Thailand In Crisis - What About The Baht?

[IMA_FARANG]

Short answer....the Thai Baht is not free to be bought and sold in large amounts on currency markets. The Thai government limits the amount of Thai Baht that can be sold or bought by any financial institution per day. For that reason you won't see the large swings either up or down with the Thai Baht you see in other, more freely available currencies.

In fact the Thai government limits the amount of trading by any one financial agency or institution per day to 300 million Baht. (about 10 million dollars equivalent). In comparison to other currencies that is chicken feed. Many international banks will exceed 10 million dollars in a single trade....and do more than a dozen trades of that size in a average one day trading session.

[Naam]

Short answer....the Thai Baht is not free to be bought and sold in large amounts on currency markets. The Thai government limits the amount of Thai Baht that can be sold or bought by any financial institution per day. For that reason you won't see the large swings either up or down with the Thai Baht you see in other, more freely available currencies.

In fact the Thai government limits the amount of trading by any one financial agency or institution per day to 300 million Baht. (about 10 million dollars equivalent). In comparison to other currencies that is chicken feed. Many international banks will exceed 10 million dollars in a single trade....and do more than a dozen trades of that size in a average one day trading session.

that is not quite correct as not the trades are limited but the total holding of Thai currency in any financial institution must not exceed THB 300mm at any time. within this bracket virtually unlimited numbers of trades are possible.

[Naam]

Short answer....the Thai Baht is not free to be bought and sold in large amounts on currency markets. The Thai government limits the amount of Thai Baht that can be sold or bought by any financial institution per day. For that reason you won't see the large swings either up or down with the Thai Baht you see in other, more freely available currencies.

In fact the Thai government limits the amount of trading by any one financial agency or institution per day to 300 million Baht. (about 10 million dollars equivalent). In comparison to other currencies that is chicken feed. Many international banks will exceed 10 million dollars in a single trade....and do more than a dozen trades of that size in a average one day trading session.

that is not quite correct as not the trades are limited but the total holding of Thai currency in any financial institution must not exceed THB 300mm at any time. within this bracket virtually unlimited numbers of trades are possible.

[chiang mai]

According to another post the BoT is shorting the Thai Baht to the tune of 70 billion dollars.

As long as they can keep this up the Baht will remain high ....... run out of funds and it will soon be 60bht to 1 dollar.

Is this backwards-day????????? Or just wrong-conclusions-based-on-wrong-assumptions-and-backward-logic-day?

If the BoT is shorting the THB, they would in fact be trying to quell its strength - and should they 'run out of funds' then the effect would be exactly the opposite of the scenario described above i.e. something more like 25THB/USD instead of something insane like 60.

The 3 sentences in the quoted reply essentially don't make sense in that the 2nd sentence doesn't match with the logic of the 1st, and that the 3rd, doesn't make sense regarding the 2nd... in other words, nonsense.

Regrettably yes it is, the first sentence is nearly correct if foriegn currency reserves are being alluded to, in reality it's closer to double that amount though - your subsequent logic is however correct.

[tfc]

According to another post the BoT is shorting the Thai Baht to the tune of 70 billion dollars.

As long as they can keep this up the Baht will remain high ....... run out of funds and it will soon be 60bht to 1 dollar.

I have lived on Koh Phangan for 10 years now and talking to Thai friends who own Bars, Resorts etc,they allseem very proud of the strong Baht but when I ask them are they better off for it I get a blank Manuel (Fawlty Towers) look

Same response when I ask about the raise in prices for hotels. Thai friends seem very proud that they are keeping prices up, when I ask whether it is good for business and getting more customers they go blank.

[Gambles]

According to another post the BoT is shorting the Thai Baht to the tune of 70 billion dollars.

As long as they can keep this up the Baht will remain high ....... run out of funds and it will soon be 60bht to 1 dollar.

Is this backwards-day????????? Or just wrong-conclusions-based-on-wrong-assumptions-and-backward-logic-day?

If the BoT is shorting the THB, they would in fact be trying to quell its strength - and should they 'run out of funds' then the effect would be exactly the opposite of the scenario described above i.e. something more like 25THB/USD instead of something insane like 60.

