How The Tide Turned For The Baht In Just One Short Month

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TREASURY VIEW

How the tide turned for the baht in just one short month

By Thiti Tantikulanan

Just one month into 2011, the baht has already weakened 3.4 per cent and is leading all Asian currencies in terms of depreciation. This is a complete turnaround from the sentiment we saw in 2010, when the baht led Asian currencies with an 11-per-cent appreciation. While some degree of correction from last year's trend was expected for the baht, the rapid pace of depreciation has caught the market by surprise.

The current trend of baht depreciation actually started in December last year when the euro-zone sovereign debt risk began to re-emerge. This caused the US dollar to strengthen after hitting a low of Bt29.50, as whenever there is heightened risk in financial markets, the dollar will rise because of its safe haven status.

Then in early January, concern about inflation risk caused Asian equities and currencies to slide. Indonesia's equity market lost around 5 per cent in value in one day after the markets perceived that the country's interest rate policy was behind the curve in battling inflation. Current inflation concern in Western economies is not much of an issue, as household spending is less focused on food. Asian economies are more at risk, as food is a larger part of the CPI, or consumer price index basket. In 2010 the price of many basic commodities rose substantially - rubber 79 per cent, corn 34 per cent, soybean 33 per cent, sugar 52 per cent - which suggests that price inflation in Asian economies is intensifying.

Lastly, local supply and demand of the dollar is a significant factor in this round of baht depreciation. Throughout 2010 we saw huge forward-selling of the dollar by exporters seeking to hedge their future dollar income. On the other side, importers didn't forward-buy the dollar much, as greenbacks were getting cheaper and cheaper meaning it made sense to wait, and buy when their obligations became mature. This caused imbalance in the supply and demand of the dollar, and is one of the reasons the baht appreciated so much last year.

Now, however, the opposite is occurring. With the US currency starting to change trend and appreciate, the supply of dollars from exporters is not as plentiful as last year, as many exporters have already sold much of their supply last year. Meanwhile the rapid rise of the dollar has triggered importers, who waited last year, to come in and started buying aggressively, contributing to the rapid appreciation of the greenback.

2011 looks to be a volatile year in the foreign exchange markets. Even though the poor economic fundamentals of the US economy and dollar - historically high federal debt and stubbornly high unemployment rate - have not changed, the market has redirected its focus toward the above mentioned factors.

We still think that the baht will eventually strengthen again to 29.00/$ by year end, but along the way it will be volatile with periods of depreciation and appreciation.

For readers who would like to keep up to date on the baht exchange rate and Thai and global economic activities, you can follow Kasikornbank dealing room's Twitter page - KbankFx.

Thiti Tantikulanan is head of Kasikornbank's Capital Markets Business Division.

-- The Nation 2011-02-01

[Chunky1]

people are taking money out of the emerging markets. they aren't going to transfer Thai baht back to the USA/UK/JPN/CHNA, it gets converted first.

It's not as though Americans were rushing to buy Thai bonds at 1% annual return, they were investing in stocks.