Why Is The Thai Baht So Strong?

[Beechboy]

The sheer cost of the recent upheavals will eventually put the economy of the country under pressure. Whether it be the cost of re-building Bangkok, the total loss of meaningful tourism or the evaporation of foreign investment, such as exemplified by Honda today. Exports have suffered as competitors take advantage of the current distractions, inward investment has stalled. I could go on. You could.

The destruction of a country is expensive. It has hardly started yet. This problem will not disappear overnight. In addition, Thailand was a bit of a "house of cards," very reliant upon ephemeral conditions. The premises were always slightly unsound.

The Bank of Thailand can manipulate all they want. Eventually the pay-day will arrive.

They can be in denial, pretending things will soon reach normality, for as long as they want.

The country now faces potential financial ruin and possible depression. The baht will likely deteriorate in value because only foreign money can pay for it all.

For how much longer can the Governement be the paymaster for the consequences of this strife. It started with paying hotel bills for stranded tourists during the yellow's seiges. Then they subsidised the whole Tourist Industry. Now we have compensation for this that and the other. Now the cost of uninsured re-building, clear-ups, army pay, police pay, transport losses, work-day losses. The cost is massive and Thailand cannot survive it without undermining the economy as a whole. To assist, the Democrats will have to squeeze Draconian taxes from their own supporters, and think of the trouble that will cause.

The Reds may have lost the fight on the streets , but they have changed Thailand forever. The recent troubles although restricted to a smallish, yet vital, area of Bkk. are not really localised. Are they?

The BoT will be the first to see the difference.

I am sorry to be the profit of doom, but you could count on the fingers of just two hands other countries in this World that have the equivalent intrinsic problems as exist in the LOS.

[Time Traveller]

In summary, BOT controls thai baht, Of course this is only 1 mans opinion but to me it does sound right on the spot.

The following is a report by Bloomberg http://www.bloomberg...YVMcWYs.A&pos=3

Losses in the baht may be limited because the central bank controls speculative trading and limits transactions from corporations and investors, according to Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo.

Daily Cap

The Bank of Thailand sets a daily cap of 300 million baht for trading accounts held by non-residents, such as overseas corporations, funds and banks, for investments in securities and other financial instruments. A similar limit is also set for non-investment accounts.[/b]

I think you misunderstand the meaning of this comment. Actually it was written poorly, but I believe the comment was intended to mean that the Central bank LIMIT speculative trading. Not control. In any case if your theory was true., ie. the BoT are intervening in the market to make the THB stronger than what it should be - that is they are buying THB (selling USD) - then this would show up in falling foreign reserves. However, official stats show otherwise. FX reserves are rising, implying that the BoT have indeed been intervening, but not trying to make THB stronger, they have been trying to make it weaker through selling THB on the market (and buying USD).

Of course cynics will argue that they just "make up" the official figures. To that comment I would reply that if what you claim is true, then obviously the day will come when they run out of USD dollars to sell (in order to buy up THB) then the THB will crash back to a level where market deems appropriate. You can believe that if you want, but I think I'll believe the official figures for a little longer.

Greece has been caught out for massaging figures; why do you suppose Thailand is more trustworthy? I am not sure it is cynical to assume the figures are doctored. It may be a more realistic interpretation. I assume you accept that information is controlled in Thailand whether that is newsprint, tv or government figures.

caf

I don't assume that they are more trustworthy, only trying to identify why the baht is maintaining strenght. People can believe all the conspiracy theories they want to believe. The only valid reason why it is so strong (I don't believe that it is) is because more money is flowing INTO the country than is going out. The trend across East Asia is trade surpluses, countries with rising FX reserves and stronger currencies. I'm not saying that there is some magical Thai economic wisdom at play. Just that global economics up until now are favouring exporting countries. The BoT figures appear to confirm what everyone is seeing. Therefore, I do place some faith in the accuracy of these statistics.

Edited May 20, 2010 by Time Traveller

[Beechboy]

Re: My previous.

I have just read that the cost of reparation will shave the gdp by 0.5%.

As this is a government department assessment, it can realistically be doubled (ahem.) Really too early to estimate in any case and likely the destruction will carry on.

This is massive, ie. a Country having to take a step backwards during the aftermath of a World Recession and when everything should be full steam ahead.

Watch the baht drift a little downwards as the costs mount.

Edited May 20, 2010 by Beechboy

[mommysboy]

I'm told it's about fundamentals, Thailand has plenty of reserves, a positive balance of payments, and Asia is riding a wave.

But, yes like many posters I'm wary of Thai figures.

Clearly Thailand also has massive social problems that can only be solved by a welfare state, and I think it now needs to borrow a lot, and I reckon there will be little investment in the future, this may be as good as it gets for Thailand.

