Baht Slow And Steady Weakening...

[sonicdragon]

I don't see anything in the US economic picture that has improved which would justify an increase in USD vs other currencies. The fed did keep the interest rate the same but also recently pumped billions of dollars into the market to save creditors from going bankrupt. The war in Iraq, subprime fiasco, debt ridden nation. None of these have improved at all, why should the dollar go back up until they do? Whether or not the baht may decline is another story.

Maybe the emotional issues you mentioned have less to do with exchange rates than Fed shepherding.

My breadhead estimates calendar year real gross domestic product growth within a range of 2% to 2.8%. This suggests the monthly average of new jobs will remain in a range of 100k to 150k. If the average monthly new job figures fall, all the Fed has to do is reduce short-term interest rates in an effort to stimulate growth.

Due in part to the current exchange rate, US exports continue to expand at a brisk pace. Gotta be happy with that.

Without regard to the Fed's battle with perceived inflation, the core inflation readings remain excellent with the key personal consumption expenditure core index just 2% above the year ago level. The consumer price index core reading is 2.2% y-o-y, and the six-month annualized CPI core index is up only 2%. Headline inflation for the CPI is currently 2.7% y-o-y.

Before the usual nutters say the CPI is broken because the price of gas is going up but the CPI isn't, it's important to point out that higher energy prices do impact the energy and transportation sectors in the CPI, but consumers are drained of their discretionary spending power and therefore the aggregate impact on the CPI trends to be counter-inflationary over time. For this reason, higher energy prices have not led to higher core inflation.

Seems like a lot of good news to me. Even the shake-out in the stock market comes at the perfect time to weed out the weak.

You can wring your hands over the War in Iraq, the "sub-prime fiasco," or your other emotional issues all you want, but meanwhile I'll be making money!

You made some interesting comments. Putting aside the issues of core vs headline inflation, what do you think about the impact of hedonics, substitution and uni-directional inflation on reported US inflation ?

[sonicdragon]

Maybe I should have asked this question here instead of another topic: could international big players in the SET be exiting the Thai stock market because they need dollars to redeem their positions in other markets? In other words, has this worldwide credit crunch caused a demand for dollars and a glut of baht? Could the exchange ratio actually be affected by supply and demand for once?

I believe that to be true. As discussed in another thread not so long ago, an unwind of the yen-carry trade will lead to a weakening of the baht onshore and a narrowing of the onshore/offshore premium.

Edited August 17, 2007 by sonicdragon

[JaiGuru]

Putting aside the issues of core vs headline inflation, what do you think about the impact of hedonics, substitution and uni-directional inflation on reported US inflation ?

Personally, I don’t really think much of them at all… Not even Substitution.

[sonicdragon]

Putting aside the issues of core vs headline inflation, what do you think about the impact of hedonics, substitution and uni-directional inflation on reported US inflation ?

Personally, I don't really think much of them at all… Not even Substitution.

Are you saying you don't think there is much impact or you don't think much of them per se ?

[Jimjim]

Huge drop in the onshore baht now. It'd be cool if it got to 36, but whatever. Who knows?

[samran]

Maybe I should have asked this question here instead of another topic: could international big players in the SET be exiting the Thai stock market because they need dollars to redeem their positions in other markets? In other words, has this worldwide credit crunch caused a demand for dollars and a glut of baht? Could the exchange ratio actually be affected by supply and demand for once?

I believe that to be true. As discussed in another thread not so long ago, an unwind of the yen-carry trade will lead to a weakening of the baht onshore and a narrowing of the onshore/offshore premium.

Yeah, I think I started at least one topic on that. I think you said Sonic, that loss of confidence would be the main reason for the trades to unwind. I though that the loss of confidence would come from China though, rather than the US....

As for the unwinding, it appears to be a double whammy. Good stocks were sold to cover positions, as well as people pulling their money out of bad ones.

[Carmine6]

Huge drop in the onshore baht now. It'd be cool if it got to 36, but whatever. Who knows?

Offshore is also closing the gap with onshore. Around 33.4 now offshore.

