The Baht Thread

[nigelforbes]

Because there has been a lot of discussion in various threads about Thai Baht exchange rates lately, I thought it might be helpful to try to contain the debates in a single thread going forward. That way, posters don’t have to go searching for relevant connected information and everything is in one place.

 

The purpose of this thread is to put the value of THB exchange rates into context, including the way they are formed and the economic factors that underpin them. I think the objective of the thread is to help educate and inform, by doing that, posters can better understand the exchange rate mechanism and improve their decision making about when to exchange currency. The thread will also, hopefully, provide some clues as to what the future holds. This post attempts to set the stage and at least touch on all the aspects of the Baht exchange rate. It is 1,200 words long, which is necessary if expats living in Thailand are to understand all the different elements of arguably one of the most important aspects of their expat life here.

 

As a starting point, it should be understood that the Thai Baht is not freely convertible. That means THB cannot be exported from Thailand in any volume, with the exception to neighbouring countries and Yunan Province in China where a 2 million Baht limit exists. THB is traded on global markets but not for delivery. Even banks outside Thailand are restricted from holding THB beyond certain levels. As a consequence, BOT has global control over the value of THB and offshore hedge funds etc cannot take effective positions against the currency to influence its onshore value. Slowly, over time BOT has relaxed many of the currency restrictions placed on both exporters and consumers. For example, even five years ago, exporters were required to sell their foreign currency earnings to the BOT, within one year. Today, exporters are allowed to invest that foreign currency overseas, which delays exporters having to sell USD for THB and further strengthening the Baht. This move was established by BOT to help weaken the Baht. 

 

The Thai Baht (THB) is not pegged to USD. But since exports represent about 60% of the Thai economy (GDP) and export bills are mostly settled in USD (which is required to be sold to BOT), the value of the Dollar is important to the economy, mostly to the value of THB. As currency swaps are used more often to pay for exports, along with increased Thai participation in the RCEP (mostly regional + China and Aus.) trade program, the level of influence on THB value, by Dollars earned from exports, will reduce substantially. This has major implications for THB value in the not distant future.

 

THB is a very small boutique currency that represents less than 0.5% of daily FOREX volume, consequently, it doesn’t take much volume to change its value. On the other hand, THB is the 22^nd most traded currency in the FOREX. The combination of those two things means at times it can be quite volatile, intra-day swings of 3% are not uncommon.

 

Foreign currency from inbound international tourism (approx. 11% of GDP) is sold to BOT and this becomes part of the Foreign Currency Reserves, which are accounted for in USD and held in safe custody of the Bank of International Settlements (BIS). That trade in foreign currency does not in itself directly increase the strength of THB but the increase in the Foreign Reserves does, since this reflects a robust economy that is financially secure. The direct benefit of tourism to the country is therefore not necessarily a stronger Baht, but increased earnings, employment and GDP.

 

Currencies are traded in pairs, for example, USD/THB. There is no fixed relationship whereby the value of the Baht against one currency means that it must equal a fixed amount against another currency. All currency values move independently, unless a fixed relationship exists. All the major currencies such as GBP, JPY, EUR have a direct relationship with USD, lesser currencies have a relationship via one of those major currencies or by means of a calculation that involve them. For example, the British Pound, GBP, does not have a direct FOREX relationship with THB, instead, GBP/THB is calculated using the following formulae: USD/THB x GBP/USD. This mean that whilst the value of USD/THB is influenced by two currencies/economies, the value of GBP/THB is influenced by three and the reason for movements in that pair is not always immediately obvious.

 

The US Dollar is the major global Reserve Currency, it sits at the top of the FOREX tree and THB is measured against it. The value of USD fluctuates but it’s value is determined by similar factors and in the same way that other currencies are. The value of USD is measured using the benchmark US Dollar Index (DI). The DI compares the value of USD to a basket of six major currencies and expresses that value as a percentage. When USD is strong, the percentage increases above 100, when it is weak it dips below. The USDI value is currently 102, a link to it follows:

https://www.marketwatch.com/investing/index/dxy

 

There is no comparable index that measures the strength of the Pound, although the Exchange Rate Index (ERI) comes close. The ERI is a measure of the overall change in the trade-weighted exchange value of sterling, calculated by weighting together a dozen or more bilateral exchange rates. The ERI value is currently 77 and the base year value in 2005 was 100, a link to it follows. As can be seen, GBP is running at only three quarters of its historic strength: https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/timeseries/bk67/mret

 

Supply and demand for a currency is the biggest reason for a change in value. Currencies increase or decrease in value because of underlying economic factors and/or because the currency is bought or sold against USD. Most often, it is changes in those underlying economic factors that cause the currency to be more or less heavily traded. Underlying economic factors include the current and forecast state of a country’s economy, government (or public) debt levels (not consumer debt), capital (in and out) flow, money supply, inflation levels and interest rates, amongst other things.