[caf]

In summary, BOT controls thai baht, Of course this is only 1 mans opinion but to me it does sound right on the spot.

The following is a report by Bloomberg http://www.bloomberg...YVMcWYs.A&pos=3

Losses in the baht may be limited because the central bank controls speculative trading and limits transactions from corporations and investors, according to Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo.

Daily Cap

The Bank of Thailand sets a daily cap of 300 million baht for trading accounts held by non-residents, such as overseas corporations, funds and banks, for investments in securities and other financial instruments. A similar limit is also set for non-investment accounts.[/b]

I think you misunderstand the meaning of this comment. Actually it was written poorly, but I believe the comment was intended to mean that the Central bank LIMIT speculative trading. Not control. In any case if your theory was true., ie. the BoT are intervening in the market to make the THB stronger than what it should be - that is they are buying THB (selling USD) - then this would show up in falling foreign reserves. However, official stats show otherwise. FX reserves are rising, implying that the BoT have indeed been intervening, but not trying to make THB stronger, they have been trying to make it weaker through selling THB on the market (and buying USD).

Of course cynics will argue that they just "make up" the official figures. To that comment I would reply that if what you claim is true, then obviously the day will come when they run out of USD dollars to sell (in order to buy up THB) then the THB will crash back to a level where market deems appropriate. You can believe that if you want, but I think I'll believe the official figures for a little longer.

Greece has been caught out for massaging figures; why do you suppose Thailand is more trustworthy? I am not sure it is cynical to assume the figures are doctored. It may be a more realistic interpretation. I assume you accept that information is controlled in Thailand whether that is newsprint, tv or government figures.

caf

I don't assume that they are more trustworthy, only trying to identify why the baht is maintaining strenght. People can believe all the conspiracy theories they want to believe. The only valid reason why it is so strong (I don't believe that it is) is because more money is flowing INTO the country than is going out. The trend across East Asia is trade surpluses, countries with rising FX reserves and stronger currencies. I'm not saying that there is some magical Thai economic wisdom at play. Just that global economics up until now are favouring exporting countries. The BoT figures appear to confirm what everyone is seeing. Therefore, I do place some faith in the accuracy of these statistics.

You seem to make some good points but you are not reading other posters points of view so you do not have a full analysis.

There is also a clear contradiction in your saying:

"I don't assume that they are more trustworthy", and " I do place some faith in the accuracy of these statistics." You are responding and making your analysis on the assumption all the facts you are using are true and accurate. In Thailand that is unlikely.

It is not only the BOT who are selling reserves and buying baht of course. And no-one knows the extent of that ( other than those doing it )

caf

[caf]

I'm told it's about fundamentals, Thailand has plenty of reserves, a positive balance of payments, and Asia is riding a wave.

But, yes like many posters I'm wary of Thai figures.

Clearly Thailand also has massive social problems that can only be solved by a welfare state, and I think it now needs to borrow a lot, and I reckon there will be little investment in the future, this may be as good as it gets for Thailand.

The reserves are being sold to buy baht by the container load. But your main premise that we need to be wary of Thai figures is absolutely right.

Some of the points posters are making are based on the fact that the figures being qouted are accurate. In Thailand that is unlikely to be true. It's not so much that the baht will crash but that the big boys will at some time reverse their selling of foreign reserves to purchases. I don't know when. But that's when the baht dollar rate will change.

caf

[caf]

You are perhaps right in one respect. The intervention to try to stop the appreciation of the baht has essentially created massive losses for the BoT and the country.

The BoT losses are largely illusory since the balance sheet show these losses in THB. But since the FX reserves are rising (using the base as USD) then you could also argue that BoT has accumulated wealth for the country in the form of FX reserves. Since the BoT also has the power to influence the supply of money (Baht) in the economy, then in reality any such losses are meaningless.

Absolutely wrong and again missing the point that has been made to you several times.

First, the impossible triangle is that you cannot control your exchange rate and your money supply together without capital controls. Without significant capital controls you are left with with controlling one or other. The whole point is that if the BoT had sold its forex reserves rather than accumulating them it would have to increase in the money supply.

If you look at the balance sheet. You will see that the BoT has a massive short in Thai baht - say US$70bn. They effectively depressed money supply by 19% or so. In other words they have tried to control the exchange rate through reducing the money supply.

So currently the BoT has 19% of MS on its balance sheet doing nothing. In a simple equation 0.81 (M based on baht) v = P (in baht) Q. Now lets assume there is only dollar reserves. To repay its borrowings the BoT could sell US$ reserves and buy baht until M appreciates and P in nominal terms remains unchanged or it could simply print money which would essentially appreciate the baht through domestic inflation at the same exchange rate.

