asia’s second largest economy was trading at 36.08 against the greenback on Monday, up 1.4% from the previous week.

The Bangkok Post delves deep into the causes of the recovery and the impact on the economy.

What forces drive the rebound?

Since the beginning of this year, the baht is down 10.3% against the US dollar. It’s worth noting where this trend started before we delve into the recovery.

In recent months, currencies have been mainly influenced by the broader US dollar trend, triggered by the invasion of Ukraine, which led to a supply shock through blockades, the destruction of farms and factories and a series of sanctions and countermeasures. sanctions.

Kobsidthi Silpachai, head of capital markets research at Kasikornbank (KBank), explained that the supply shock amplified inflationary pressures, eventually prompting the US Federal Reserve to tighten monetary policy and reduce US dollar supply. As a result, the US dollar appreciated against other currencies, including the baht.

So far this year, the US Federal Reserve (Fed) has hiked interest rates three times. The reference interest rate is now between 2.25% and 2.50%.

“Since World War II, 11 of the Fed’s 14 tightening cycles have ended in recession, which is a 78% probability. This prompted markets to change their minds,” Mr Kobsidthi said, adding that expectations of the fed fund’s path through the futures market later diminished.

“This was confirmed by the release of US GDP data in the second quarter of this year, which fell 0.9% for the second straight quarter. It is a technical recession.”

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The head of Capital Markets Research at KBank added that changes in Fed Funds expectations led to changes in US Dollar Index (DXY) expectations, resulting in a mean trend reversal.

Wei-Liang Chang, FX and credit strategist at DBS in Singapore, commented on the impact of the Fed’s rate hike on the baht.

“The baht has rallied against the US dollar, which is weakening as the market prices in smaller rate hikes from the Fed on slowing US growth. Another factor is stronger economic momentum from the reopening of international travel, which could support the baht,” Mr Chang said.

What has the central bank done so far?

Bank of Thailand Governor Sethaput Suthiwartnarueput recently said it would not need a special meeting to contain the currency like other countries in the region such as Singapore and the Philippines.

The central bank will let the baht move in line with market forces. The movement will be closely monitored and should there be excessive volatility, the central bank will take action, Mr Sethaput said.

Is a low baht part of the central bank’s strategy to prop up tourism and exports?

Tourism and export have long been the two main drivers of the economy. The Intelligence Center of the Tourism Authority of Thailand reports that 3,334,326 foreign arrivals were recorded as of July 31.

The top markets are Malaysia, India, Singapore, UK and USA. In total, the government expects around 10 million international visitors in 2022.

Meanwhile, exports grew by 12.7% year-on-year in the first half of 2022. One standout performing category is food and agricultural products, which grew 20.4% year over year in the second quarter of this year.

The top products shipped are potatoes, rice, brown sugar and pet food. KrungThai Compass attributes the stellar growth to the weak baht and high global food demand due to the Russia-Ukraine war.

Mr Kobsidthi said a low baht is not part of the central bank’s plan to revitalize key sectors.

“The Bank of Thailand’s stance on FX is usually focused on stability rather than direction. It does this by buying and selling USD/THB with its FX reserves. We can track this by calculating changes in the weekly FX reserve position.

As FX reserve changes increase, the central bank should buy US dollars and sell baht to weaken the latter. If foreign exchange reserves fall, the bank should sell to strengthen the baht and help control import inflation.

If the central bank tries to weaken the baht, changes in foreign exchange reserves should be consistently positive, rather than alternating [as is currently happening],” he said.

Mr Kobsidthi added that he found no empirical evidence that a weaker currency improves long-term export competitiveness – a growing share of global exports.

“Thai exports have benefited from the global recovery from Covid-19. However, as the war in Ukraine continues, world trade and globalization will face increasing headwinds. We expect exports to grow 7.8% in 2022, compared to 18.8% growth last year,” he said.

Referring to Thai tourism, Mr Kobsidthi said the sector is expected to welcome 7.2 million foreign arrivals in 2022, up from 430,000 in 2021.

Is Thailand’s massive foreign exchange reserve contributing to volatility?

Thailand has a massive foreign exchange reserve, which as of June 2022 totaled $201.4 billion.

Amonthep Chawla, head of research at CIMB Thai Bank, said the baht’s recent short-term volatility may not be relevant to foreign exchange reserves. That will only happen if the Bank of Thailand forces intervention to allow the baht to move in line with its peers.

He warned that Thailand should consider ways to use its foreign exchange reserves more efficiently.

“Forex reserves can be viewed as insurance. You’ll never know if we might be hit anywhere. Let’s say it’s an emerging market crisis now [comes] of high foreign debt, an enormous current account deficit and a weakening currency. Thailand could one day end up with high volatility with various symptoms like high inflation, high household debt and financial instability. It’s good to have a foreign exchange reserve to cushion volatility and build confidence. But too much foreign exchange reserves could be a dilemma. We are too afraid to take risks, which leads to low growth,” he warned.

Meanwhile, Anusorn Tamajai, a former Bank of Thailand board member, said many studies show a long-term equilibrium relationship between foreign exchange reserves and exchange rates.

“In addition, changes in foreign exchange reserves would cause the exchange rate to fluctuate, but not vice versa. The reform from the fixed regime to the floating exchange rate regime not only increased the flexibility of the baht exchange rate, but also increased the accumulation of foreign currency reserve of Thailand,” Mr Anusorn said.

What is the outlook for the baht compared to other emerging market currencies?

Mr Chang of DBS in Singapore said the baht is still overvalued based on its long-term fair value metric.

“The baht is the worst-performing currency in ASEAN this year on a total return basis. Further weakness against regional currencies is likely as Thailand is still running trade deficits while Thai interest rates are also lower compared to regional peers,” he said.

Poon Panichpibool, a market strategist at Krungthai Bank (KTB), made a similar comment on the near-term outlook for the baht. He said the baht may not appreciate significantly against other emerging markets, except for some countries facing weak economic prospects, such as China. However, he believes the baht could gain strength in the fourth quarter of this year as Thailand enters the peak tourist season.

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