The 3 sentences in the quoted reply essentially don't make sense in that the 2nd sentence doesn't match with the logic of the 1st, and that the 3rd, doesn't make sense regarding the 2nd... in other words, nonsense.

Where SB is right is that the BoT is effectively shorting Baht by building huge Fx reserves and selling Baht. SB then loses his way about the logic; - this policy has been implemented to stop the Baht from strengthening too much. Run out of funds (i.e. Baht liquidity) to pursue this policy and 30 would be a likelier outcome. Howver running out of Baht is unlikley as this allows the BoT to issue more Baht and increase the monetary base (in an essentially non-inflationary way if the surplus capital is exported). There is a thread all about this.....

[Abrak]

Where SB is right is that the BoT is effectively shorting Baht by building huge Fx reserves and selling Baht. SB then loses his way about the logic; - this policy has been implemented to stop the Baht from strengthening too much. Run out of funds (i.e. Baht liquidity) to pursue this policy and 30 would be a likelier outcome. Howver running out of Baht is unlikley as this allows the BoT to issue more Baht and increase the monetary base (in an essentially non-inflationary way if the surplus capital is exported). There is a thread all about this.....

Gambles, you have very much oversimplified the underlying issue. Of course, the BoT will never run out of baht because they can simply print the stuff. The underlying issue is that their policy has costs - the interest payments on baht bonds - and benefits of an artificially low exchange rate.

To the extent they are sterlising and increase their sterilisation policy they are by definition increasing their costs. As we all know this at some point it becomes economically unviable because the extent of their intervention encourages speculative inflows that at any given rate will simply increase their costs without interfering with what people believe is the underlying true value of the baht. Ultimately they end up at the stage they are either suppressing inflation or baht appreciation. So, in theory, you can reach a stage at which sterilisation becomes inherently counterproductive.

To the extent that you say the baht would be at 30 without sterilization, you are simply saying that 30 is the right price, and people can spot the short a mile off, and capital inflows will continue until the BoT realizes that cost of maintaining an undervalued currency is larger than the costs of maintaining it. They will not only suffer the loss on the short baht funding costs but the loss on their forex reserves.

[Abrak]

According to another post the BoT is shorting the Thai Baht to the tune of 70 billion dollars.

As long as they can keep this up the Baht will remain high ....... run out of funds and it will soon be 60bht to 1 dollar.

Is this backwards-day????????? Or just wrong-conclusions-based-on-wrong-assumptions-and-backward-logic-day?

If the BoT is shorting the THB, they would in fact be trying to quell its strength - and should they 'run out of funds' then the effect would be exactly the opposite of the scenario described above i.e. something more like 25THB/USD instead of something insane like 60.

The 3 sentences in the quoted reply essentially don't make sense in that the 2nd sentence doesn't match with the logic of the 1st, and that the 3rd, doesn't make sense regarding the 2nd... in other words, nonsense.

And take note. To the extent that the BoT is shorting the baht to US$70bn - to the extent it strategy fails (based really on short term intervention can only be successful based on a thesis that intervention was necessary to prevent short term volatility from an underling equilibrium rather than to protect an undervalued currency (you need forex controls to do that)) its underlying goals could prove counterproductive.

The most likely result is that you will achieve exactly the opposite of what you want.

Say take 1997, the currency was perhaps overvalued at the the time by say 15%. The BoT intervened to prevent the devaluation of its currency by spending US$30bn of its reserves until it had no money left. The result was a massive 'undervaluation' of its currency purely because the BoT attempted to keep its currency 'overvalued'.

The idea that if you short something that when you run out of funds to do so, the price will go down so that you make a profit, is simply ridiculous.

To be honest I feel a bit sorry for Sarah.

[Gambles]

Where SB is right is that the BoT is effectively shorting Baht by building huge Fx reserves and selling Baht. SB then loses his way about the logic; - this policy has been implemented to stop the Baht from strengthening too much. Run out of funds (i.e. Baht liquidity) to pursue this policy and 30 would be a likelier outcome. Howver running out of Baht is unlikley as this allows the BoT to issue more Baht and increase the monetary base (in an essentially non-inflationary way if the surplus capital is exported). There is a thread all about this.....