Hi Abrack - I think what you are saying is Thailand is spending its massive USD FX reserves - is that a true assement of your thoughts?

A much clearer way of putting it. Hope Abrak comes back on this but more clearly

[Time Traveller]

I don't assume that they are more trustworthy, only trying to identify why the baht is maintaining strenght. People can believe all the conspiracy theories they want to believe. The only valid reason why it is so strong (I don't believe that it is) is because more money is flowing INTO the country than is going out. The trend across East Asia is trade surpluses, countries with rising FX reserves and stronger currencies. I'm not saying that there is some magical Thai economic wisdom at play. Just that global economics up until now are favouring exporting countries. The BoT figures appear to confirm what everyone is seeing. Therefore, I do place some faith in the accuracy of these statistics.

You seem to make some good points but you are not reading other posters points of view so you do not have a full analysis.

There is also a clear contradiction in your saying:

"I don't assume that they are more trustworthy", and " I do place some faith in the accuracy of these statistics." You are responding and making your analysis on the assumption all the facts you are using are true and accurate. In Thailand that is unlikely.

It is not only the BOT who are selling reserves and buying baht of course. And no-one knows the extent of that ( other than those doing it )

This is not a contradiction. If you read all of it you will see I start with a theory, look at the data and then make a conclusion. This is how all theories are tested.

Here are 5 reasons as supporting evidence for the “apparent” THB strength

1. Trade Surplus

2. FX reserves & low debt to GDP compared with other countries

3. Foreign Investment flows into Emerging markets (Thailand is one of these)

4. Growing export income as seen in Electronics and Autos production/export numbers and higher prices for key agricultural exports. (Rubber, Sugar, Palm oil, even rice to a lesser extend)

5. Weakness in GBP, EUR make it seem as if the THB is strong. But comparing THB against the USD it was stronger back in 2007 than it is now.

Conclusion: the Thai economy is in a fundamentally stronger position than than Western economies. The BoT figures just reflect this.

If some people only want to believe that the BoT are making the baht stronger, that FX reserves are really falling as BoT is frantically buying Baht and Government data is all wrong. If this is your theory then where is the data to prove this and what is their motive?…..What possible reason would the BoT want to make their economy less competitive?

You have have come to a conclusion with just hearsay (we can't trust them, they're thai) and you can't even provide a reason why the BoT would want to make the Baht stronger. Your logic is flawed.

[Time Traveller]

I have just read that the cost of reparation will shave the gdp by 0.5%.

As this is a government department assessment, it can realistically be doubled (ahem.)

I’m not exactly sure what you’re saying but it is in the Govt’s own interest to overstate the damage to economic growth. This way they can blame the Red shirts when the economy performs poorly. If the economy does return to normal then they can say it’s their great economic management despite the turmoil.

[caf]

I don't assume that they are more trustworthy, only trying to identify why the baht is maintaining strenght. People can believe all the conspiracy theories they want to believe. The only valid reason why it is so strong (I don't believe that it is) is because more money is flowing INTO the country than is going out. The trend across East Asia is trade surpluses, countries with rising FX reserves and stronger currencies. I'm not saying that there is some magical Thai economic wisdom at play. Just that global economics up until now are favouring exporting countries. The BoT figures appear to confirm what everyone is seeing. Therefore, I do place some faith in the accuracy of these statistics.

You seem to make some good points but you are not reading other posters points of view so you do not have a full analysis.

There is also a clear contradiction in your saying:

"I don't assume that they are more trustworthy", and " I do place some faith in the accuracy of these statistics." You are responding and making your analysis on the assumption all the facts you are using are true and accurate. In Thailand that is unlikely.

It is not only the BOT who are selling reserves and buying baht of course. And no-one knows the extent of that ( other than those doing it )

This is not a contradiction. If you read all of it you will see I start with a theory, look at the data and then make a conclusion. This is how all theories are tested.

Here are 5 reasons as supporting evidence for the “apparent” THB strength

1. Trade Surplus

2. FX reserves & low debt to GDP compared with other countries

3. Foreign Investment flows into Emerging markets (Thailand is one of these)

4. Growing export income as seen in Electronics and Autos production/export numbers and higher prices for key agricultural exports. (Rubber, Sugar, Palm oil, even rice to a lesser extend)

5. Weakness in GBP, EUR make it seem as if the THB is strong. But comparing THB against the USD it was stronger back in 2007 than it is now.

Conclusion: the Thai economy is in a fundamentally stronger position than than Western economies. The BoT figures just reflect this.

If some people only want to believe that the BoT are making the baht stronger, that FX reserves are really falling as BoT is frantically buying Baht and Government data is all wrong. If this is your theory then where is the data to prove this and what is their motive?…..What possible reason would the BoT want to make their economy less competitive?

