Bot Rejects Fears It Will Peg Currency

[george]

BOT rejects fears it will peg currency

BANGKOK: -- The Bank of Thailand (BOT) has rushed to dismiss a market rumour that it plans to peg the exchange rate at Bt36 to the greenback.

"We found that some banks have reaped profits from the currency, so we have asked the Thai Bankers' Association to take care of the issue. If banks take benefit from the foreign exchange rate, they should stop doing so. The central bank also affirmed that we would not peg the foreign exchange rate and we don't have any new measures. Fully hedging measures are good enough," BOT governor Tarisa Watanagase said.

"We summoned the banks because there was a rumour in the market that the central bank would fix the foreign exchange rate. Don't worry, we will not do so. We did not issue a circular letter to require banks to buy the US dollar," BOT assistant governor Nitaya Pibul-ratanagit told reporters after a meeting with executives of the banks.

Baht trading yesterday was highly volatile. It opened at 34.95-34.98 to the US dollar before closing at 35.05-35.08. On Friday it closed at 35.05.

Meanwhile, Finance Minister Chalongphob Sussangkarn said in a separate meeting that he preferred the central bank to reduce interest rates while the Finance Ministry will soften its fiscal policies in a bid to boost the economy.

He also said that the central bank should be more effective in sending signals to the market to avoid confusing investors.

He said the central bank should explore all available tools to keep exchange rates under control. While saying that the 30-per-cent withholding requirement on capital inflows was "too a strong measure", he said the measure was only "on paper".

In response to the International Monetary Fund's recommendation to abolish the central bank's capital controls, Chalongphob said that the 30-per-cent withholding requirement was not enforced, since the central bank put in place the full hedge requirement on March 15.

BOT assistant governor Suchada Kirakul also denied the rumour that the central bank would peg the currency.

"It is groundless. We have never had any idea to peg the baht at 36. The managed floating system is the right policy. All systems cannot prevent currency problems," she said.

A source at a bank said after the meeting that the central bank had asked both foreign and local banks to adjust their foreign-exchange positions to the same level as at the end of 2006, resulting in banks buying US dollars.

The measure caused the baht to weaken significantly last Friday. There was a report that the Thai Bankers' Association issued the circular for banks to adjust their position by buying US dollars after the central bank asked for their assistance.

A dealer at a local bank said the baht weakened to below the 35-threshold yesterday as the banks were not sure whether the central bank would introduce any new measures in a bid to depreciate the baht, so they decided to hold US dollars.

He said it was possible that the central bank would fix the baht as rumoured, but questioned whether it was the appropriate measure to defend the baht.

--The Nation 2007-03-27

[sonicdragon]

Pegging the exchange rate is a very bad idea. For it to be succesful it requires a currency board arrangement, or very stringent capital controls. Without one or the other, speculative money would have a field day - it would be like a red flag to a bull. It might have the desired short-term effect, but long term it would just undermine confidence (even more).

[topfield]

Sometimes I truly believe that they dont know what they're doing at the BOT. Honestly !

The admitted acknowledged aim of the BOT is to bring down the high flying baht. A trillion baht has been spent buying dollars doing this.

Yesterday rumours spread in the market that the baht would be pegged at 36. For the first time in months the baht started to fall a little.

What did the BOT do ? Instead of keeping quiet and allowing the rumour to persist ....resulting in the aim being achieved through market sentiment ..........

They call a press conference to announce that they have no intention of allowing a baht peg !!

The BOT thus shot itself in the leg and damaged its own self interest .

Are they just stupid or what ??

[backflip]

Pegging currencies essentially stopped when the Bretton Woods agreements were tossed aside when the USD was devalued. As the economies and markets realized, pegging currencies is a terrible idea.

[cclub75]

They call a press conference to announce that they have no intention of allowing a baht peg !!

The BOT thus shot itself in the leg and damaged its own self interest .

Are they just stupid or what ??

You know the answer.

But I think they were afraid of further fall in confidence within the investors and business community.

Anyway, the BOT and the gvt are like a ghost ship on crazy waters. Or like an elephant walking through a mine fields.