 

Whilst some believe that the BOT manipulate the value of the Baht, it is highly improbable that they do. BOT is obliged to manage undue exchange rate volatility and to conduct exchange rate smoothing operations, under IMF rules. It cannot be ruled out however that other entities such as major banks and brokers collude to manipulate values since this happens periodically in other cities around the world also. Most people who believe that BOT manipulate the Baht exchange rate think the underlying reason is to keep the Baht strong. The reality is the opposite, most attempts at intervention (not manipulation) by the Central Bank are to try and weaken THB, or at least maintain it in an optimum range, because its natural tendency is to strengthen on its own. An unnecessarily strong Baht hurts exports hence the trend has been for BOT to try and weaken the Baht.

 

Lastly, much has been made of Thailand being accused of currency manipulation by the US Federal Reserve and being placed on a watch list. The type of manipulation described by the Fed. Is not straight forward buying and selling currency but involves a much more complex trade aspect where exports are always greater than imports, particularly to the USA. This has the effect of creating a current account surplus which in turn strengthens the currency. This subject is described more completely in the following link and shows graphically, other alleged currency manipulators which also includes Vietnam, Switzerland and Taiwan!

https://www.cfr.org/article/tracking-currency-manipulation

[Gsxrnz]

What does "Teflon Thailand" mean? 

[nigelforbes]

4 minutes ago, Gsxrnz said:

What does "Teflon Thailand" mean? 

It has been nicknamed “Teflon Thailand” - an economy seemingly impervious to any lasting effects from regular spasms of violent political unrest.

 

https://www.cnbc.com/2014/01/09/as-bangkok-shutdown-looms-thailands-teflon-economy-put-to-the-test.html#:~:text=It has been nicknamed “Teflon,spasms of violent political unrest.

 

Yes, even in 2014 when there was a lot of political problems, mostly manifesting themselves in Bangkok, exporters in the rest of the country continued to export and tourists in the South and the North, continued to be tourists. None of which impacted the economy negatively because political unrest here is not a factor that impacts THB value on a lasting basis.

[Patong2021]

Thank you. Appreciate the  education. In respect to Thai baht exchange rate over the next 3 quarters, it would be helpful to see projections of THB against i. USD, ii. Euro iii. Pound Sterling and iv. Australian$,. More specifically, will the exchange rate remain  close to what it is or whether or not it will change (significantly).

 

[nigelforbes]

1 minute ago, Patong2021 said:

Thank you. Appreciate the  education. In respect to Thai baht exchange rate over the next 3 quarters, it would be helpful to see projections of THB against i. USD, ii. Euro iii. Pound Sterling and iv. Australian$,. More specifically, will the exchange rate remain  close to what it is or whether or not it will change (significantly).

 

I could only guess at this, just as others can. You would need to look at each of the component currencies to try and see where they are headed. Market forecasts are unanimous that THB will have a good year. Markets are also clear that Sterling is having problems. It appears the USD is flat but earnings season is underway and growth forecasts will probably fall. So, Baht up, Pound down, USD flat or down, that's my guess for the next two quarters. Note: I would avoid paying serious regard to exchange rate forecast sites, there's one that forecasts about five years which is nothing more than an extrapolation of the current view and doesn't tell us anything sensible. 

[gt162]

Baht is still bulletproof.

[nigelforbes]

6 minutes ago, gt162 said:

Baht is still bulletproof.

Yup, it's an import/export thing. If imports were increased and they stop using Dollars as payments for exports, that will change.

[Gottfrid]

It´s nothing wrong with the baht. The only thing that is wrong, is people that complains over every dip. However, that´s just people who built their life on a too narrow budget.

[KannikaP]

1 hour ago, Patong2021 said:

it would be helpful to see projections of THB

Do you mean GUESSES?

[KhunLA]

All irrelevant ... money comes in, bank tells me what it's worth.

 

Last Oct/Nov ฿37+ / $1 USD, this month's DD ฿34, next month ฿32, hopefully.

 

Stay above ฿30 / $1 ... I'm satisfied, not happy, but what I think and the 'why', doesn't matter.

[Gottfrid]

7 minutes ago, KannikaP said:

Do you mean GUESSES?

That´s right. 100 % That´s why they created the word "speculation" ???? 

[ExpatOilWorker]

This is an excellent write up and very informative. 

You don't mention benchmark interest rate, but as we are coming out of the 10 year long zero interest rate period, I think exchange rates will be heavily influenced on how high different central banks set the national interest rate.