You have have come to a conclusion with just hearsay (we can't trust them, they're thai) and you can't even provide a reason why the BoT would want to make the Baht stronger. Your logic is flawed.

AS i said and I say again you make some good points but:

"The BoT figures just reflect this." You assume the accuracy of the BOT figures.

"we can't trust them, they're thai" I think you're putting words into peoples mouths here.

Were you here in 1979 when a great deal of money was made in a similar scenario.

As I implied, I don't fault your technical analysis but we live in a real world.

[aussiebebe]

I agree strongly with what 'Time Traveller' wrote:

5. Weakness in GBP, EUR make it seem as if the THB is strong. But comparing THB against the USD it was stronger back in 2007 than it is now.

I think that's spot on and is highly relevant in revealing the OP's bias for starting this thread. They were really trying to ask why Sterling is weak, not about the strength of the Baht. The strength of the export sector is certainly bolstering the baht, but the baht/Euro and baht/Sterling exchange rates infer little about the Thai economy.

[Time Traveller]

"The BoT figures just reflect this." You assume the accuracy of the BOT figures.

"we can't trust them, they're thai" I think you're putting words into peoples mouths here.

Were you here in 1979 when a great deal of money was made in a similar scenario.

As I implied, I don't fault your technical analysis but we live in a real world.

Putting words in peoples mouths perhaps, but you still have not offered any reason not to trust BoT figures.

What we can see is the rate at which the baht is trading now. What we can see is the rate where other asian currencies are trading at. What we can see is a crisis in Europe over indebtedness. What we can see is the market price of commodities such as Rubber, Palm oil, sugar, rice rising. What we can see are Automotive company production figures in thailand and so forth. None of these are "made up" by the Bank of Thailand as you seem to imply that the Trade data, FX reserves, national accounts are.

The common trend is that Asian exporting economies are currently benefiting from the recent rebound in global trade. Thailand is one of them - and the reason for a strong currency. Conspiracy theories that really Thailand exports nothing, the country is in debt more than Greece, that BoT has almost used up all of the FX reserves to buy up the Baht and destroy it's export industry in the process. Yes this is possible. But you'd have to be crazy to believe it.

Edited May 21, 2010 by Time Traveller

[caf]

"The BoT figures just reflect this." You assume the accuracy of the BOT figures.

"we can't trust them, they're thai" I think you're putting words into peoples mouths here.

Were you here in 1979 when a great deal of money was made in a similar scenario.

As I implied, I don't fault your technical analysis but we live in a real world.

Putting words in peoples mouths perhaps, but you still have not offered any reason not to trust BoT figures.

What we can see is the rate at which the baht is trading now. What we can see is the rate where other asian currencies are trading at. What we can see is a crisis in Europe over indebtedness. What we can see is the market price of commodities such as Rubber, Palm oil, sugar, rice rising. What we can see are Automotive company production figures in thailand and so forth. None of these are "made up" by the Bank of Thailand as you seem to imply that the Trade data, FX reserves, national accounts are.

The common trend is that Asian exporting economies are currently benefiting from the recent rebound in global trade. Thailand is one of them - and the reason for a strong currency. Conspiracy theories that really Thailand exports nothing, the country is in debt more than Greece, that BoT has almost used up all of the FX reserves to buy up the Baht and destroy it's export industry in the process. Yes this is possible. But you'd have to be crazy to believe it.

[caf]

"Conspiracy theories that really Thailand exports nothing, the country is in debt more than Greece, that BoT has almost used up all of the FX reserves to buy up the Baht and destroy it's (sic) export industry in the process"

No one said any of this.

"but you still have not offered any reason not to trust BoT figures."

Well some people believe everything they read, some don't. This is Thailand

Edited May 21, 2010 by caf

[Gambles]

You are perhaps right in one respect. The intervention to try to stop the appreciation of the baht has essentially created massive losses for the BoT and the country.

The BoT losses are largely illusory since the balance sheet show these losses in THB. But since the FX reserves are rising (using the base as USD) then you could also argue that BoT has accumulated wealth for the country in the form of FX reserves. Since the BoT also has the power to influence the supply of money (Baht) in the economy, then in reality any such losses are meaningless.

Absolutely wrong and again missing the point that has been made to you several times.

First, the impossible triangle is that you cannot control your exchange rate and your money supply together without capital controls. Without significant capital controls you are left with with controlling one or other. The whole point is that if the BoT had sold its forex reserves rather than accumulating them it would have to increase in the money supply.

If you look at the balance sheet. You will see that the BoT has a massive short in Thai baht - say US$70bn. They effectively depressed money supply by 19% or so. In other words they have tried to control the exchange rate through reducing the money supply.