Gambles, you have very much oversimplified the underlying issue. Of course, the BoT will never run out of baht because they can simply print the stuff. The underlying issue is that their policy has costs - the interest payments on baht bonds - and benefits of an artificially low exchange rate.

To the extent they are sterlising and increase their sterilisation policy they are by definition increasing their costs. As we all know this at some point it becomes economically unviable because the extent of their intervention encourages speculative inflows that at any given rate will simply increase their costs without interfering with what people believe is the underlying true value of the baht. Ultimately they end up at the stage they are either suppressing inflation or baht appreciation. So, in theory, you can reach a stage at which sterilisation becomes inherently counterproductive.

To the extent that you say the baht would be at 30 without sterilization, you are simply saying that 30 is the right price, and people can spot the short a mile off, and capital inflows will continue until the BoT realizes that cost of maintaining an undervalued currency is larger than the costs of maintaining it. They will not only suffer the loss on the short baht funding costs but the loss on their forex reserves.

A, I wouldn't disagree but I think that we'd need to start another thread about the total costs and net benefits (because you also have to figure the loss on export profitability if you allow the Baht to strengthen along with all the embedded short term benefits and long term costs of fiscal and monetary policy interference). In general I'm not in favour of artificial policies but these are not normal times....

So apologies for oversimplification but it seemed that people were getting lost on here and going round in circles...I think that I did say somewhere that you wouldn't be happy with my reductio......

[Abrak]

A, I wouldn't disagree but I think that we'd need to start another thread about the total costs and net benefits (because you also have to figure the loss on export profitability if you allow the Baht to strengthen along with all the embedded short term benefits and long term costs of fiscal and monetary policy interference). In general I'm not in favour of artificial policies but these are not normal times....

So apologies for oversimplification but it seemed that people were getting lost on here and going round in circles...I think that I did say somewhere that you wouldn't be happy with my reductio......

Actually, Gambles, I am fully aware that, the biggest benefit, of an artificially depressed exchanged rate comes through the increasing competitiveness that it gives the country through its current account.

So it is a two edged sword from the BoT's point of view. It can lose money but it can be net beneficial to the country. But that is why it is such an easy policy to bet against in a speculative sense. When you know someone is prepared to lose money one way in order to gain elsewhere, you simply make money on the basis that you only need to take one half of the bet.

What makes it especially cool as a speculative bet is the more money you put in, the more you gain, the more they lose and the more they lose relative to a fixed estimated gain. So eventually they will cave in.

The point being that underlying the dynamics of the game here is that sterilisation can only be effective to a degree that is far less than the cost meets benefits analysis will assume because once you get close to the cost = benefits analysis you will face enormous and very rapid inflows which will cause cost, to their benefit until you allow an appreciation and further losses for the CB and further gains for the speculator.

[Gambles]

A, I wouldn't disagree but I think that we'd need to start another thread about the total costs and net benefits (because you also have to figure the loss on export profitability if you allow the Baht to strengthen along with all the embedded short term benefits and long term costs of fiscal and monetary policy interference). In general I'm not in favour of artificial policies but these are not normal times....

So apologies for oversimplification but it seemed that people were getting lost on here and going round in circles...I think that I did say somewhere that you wouldn't be happy with my reductio......

Actually, Gambles, I am fully aware that, the biggest benefit, of an artificially depressed exchanged rate comes through the increasing competitiveness that it gives the country through its current account.

So it is a two edged sword from the BoT's point of view. It can lose money but it can be net beneficial to the country. But that is why it is such an easy policy to bet against in a speculative sense. When you know someone is prepared to lose money one way in order to gain elsewhere, you simply make money on the basis that you only need to take one half of the bet.

What makes it especially cool as a speculative bet is the more money you put in, the more you gain, the more they lose and the more they lose relative to a fixed estimated gain. So eventually they will cave in.

The point being that underlying the dynamics of the game here is that sterilisation can only be effective to a degree that is far less than the cost meets benefits analysis will assume because once you get close to the cost = benefits analysis you will face enormous and very rapid inflows which will cause cost, to their benefit until you allow an appreciation and further losses for the CB and further gains for the speculator.

I wouldn't disagree with any of that, A, and I'm in there with you but I would add the proviso that you always need to be careful when playing in someone else's casino