[JTXR]

People think they can know what the baht exchange rate will do (i.e., in the future).

 

The only 100% sure thing anyone can say about the exchange rate of any two currencies, just like the only 100% sure thing anyone can say about the stock market, is:

"It will fluctuate."

 

Anyone who says they know what the baht exchange rate will be next month or next year (against pound, dollar, yen, whatever) -- or even if it will go up or down -- is simply full of it.

[Celsius]

30 minutes ago, KhunLA said:

All irrelevant ... money comes in, bank tells me what it's worth.

 

Last Oct/Nov ฿37+ / $1 USD, this month's DD ฿34, next month ฿32, hopefully.

 

Stay above ฿30 / $1 ... I'm satisfied, not happy, but what I think and the 'why', doesn't matter.

 

If it goes to 29.54 will that upset you?

[nigelforbes]

19 minutes ago, JTXR said:

People think they can know what the baht exchange rate will do (i.e., in the future).

 

The only 100% sure thing anyone can say about the exchange rate of any two currencies, just like the only 100% sure thing anyone can say about the stock market, is:

"It will fluctuate."

 

Anyone who says they know what the baht exchange rate will be next month or next year (against pound, dollar, yen, whatever) -- or even if it will go up or down -- is simply full of it.

You missed the point, the thread is not about what the rate might be, it's about the underlying factors are that contribute to whatever it might be.

[nigelforbes]

36 minutes ago, KannikaP said:

Do you mean GUESSES?

Yes, but there are guesses and then there are informed projections based on fact, there's a difference, even if both are equally wrong.

[RayC]

Thanks, Nigel. Very informative.

 

Re the value of the baht vs. sterling in the future. I am 100% certain about my following prediction: it will either increase, decrease, or remain the same.

[nigelforbes]

1 hour ago, ExpatOilWorker said:

This is an excellent write up and very informative. 

You don't mention benchmark interest rate, but as we are coming out of the 10 year long zero interest rate period, I think exchange rates will be heavily influenced on how high different central banks set the national interest rate.

A good point about interest rates that I hadn't considered, it was not easy to know where to draw the boundaries on this. Plus I don't really have a view on interest rates, I suspect that's just as thorny as exchange rates although probably not as emotive. 

[JTXR]

50 minutes ago, nigelforbes said:

You missed the point, the thread is not about what the rate might be, it's about the underlying factors are that contribute to whatever it might be.

No, I got the point.  Just reminding folks that even understanding those factors better is not really going to help you to make the kind of predictions you so often see people making all the time (on this forum and elsewhere).

There are some exceptions, of course.  While I agree it is highly improbably that the Thai government or central bank is manipulating the baht, if it WERE to try to manipulate it, or some other large entity tried to manipulate it (AND you had insider knowledge of that manipulation), then you'd have a better basis for prediction.

[nigelforbes]

1 minute ago, JTXR said:

No, I got the point.  Just reminding folks that even understanding those factors better is not really going to help you to make the kind of predictions you so often see people making all the time (on this forum and elsewhere).

There are some exceptions, of course.  While I agree it is highly improbably that the Thai government or central bank is manipulating the baht, if it WERE to try to manipulate it, or some other large entity tried to manipulate it (AND you had insider knowledge of that manipulation), then you'd have a better basis for prediction.

Yes I agree. It's pure folly of course to try and predict short term interest rates but trying to establish direction. based on sound reasoning, is worth some effort. I said in a separate thread that I thought another poster was correct when he said he could see that Pound/Baht would reach 30 within ten years. That to me is not predicting exchange rates, that's about establishing trend and direction which is a different game entirely.

[Berkshire]

Thanks OP for the informative explanation of the dynamics of currency fluctuation.  I tend to believe that the value of the THB (with respect to other currencies) has more to do with what is happening in the home country of that currency, not the Thai GOV.  The USD, for example, is largely tied to what's happening in the US, i.e., interest rates, the economy, trade, politics, etc.  The BOT can only try to minimize volatility, that's it.  I'm most interested in the USD for selfish reasons, and I recall the dollar going to 38 recently....mostly due to hefty interest rate hikes by the fed.  I had no idea it would tank to below 33 this quickly.  It seems inflation in the US is slowing, so the feds are also putting on the brakes.  What concerns me is the looming debt ceiling issue.  If the US were to default, no idea what that would do to the USD.  But I'm guessing it won't be good.   