So currently the BoT has 19% of MS on its balance sheet doing nothing. In a simple equation 0.81 (M based on baht) v = P (in baht) Q. Now lets assume there is only dollar reserves. To repay its borrowings the BoT could sell US$ reserves and buy baht until M appreciates and P in nominal terms remains unchanged or it could simply print money which would essentially appreciate the baht through domestic inflation at the same exchange rate.

Hi Abrack - I think what you are saying is Thailand is spending its massive USD FX reserves - is that a true assement of your thoughts?

I think that he was saying the opposite - that over the last few years the BoT has accumulated huge Forex (it's actually mainly but not exclusively USD but Abrak was simplifying to make a point) reserves - by selling Baht and buying Forex. So the Bot has been undermining Baht strength to stop it getting too strog and in the process built huge reserves.

It is true that some of these reserves may be depleted now if there is a run on the Baht which is most likley for political not economic reasons and there is a need to suggest a sense of order but this would most likely be short term and a very small dent in a huge pile which would then continue growing.

[chiang mai]

Central banks usually amass large foriegn currency reserves through boyant exports rather than via intervention, BOT reserves are circa USD 150 bill and I think you'll find this is a function of them settling their export bills in USD rather than proactive intervention to restrain Baht growth - it's the same end point but the mechanics are slightly different.

[Murf]

Anyone care to speculate when the THB GBP exchange rate will get back to 50THB = 1GBP (or dare i say, higher?)

It currently lies at 46THB = 1GBP

[Naam]

Anyone care to speculate when the THB GBP exchange rate will get back to 50THB = 1GBP (or dare i say, higher?)

it will strengthen before Christmas. which year? how would i know?

[TokyoT]

Why is the Thai baht so strong?

I'd say a large part of it is the relative weakness of other curriencies more so then the strength of the Thai baht.

But then again there is this:

http://www.canadianbusiness.com/markets/he...ontent=b3445537

Thai economy grows at fastest pace in 15 years in 1Q but unrest expected to crimp expansion

BANGKOK - Thailand's economy grew at its fastest pace in 15 years in the first quarter as exports recovered but the country's worst political violence in decades is likely to crimp expansion over the rest of the year.

Gross domestic product expanded 12 per cent over a year earlier in the January-March quarter, boosted by the global economic recovery, the government's economic planning agency said Monday.

Despite calling the first quarter "outstanding", the agency left its growth forecast for the year unchanged at a range of 3.5 per cent to 4.5 per cent, citing political instability and risks to the global economy from Europe's debt crisis.

[Abrak]

I slightly gave up on this thread because it seemed I couldnt adequately explain a concept that is so inherently simple.

So I will try again....

Here is Wikipedia on sterilization....

Sterilization in macroeconomics refers to open market operations undertaken by a country's central bank (CB) whose aim is to neutralize the impact of associated foreign exchange operations.[1]

Most often sterilization is used in the context of a central bank which takes actions to negate potentially harmful impacts of capital inflows, such as currency appreciation, loss of export competitiveness and inflation. Occasionally it may refer to any form of monetary policy which seeks to leave the domestic money supply unchanged in the face of shocks or other changes, including capital outflows.

Central banks use sterilization to eliminate negative side-effects of their intervention in foreign exchange markets. For example, assume that a country's currency is depreciating. To prevent this the country's central bank may decide to intervene in the foreign exchange market of the country. To prop up the value of the nation's currency the CB may resort to creating artificial demand for its currency. This it may do by selling foreign exchange reserves and buying local currency. The resultant demand stops the currency's depreciation but decreases the amount of liquidity in the local economy (the amount of local currency held by banks, credit unions, businesses, individuals, etc). Hence, to offset this negative outcome the CB may engage in open market operations that supply liquidity into the system (by buying local-currency-denominated bonds), thereby "sterilizing" the negative effect of its foreign exchange intervention

Now simply reverse the last paragraph....

For example, assume that a country's currency is appreciating. To prevent this the country's central bank may decide to resort to intervene in the foreign exchange market of the country. To depress the value of the nations's currency the CB may resort to creating artificial supply for its currency. This it may do by buying foreign exchange reserves and selling local currency. The resultant supply stops the currency appreciating but increases the amount of liquidity in the local market (the amount of local currency held by banks, credit unions, businesses, individuals etc.). Hence, to offest this negative outcome the CB may engage in open market operations that decreases liquidity into the system (by selling local-currency-denominated bonds), thereby 'sterilizing' the negative effect of its foreign exchange intervention.

Simply the BoT is short baht - long reserves. It can only unwind by issuing baht into the domestic MS and creating inflation or allowing the baht to appreciate as others buy US dollars and sell baht to repay the bonds.

[jesimps]

I slightly gave up on this thread because it seemed I couldnt adequately explain a concept that is so inherently simple.