[sonicdragon]

Maybe I should have asked this question here instead of another topic: could international big players in the SET be exiting the Thai stock market because they need dollars to redeem their positions in other markets? In other words, has this worldwide credit crunch caused a demand for dollars and a glut of baht? Could the exchange ratio actually be affected by supply and demand for once?

I believe that to be true. As discussed in another thread not so long ago, an unwind of the yen-carry trade will lead to a weakening of the baht onshore and a narrowing of the onshore/offshore premium.

Yeah, I think I started at least one topic on that. I think you said Sonic, that loss of confidence would be the main reason for the trades to unwind. I though that the loss of confidence would come from China though, rather than the US....

As for the unwinding, it appears to be a double whammy. Good stocks were sold to cover positions, as well as people pulling their money out of bad ones.

Always expect the unexpected ! But seriously, I do think that the unexpected effects of what is happening now will dwarf the expected ones.

[samran]

Always expect the unexpected ! But seriously, I do think that the unexpected effects of what is happening now will dwarf the expected ones.

confused by what you mean?

My personal (well not so personal - ripped off from others) is that as the smoke clears will get a better idea of who the stars are and who the duds are, and the markets perception of price is actually in line with the 'fair' value of the underlying business. I'd much perfer things to be transparent that surrounded by a a bunch of hype and exuberance...

[sonicdragon]

Huge drop in the onshore baht now. It'd be cool if it got to 36, but whatever. Who knows?

Offshore is also closing the gap with onshore. Around 33.4 now offshore.

It's not outside the realms of possibility that, after the dust of the current strorm settles, there could be concerted activity towards dislodging apparently overvalued currencies. I wouldn't be surprised to see 36 in the coming weeks. But as you said, who knows !?

[lannarebirth]

Always expect the unexpected ! But seriously, I do think that the unexpected effects of what is happening now will dwarf the expected ones.

confused by what you mean?

My personal (well not so personal - ripped off from others) is that as the smoke clears will get a better idea of who the stars are and who the duds are, and the markets perception of price is actually in line with the 'fair' value of the underlying business. I'd much perfer things to be transparent that surrounded by a a bunch of hype and exuberance...

You think you do, but believe me you do not. Publicly traded companies trade at multiples of what well run, profitable, privately owned companies would sell for. Without the exhuberance and hype, and the lack of choices in retirement schemes, stock prices would fall dramatically.

[Naam]

Huge drop in the onshore baht now. It'd be cool if it got to 36, but whatever. Who knows?

don't hold your breath Jim. what we are seeing since a few days is not Baht weakness but Dollar strength (except vs. JP¥). the jury is still out whether this dollar strength is temporary or lasting.

[highdiver]

Huge drop in the onshore baht now. It'd be cool if it got to 36, but whatever. Who knows?

don't hold your breath Jim. what we are seeing since a few days is not Baht weakness but Dollar strength (except vs. JP¥). the jury is still out whether this dollar strength is temporary or lasting.

now it all depends what the FEDs will do. if all those investors are going toredeem the funds into cash there will be a very high demand for the USD.

Confucius say... may you live in intersting times...

[sonicdragon]

Always expect the unexpected ! But seriously, I do think that the unexpected effects of what is happening now will dwarf the expected ones.

confused by what you mean?

My personal (well not so personal - ripped off from others) is that as the smoke clears will get a better idea of who the stars are and who the duds are, and the markets perception of price is actually in line with the 'fair' value of the underlying business. I'd much perfer things to be transparent that surrounded by a a bunch of hype and exuberance...

What I mean is that conventional economic thinking predicts outcomes from "certain events", but in the current situation there will be outomes that the models don't predict. Models are not good at dealing with large rapid movements in their inputs (and neither are real economies). This is why quant funds are having a tough time at the moment - and why LTCM went bust in 98. There are some models, such as self-organising criticality, that try handle these things, but they are not easily applied to economics and financial markets. Anyway, that's getting off the point. In addition to the problem just mentioned, we don't even know (at the moment) what "certain events" are, so that makes the outcomes even more unpredictable, and this is the point you are making I believe, so I would agree with you there.