We should note that :

-they backed off from their Retail Act (yesterday).

-and amendement of FBA is lost within the toilets-maze of the administration (they are still talking, and now we have a... third draft from the National Council)

They start to be a little bit more concerned about foreigners reactions...

I mean put this in perspective of an interim gvt whose life span is shrinking like ice under the sun...

Plus the oil joker that is coming back at full speed... Plus a shrinking growth, etc. Plus a major trend with currencies (USD under great pressure), etc.

Basically, they are fxxxed.

Their only option at that point : doing nothing...

Edited March 28, 2007 by cclub75

[sonicdragon]

Well put, cclub75, although I do believe there is a high probability of a more accomodative monetary policy in the near future.

[Losangels]

Yeah do nothing, anything every thing done causes damage. Can't we get competent BOT officials? Shouldn't some of these people at least take somekind of resposibility like resigning

[PeaceBlondie]

Yeah do nothing, anything every thing done causes damage. Can't we get competent BOT officials? Shouldn't some of these people at least take some

kind of resposibility like resigning

But maybe these officials, like Dr. Tarisa, are the best the junta can get! On the way home today, my Thai partner said something about the current leadership that I won't repeat. I replied, "Well, at least Shinawatra knew how to run the country, even if he did enrich himself in the process."

I suspect the politicians are still singing that song by X-Japan: "Say Anything". And do nothing constructive.

[sonicdragon]

As is often the case in economics and finance, there will never be consensus about the correct policy decisions to make. There is always contradictng advice from the "experts". Even central banks in well developed large economies don't get it "right" most of the time, so what chance does thailand have ?

[steveromagnino]

On the way home today, my Thai partner said something about the current leadership that I won't repeat. I replied, "Well, at least Shinawatra knew how to run the country, even if he did enrich himself in the process."

How Taksin fooled people that he knew what he was donig I will never know.

BUt I do agree with your point, that maybe these people are the best an interim semi neutral govt can muster up though. Then again, BOT are civil servants...but they do answer to their masters in power.

Edited March 28, 2007 by steveromagnino

[Old Man River]

In defense of the BOT (I realize this is highly unusal at TV), they have been working on solving several issues. The THB was attacked by offshore speculators and now large exporters and onshore banks are speculating on the THB's rise. On the offshore issue, this is not something that central bankers face every day, and Dr. Tarisa's aproach to regional central bankers for ideas showed this as they had none.

Now, the BOT are faced with speculation onshore, which is coming from large exporters and onshore banks. While it is thought that lowering interest rates may have helped fight offshore speculators by making it less attractive to them to hold THB paper, it does little to counter onshore speculators (It is obvious that this country's nationalism extends only as far as their bank accounts).

Ok, since the BOT is "stupid" as some of you have written, what measures would you take to counter the onshore speculation? Surely if you know what not to do you must know what should be done.

[sonicdragon]

<<snip>>

But seriously, I really don't know what the BoT can do about it. Short of introducing more capital controls, it's very difficult to stop people speculating on your currency rising, particularly if they are doing it onshore. They can intervene in the market - but they are surely doing that already. They can reduce interest rates, but that won't deter short term speculation very much.

[topfield]

<<snip>>

But seriously, I really don't know what the BoT can do about it. Short of introducing more capital controls, it's very difficult to stop people speculating on your currency rising, particularly if they are doing it onshore. They can intervene in the market - but they are surely doing that already. They can reduce interest rates, but that won't deter short term speculation very much.

Beg to differ. It pays to hold baht now. You enjoy a healthy 4.5 percent interest. Were rates to drop to 2 per cent you would find speculators jumping the baht ship and returning to higher yielding currencies.

By the way sonic, is it not amazing the way the financial markets reacted today .

Bad political news and the stock market drops ten points. The currency markets reacted in a completely opposite way as the baht rose and hit a new high at noon of 31.70 .

Now why in your view is the reaction so completely different. After all Thailand is facing political meltdown at the moment. There's talk of wide rifts having opened up between Sontee the coup leader and Surayut the Prime Minister and that can only bode ill for the future.