So I will try again....

Here is Wikipedia on sterilization....

Sterilization in macroeconomics refers to open market operations undertaken by a country's central bank (CB) whose aim is to neutralize the impact of associated foreign exchange operations.[1]

Most often sterilization is used in the context of a central bank which takes actions to negate potentially harmful impacts of capital inflows, such as currency appreciation, loss of export competitiveness and inflation. Occasionally it may refer to any form of monetary policy which seeks to leave the domestic money supply unchanged in the face of shocks or other changes, including capital outflows.

Central banks use sterilization to eliminate negative side-effects of their intervention in foreign exchange markets. For example, assume that a country's currency is depreciating. To prevent this the country's central bank may decide to intervene in the foreign exchange market of the country. To prop up the value of the nation's currency the CB may resort to creating artificial demand for its currency. This it may do by selling foreign exchange reserves and buying local currency. The resultant demand stops the currency's depreciation but decreases the amount of liquidity in the local economy (the amount of local currency held by banks, credit unions, businesses, individuals, etc). Hence, to offset this negative outcome the CB may engage in open market operations that supply liquidity into the system (by buying local-currency-denominated bonds), thereby "sterilizing" the negative effect of its foreign exchange intervention

Now simply reverse the last paragraph....

For example, assume that a country's currency is appreciating. To prevent this the country's central bank may decide to resort to intervene in the foreign exchange market of the country. To depress the value of the nations's currency the CB may resort to creating artificial supply for its currency. This it may do by buying foreign exchange reserves and selling local currency. The resultant supply stops the currency appreciating but increases the amount of liquidity in the local market (the amount of local currency held by banks, credit unions, businesses, individuals etc.). Hence, to offest this negative outcome the CB may engage in open market operations that decreases liquidity into the system (by selling local-currency-denominated bonds), thereby 'sterilizing' the negative effect of its foreign exchange intervention.

Simply the BoT is short baht - long reserves. It can only unwind by issuing baht into the domestic MS and creating inflation or allowing the baht to appreciate as others buy US dollars and sell baht to repay the bonds.

Sounds logical to me, why can't the UK do this, or do we want our currency to remain weak?

[Abrak]

Sounds logical to me, why can't the UK do this, or do we want our currency to remain weak?

Well, I dont think that with the UK's fiscal deficit they are too worried about sterilizing excess capital inflows. More how to encourage capital inflows without increasing interest rates.

Essentially why sterilization was an inherently useless and costly idea is because I find any policy aimed at stopping the appreciation of the baht over the last few years, when compared to the UK and US, simply totally unviable. I will admit though that all out civil war would be perhaps the best and least costly option that the BoT could have pursued.

[badge]

Simply the BoT is short baht - long reserves. It can only unwind by issuing baht into the domestic MS and creating inflation or allowing the baht to appreciate as others buy US dollars and sell baht to repay the bonds.

I can appreciate that, but Im not sure I can believe that foreign flows are so strong?

In an open, free market, would USDTHB still be 32?

I have doubts.

In the last few weeks THBs regional peers have all lost ground to a very sprightly USD, yet THB has hardly budged, even with all its unique challenges thrown in for good measure.

I reckon a day will come when the BoT simply decide to rerate the THB, to become more competitive?

[badge]

Ive been refering to this graph for as long as Ive been on TV.

Id suggest a 'worst case scenario' for those not denominated in THB is a retest of the 29 rate seen in '07.

I believe that in time the exchange rate will start moving higher; whether encouraged by market forces(?) or the BoT mavericks deciding overnight to do something outlandish

[rizla]

So I will try again....

Here is Wikipedia on sterilization....

Sterilization in macroeconomics refers to open market operations undertaken by a country's central bank (CB) whose aim is to neutralize the impact of associated foreign exchange operations.[1]

Most often sterilization is used in the context of a central bank which takes actions to negate potentially harmful impacts of capital inflows, such as currency appreciation, loss of export competitiveness and inflation. Occasionally it may refer to any form of monetary policy which seeks to leave the domestic money supply unchanged in the face of shocks or other changes, including capital outflows.

Central banks use sterilization to eliminate negative side-effects of their intervention in foreign exchange markets. For example, assume that a country's currency is depreciating. To prevent this the country's central bank may decide to intervene in the foreign exchange market of the country. To prop up the value of the nation's currency the CB may resort to creating artificial demand for its currency. This it may do by selling foreign exchange reserves and buying local currency. The resultant demand stops the currency's depreciation but decreases the amount of liquidity in the local economy (the amount of local currency held by banks, credit unions, businesses, individuals, etc). Hence, to offset this negative outcome the CB may engage in open market operations that supply liquidity into the system (by buying local-currency-denominated bonds), thereby "sterilizing" the negative effect of its foreign exchange intervention

Now simply reverse the last paragraph....