[nigelforbes]

21 minutes ago, Berkshire said:

Thanks OP for the informative explanation of the dynamics of currency fluctuation.  I tend to believe that the value of the THB (with respect to other currencies) has more to do with what is happening in the home country of that currency, not the Thai GOV.  The USD, for example, is largely tied to what's happening in the US, i.e., interest rates, the economy, trade, politics, etc.  The BOT can only try to minimize volatility, that's it.  I'm most interested in the USD for selfish reasons, and I recall the dollar going to 38 recently....mostly due to hefty interest rate hikes by the fed.  I had no idea it would tank to below 33 this quickly.  It seems inflation in the US is slowing, so the feds are also putting on the brakes.  What concerns me is the looming debt ceiling issue.  If the US were to default, no idea what that would do to the USD.  But I'm guessing it won't be good.   

I completely agree, the Baht is on the end of a piece of string that is being, no pun intended, yanked up and down by erratic Dollar value, which makes it even more bizarre that the Fed labels Thailand as a currency manipulator! That is of course not a currency issue, it is almost exclusively a trade issue which has currency implications downstream.

 

If you look at how the US DI is constructed and how it ends up with a rating of 102% (or whatever it is at the time), it's because that is the sum total of its trade weighted component currencies, GBP, EUR, JPY etc. The US DI soared to 115% because markets expected the Fed to do something but they didn't know what. Now that they know the limitations of what the Fed will do, ie a terminal rate of 5.5%, the DI has returned to its baseline value. So this reversion to the norm is not so much about the actions of the Fed but of markets reactions to what the Fed MIGHT do. The response to those things was that funds flowed out of the key currencies and into USD, now that the DI is back to normal they are flowing out once again....hence to 32 to 38 and back to 32.

 

Lastly the debt ceiling. I'm pretty sure that history will repeat, parts of government will close and subsequently the increase will be approved. I think the impact will be to send USD below 100, which is where it has been for all of the past 20 years, baring this recent hiccup when it went to 115. The net effect of THB? Dollar getting weaker, Baht getting stronger, BOT trying to weaken it, the Fed complaining about Thailand's manipulation....business as usual...is my guess.

[Phulublub]

1 hour ago, nigelforbes said:

Yes I agree. It's pure folly of course to try and predict short term interest rates but trying to establish direction. based on sound reasoning, is worth some effort. I said in a separate thread that I thought another poster was correct when he said he could see that Pound/Baht would reach 30 within ten years. That to me is not predicting exchange rates, that's about establishing trend and direction which is a different game entirely.

I agreew itht he main thrust of this.  Whether it reaches 30 in ten years or twenty is open to debate, but since the UK "mature" economy is in decline, while the Thai "third(?) world" economy is growing, there is only one way for the trend to go.

 

PH

[itsari]

Right now I see the baht strengthening.

How much longer is hard to say .

As a stab in the dark the exuberance on the baht  will deflate soon .

[nigelforbes]

Some more useful (real time delayed) links to see what's really going on with each pair.

 

https://finance.yahoo.com/quote/GBPTHB%3DX?p=GBPTHB%3DX

 

https://finance.yahoo.com/quote/THB%3DX?p=THB%3DX

 

https://finance.yahoo.com/quote/GBPUSD%3DX?p=GBPUSD%3DX

[Expat68]

I have given up trying to understand it????

[Lee65]

Fwiw, I have long noted a strong positive correlation between the strength of THB and my need to buy it.

[TucsonDavid]

Thanks Nigel for an informative and well written article. 

[Stevemercer]

Thanks for the comprehensive explanation.

 

What perplexes me about the Thai Baht is that the government seems to have no clear policy about whether they want a stronger/weaker Baht. The PM and senior Ministers often jawbone it up, while the central bank fiddles around to weaken it incrementally. Maybe the PM is haunted by the 1997 Baht crash and also has the nationalistic/third world view that a strong currency is good for the nation and reflects his own good governance.

 

Compare this to a typical Western country which will have a clear policy/government line (even if counter to the central bank). I come from Australia which, as an exporting nation, always maintains the mantra for a weaker Australia dollar so as to boost exports and (hopefully) dampen imports. I suspect a lower dollar is also a means of boosting government revenues whilst also promoting more spending within Australia, rather than overseas, by its citizens.

 

I would have thought that Thailand, as an exporting nation, would also talk the Baht down, but it rarely does. It surprises me that this lack of certainty doesn't harm the Baht. Maybe the Baht stays strong in the long run precisely because investors (and finance beauracrats) are certain that the government, in its heart, wants a strong Baht.

[digger70]

 

8 hours ago, Gottfrid said:

It´s nothing wrong with the baht. The only thing that is wrong, is people that complains over every dip. However, that´s just people who built their life on a too narrow budget.

Some people  have only a narrow budget ,they don't built there life on it they just have to manage. 

Not everyone has money to burn like you. Don't talk down on people.