[britmaveric]

Peg the currency, thats what they want to do, just don't want to say it.

[sonicdragon]

<<snip>>

But seriously, I really don't know what the BoT can do about it. Short of introducing more capital controls, it's very difficult to stop people speculating on your currency rising, particularly if they are doing it onshore. They can intervene in the market - but they are surely doing that already. They can reduce interest rates, but that won't deter short term speculation very much.

Beg to differ. It pays to hold baht now. You enjoy a healthy 4.5 percent interest. Were rates to drop to 2 per cent you would find speculators jumping the baht ship and returning to higher yielding currencies.

By the way sonic, is it not amazing the way the financial markets reacted today .

Bad political news and the stock market drops ten points. The currency markets reacted in a completely opposite way as the baht rose and hit a new high at noon of 31.70 .

Now why in your view is the reaction so completely different. After all Thailand is facing political meltdown at the moment. There's talk of wide rifts having opened up between Sontee the coup leader and Surayut the Prime Minister and that can only bode ill for the future.

I wasn't talking about people buying the baht as a carry trade (if they are), I was talking about Old Man River's comment about "speculation onshore, which is coming from large exporters and onshore banks" (I guess I should have quoted that in my post).

As for market reaction yesterday, maybe it means that speculative money is still betting on short-term baht appreciation, while the real money is in the stock market.

[sonicdragon]

Peg the currency, thats what they want to do, just don't want to say it.

Getting a little fed up of saying this, but anyway, I'm pretty sure that they don't want to peg the baht because they know that it will not work unless accompanied by other radical (yes I really mean radical) moves such as the capital controls that existed in malaysia for a large part of the last 10 years, or a currency board arrangement. The latter is a financial impossibility for thailand, and although the former is possible I doubt that it would be welcomed by many.

[cclub75]

Peg the currency, thats what they want to do, just don't want to say it.

Getting a little fed up of saying this, but anyway, I'm pretty sure that they don't want to peg the baht because they know that it will not work unless accompanied by other radical (yes I really mean radical) moves such as the capital controls that existed in malaysia for a large part of the last 10 years, or a currency board arrangement. The latter is a financial impossibility for thailand, and although the former is possible I doubt that it would be welcomed by many.

We could say that the THB is... de facto pegged... Partially.

Chinese Renminbi style : with the now famous "on shore" rate, that evolves within a small range (hovering around 35).

I don't think this situation can last very long. And I think it's really a novelty.

Do we have previous example of such -and official- difference, where the official rate is lower than the real one ? I mean other than "african style" countries (like Burma for instance). Because, usually, it's the other way : official rate much higher than the real one (market) !

Edited March 29, 2007 by cclub75

[topfield]

Ok I'll stick my neck out.

I know of no other example where a currency is worth more outside a country than inside. It is in fact ALWAYS the other way round !

As regards certain BANKNOTES I do know of an example...or at least read about it as I was not an active participant those days !

During the Second World War the Swiss 1000 Franc notes were sold /traded at a huge premium in Germany and occupied Europe....and that means most of Europe at that time !

This was because they represented the easiest way to get money out and to freedom !

Gold was too heavy and the British 1000 pound notes were out of circulation. Diamonds required specialised knowledge.

[sonicdragon]

I tend to agree. The situation is very unusual.

As for such situations in previous times, I don't know of any, but the example mentioned by topfield sounds very plausible.

[bingobongo]

Foreign investors fed up with Thai fumbles

HONG KONG (Reuters) - Foreign investors are fed up with repeated policy fumbles and flip flops by Thailand's financial authorities to the point that many shun Thai markets and consider selling existing holdings.

"Who knows what the next rule change will be, but it's probably not far away. In the meantime, we view (the baht) as best avoided for anyone without a strong need to be involved."

"Thailand is not the only market in Asia, and it's not a sizable market either," he said. "So do we need to spend a lot of time and resources to monitor such an unclear but small market? I think obviously the answer is no."

http://www.borsaitaliana.reuters.it/news/n...;archived=False

Edited March 29, 2007 by bingobongo