For example, assume that a country's currency is appreciating. To prevent this the country's central bank may decide to resort to intervene in the foreign exchange market of the country. To depress the value of the nations's currency the CB may resort to creating artificial supply for its currency. This it may do by buying foreign exchange reserves and selling local currency. The resultant supply stops the currency appreciating but increases the amount of liquidity in the local market (the amount of local currency held by banks, credit unions, businesses, individuals etc.). Hence, to offest this negative outcome the CB may engage in open market operations that decreases liquidity into the system (by selling local-currency-denominated bonds), thereby 'sterilizing' the negative effect of its foreign exchange intervention.

Simply the BoT is short baht - long reserves. It can only unwind by issuing baht into the domestic MS and creating inflation or allowing the baht to appreciate as others buy US dollars and sell baht to repay the bonds.

So we are stuffed until the Uk/US economies grow, or thailand runs out of foreign reserves, but there is still also a huge wealth of an individual (would that ever be calculated into a countries wealth) ???

[Gambles]

Thai Baht is not strong the pound is miserably weak!!

Live rates at 2010.05.18 11:05:09 UTC

1.00 GBP = 46.6997 THB view GBP/THB chart

United Kingdom Pounds Thailand Baht

1 GBP = 46.6997 THB 1 THB = 0.0214134 GBP

True but I think that shows up better when you look at GBP versus currencies other than Baht

Unfortunately I don't know how to get the graphics to upload...

Central banks usually amass large foriegn currency reserves through boyant exports rather than via intervention, BOT reserves are circa USD 150 bill and I think you'll find this is a function of them settling their export bills in USD rather than proactive intervention to restrain Baht growth - it's the same end point but the mechanics are slightly different.

Correct

Edited May 27, 2010 by Gambles

[Gambles]

Sounds logical to me, why can't the UK do this, or do we want our currency to remain weak?

it's not that the government or anyone else wants Sterling to remain weak (stable economic policy generally requires a currency weak enough to make exports attractive, and imports expensive - however a trade surplus eventually creates a stronger currency unless policy intervention such as sterilisation partially neutralises this - and strong enough to create confidence for people to actually want to hold the currency once they have it)

There have been different descriptions but the easiest might be what Chiang Mai seemed to be saying of the Thai central bank almost passively mopping up this 'imported Fx' into its own reserves by swapping it for Baht and I think that Abrak has elegantly explained how to do so obviously impacts on Baht in circulation (Baht in Fx transaction and Baht used for trade are a subset of total Baht in circulation and can't live in isolation)

Imagine that there were only 100 Baht in the world and that you sold something here in Thailand to someone else in Thailand (the person that has the only THB 100) for those 100 Baht

That would have no impact on Fx or on money supply - unless the buyer borrowed the money but let's not go there for now).

Imagine instead that the buyer was a Brit and that the world was awash with Pounds

You take his Pounds

You go to the Bank of Thailand

They make some nice new Baht which they give you in exchange for his Pounds

Suddenly there are now THB 200 in circulation because of the demand for them (both you and the other guy each want to have the THB 100) and the BoT has maintained the value of the Baht even though twice as many are in circulation as it's Balance sheet is now bigger on both the liability (the extra Baht that it has issued) and the asset side (the Sterling Fx reserves that it has built up) but it neutralised the demand for the Baht (i.e. stopped there being a bidding war involving Sterling for teh Baht

Imagine this transaction occurring many times over - each time in effect BoT has to decide whether to increase the monetary base which is quite neutral for the Baht or to allow greater demand for the same supply of baht which will push up the Baht value

In reality it steers a path somewhere in between which is why Baht is strengthening but not as much as other Asean currencies. It's helped to achieve this currently by the political risk attaching to Baht which means that Baht holders are quite happy to put their Baht back into the system rather than keep Baht because of the political uncertainty

The BoT sterilisation is designed to prevent the Baht becoming stronger and the reality is that it's a kind of partial sterilisation designed to allow the Baht to increase in value to some extent but not too much - e.g. to be competitive against other Asian countries

On the other hand the UK is a deficit country - it imports not next exports.

The BoE's problem is therefore the opposite of the BoT's problem - in a sense it has to make Sterling attractive enough that people will accept and retain Sterling in international trade and not just convert it all back straight away into the exporter's currency.

So BoE can't adopt BoT policy because it faces the opposite problem - BoT is currently concerned about too much demand for baht and in a sense is trying to dampen that

BoE is concerned about not enough demand for Sterling (and there's certainly plenty of supply right now) so it can't adopt the same policies because it isn't in the same position

BoT is trying to prevent too much Baht strength

BoE needs to prevent too much Sterling weakness

Abrak and Chiang Mai are probably muttering unspeakable curses under their collective breath about the oversimplicity of my analogies - apologies chaps - but I hope that this helps in some small way??