[lannarebirth]

Huge drop in the onshore baht now. It'd be cool if it got to 36, but whatever. Who knows?

don't hold your breath Jim. what we are seeing since a few days is not Baht weakness but Dollar strength (except vs. JP¥). the jury is still out whether this dollar strength is temporary or lasting.

That's right Dr. Naam. The $USD index while apparently exhibiting strength, actuall fell yesterday, given the yens rise, at a point of resistance it has for a long time been unable to overcome.

http://stockcharts.com/h-sc/ui?s=$USD...&a=63893762

Closeup version:

http://stockcharts.com/h-sc/ui?s=$USD...&a=63893762

[JaiGuru]

Are you saying you don't think there is much impact or you don't think much of them per se ?

The BLS's numbers suit me just fine; I don't believe in super-secret inflation.

But on the other hand, one might make the arguement that the Fed does... Or did, anyway...

[bangkoksingapore]

the Feds lowered the interest rate, doesn't that mean that dollar is weaker?

[sonicdragon]

the Feds lowered the interest rate, doesn't that mean that dollar is weaker?

They have lowered the discount rate, not the fed funds target rate. Anyway, lowering rates does not necessarily lead to a weaker dollar, if the lower rates keep the economy motoring along without stoking inflation expectations.

[VegasVic]

the Feds lowered the interest rate, doesn't that mean that dollar is weaker?

They have lowered the discount rate, not the fed funds target rate. Anyway, lowering rates does not necessarily lead to a weaker dollar, if the lower rates keep the economy motoring along without stoking inflation expectations.

You are correct Sonic, but I would expect that there will be a cut in the FED funds rate at the September FOMC meeting as the market has already discounted a 50 basis point reductuion. Hank Paulson was talking about a strong dollar policy on Friday, but who knows if he really means it this time or it is just more public posturing. One thing is for certain and that is that there has been a flight to the U.S. dollar over the past week since this mini crisis started so I would imagine for the next few weeks that the dollar has a good chance to make some more gains.

[sonicdragon]

the Feds lowered the interest rate, doesn't that mean that dollar is weaker?

They have lowered the discount rate, not the fed funds target rate. Anyway, lowering rates does not necessarily lead to a weaker dollar, if the lower rates keep the economy motoring along without stoking inflation expectations.

You are correct Sonic, but I would expect that there will be a cut in the FED funds rate at the September FOMC meeting as the market has already discounted a 50 basis point reductuion. Hank Paulson was talking about a strong dollar policy on Friday, but who knows if he really means it this time or it is just more public posturing. One thing is for certain and that is that there has been a flight to the U.S. dollar over the past week since this mini crisis started so I would imagine for the next few weeks that the dollar has a good chance to make some more gains.

I think the "flight" to the USD is more a function of repatriation of capital, than a flight to quality. the USD is still structurally weak.

Obviously (to me) the Fed has a very tricky tightrope to walk here. It will not take much for there to be a major flight out of the USD. Obviously they are hoping for a post LTCM situation. The main thing on the USDs side is, perversely, this: if you want to short the dollar, what do you buy ? I suppose the obvious candidates will be AUD, NZD and CAD again, but these all have their own problems, and EUR and GBP there's too.

For me, I'm keeping my core currency exposure in a basket of currencies, including USD, AUD, EUR, JPY, THB, and CNY, while trading on the margins.

[JaiGuru]

I think the "flight" to the USD is more a function of repatriation of capital, than a flight to quality.

A flight to saftey instead of a flight to quality?

[sonicdragon]

I think the "flight" to the USD is more a function of repatriation of capital, than a flight to quality.

A flight to saftey instead of a flight to quality?

That's not what I meant. Significants sums were put to work by US-based investors in non-USD denominated assets. Some of those investments were sold and the US$ repatriated in a short space of time, hence the spike in the $ and in the t-bill market.

[highdiver]

I think the "flight" to the USD is more a function of repatriation of capital, than a flight to quality.

A flight to saftey instead of a flight to quality?

That's not what I meant. Significants sums were put to work by US-based investors in non-USD denominated assets. Some of those investments were sold and the US$ repatriated in a short space of time, hence the spike in the $ and in the t-bill market.

totaly true.