Edited May 27, 2010 by Gambles

[Gambles]

Sounds logical to me, why can't the UK do this, or do we want our currency to remain weak?

Well, I dont think that with the UK's fiscal deficit they are too worried about sterilizing excess capital inflows. More how to encourage capital inflows without increasing interest rates.

Essentially why sterilization was an inherently useless and costly idea is because I find any policy aimed at stopping the appreciation of the baht over the last few years, when compared to the UK and US, simply totally unviable. I will admit though that all out civil war would be perhaps the best and least costly option that the BoT could have pursued.

slightly unfair, Abrak

They've done a good job of undercutting Asean (they = BoT policy + political risk) currencies and maintaining competitive USD bloc levels

Look at the exports by destination now; you'd have to say that Fx policy is working in terms of exports

While philosophically I agree with you in general terms about central bank interventions, I think (and I'm sure you won't agree) that the BoT have done a decent job of tinkering around the edges to get Baht to a place that works in a very pragmatic 'Thai' way. The Bot don't have the global power to implement the brilliant whims of teams of thousands of the world's smartest quants in a way that our Northern neighbour but one does

[Gambles]

Simply the BoT is short baht - long reserves. It can only unwind by issuing baht into the domestic MS and creating inflation or allowing the baht to appreciate as others buy US dollars and sell baht to repay the bonds.

I can appreciate that, but Im not sure I can believe that foreign flows are so strong?

In an open, free market, would USDTHB still be 32?

I have doubts.

In the last few weeks THBs regional peers have all lost ground to a very sprightly USD, yet THB has hardly budged, even with all its unique challenges thrown in for good measure.

I reckon a day will come when the BoT simply decide to rerate the THB, to become more competitive?

Almost, badge

My theory is that they need to prevent a less competitive revaluation upwards of Baht now

Right now exports suggest that THB is in a sweet spot

but the competitive edges are very small

John Sheehan of GMA believes in locking this in by fixing at these levels

I agree with the idea but I'm sure that there's a canny Siamese way of achieving the same outcome without using a sledgehammer on this particular walnut

[Gambles]

So I will try again....

Here is Wikipedia on sterilization....

Sterilization in macroeconomics refers to open market operations undertaken by a country's central bank (CB) whose aim is to neutralize the impact of associated foreign exchange operations.[1]

Most often sterilization is used in the context of a central bank which takes actions to negate potentially harmful impacts of capital inflows, such as currency appreciation, loss of export competitiveness and inflation. Occasionally it may refer to any form of monetary policy which seeks to leave the domestic money supply unchanged in the face of shocks or other changes, including capital outflows.

Central banks use sterilization to eliminate negative side-effects of their intervention in foreign exchange markets. For example, assume that a country's currency is depreciating. To prevent this the country's central bank may decide to intervene in the foreign exchange market of the country. To prop up the value of the nation's currency the CB may resort to creating artificial demand for its currency. This it may do by selling foreign exchange reserves and buying local currency. The resultant demand stops the currency's depreciation but decreases the amount of liquidity in the local economy (the amount of local currency held by banks, credit unions, businesses, individuals, etc). Hence, to offset this negative outcome the CB may engage in open market operations that supply liquidity into the system (by buying local-currency-denominated bonds), thereby "sterilizing" the negative effect of its foreign exchange intervention

Now simply reverse the last paragraph....

For example, assume that a country's currency is appreciating. To prevent this the country's central bank may decide to resort to intervene in the foreign exchange market of the country. To depress the value of the nations's currency the CB may resort to creating artificial supply for its currency. This it may do by buying foreign exchange reserves and selling local currency. The resultant supply stops the currency appreciating but increases the amount of liquidity in the local market (the amount of local currency held by banks, credit unions, businesses, individuals etc.). Hence, to offest this negative outcome the CB may engage in open market operations that decreases liquidity into the system (by selling local-currency-denominated bonds), thereby 'sterilizing' the negative effect of its foreign exchange intervention.

Simply the BoT is short baht - long reserves. It can only unwind by issuing baht into the domestic MS and creating inflation or allowing the baht to appreciate as others buy US dollars and sell baht to repay the bonds.

So we are stuffed until the Uk/US economies grow, or thailand runs out of foreign reserves, but there is still also a huge wealth of an individual (would that ever be calculated into a countries wealth) ???

but there aren't really any of the signs of excess liquidity in terms of asset bubbles or high inflation so no sterlisation via bond issues required

recent events certainly won't have helped liquidity so as far as BoT then 'steady as she goes'