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Three key current factors that are worth watching

Mar 12. 2017
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Prakit Sirivattanaket Vice President Kasikorn Securities Oil, ECB, baht and KCE Three interesting issues have arisen as a result of dropping |crude prices, the chance the European Central Bank (ECB) will shift its policy and the baht’s depreciation.

The WTI crude price dropped 2 per cent to its low from the beginning of this year of US$49.28 (Bt1,700) per barrel due to pressure from US crude stocks that, according to the US Energy information Administration, surged 8.2 million barrels (more than market expectations by two million barrels), a historical high, for nine consecutive weeks to 528.4 million barrels. The price was also pressured by the US dollar following speculation the Fed is likely to raise the benchmark rate.

Speculation on crude prices may occur again as the March 25-26 meeting of the Opec and non-Opec committee that will look at cooperating to reduce Kuwait’s crude production capacity. The meeting result is expected to result in the non-Opec group expediting its crude production reduction as stated in the agreement.

The non-Opec group has already cut its production 50-60 per cent in line with the agreement. The Opec group cut its crude production 93 per cent, as agreed. Russia, the leader of the non-Opec group, is expected to cut its crude production by 200,000 and 300,000 barrels per day in March and April, respectively.

Despite the ECB maintaining its monetary measures, ECB president Mario Draghi insisted on using monetary easing and quantitative easing to boost inflation to its target. Although inflation stayed at 2 per cent in February as a result of cosh push, core inflation was low at 0.9 per cent.

The ECB revised up this year’s targeted inflation from 1.3 per cent to 1.7 per cent and prepared to cut the QE amount to 60 billion euros (Bt2.3 trillion) from April, signalling that it is ready to cut and end the monetary easing soon. When the ECB ends its monetary easing, other central banks including the Bank of Japan are expected to follow suit, which could pressure more capital to flow out of emerging markets and move into developed markets. This is the risk to emerging markets in the near future. 

The baht continues to depreciate. The Thai currency was 35.42 per US dollar despite the dollar’s stability and the euro’s 0.37 per cent appreciation, reflecting the baht depreciation as a result of capital outflow. The baht is expected to depreciate further until the Federal Open Market Committee on Tuesday and Wednesday.

If the Fed hikes its rate, markets will be concerned over risks associated with it raising its key rate more than three times this year. Based on the dot plot, if as expected the Fed raises the rate from the current 1.375 per cent, it’s believed that would result in an appreciating US dollar and a depreciating baht for a long period.

KBank expects the baht to have a chance to depreciate further to 35.7 per dollar in 2017. Under the depreciating baht, we pick KCE, given its benefits from the exchange rate and consistent drops in the copper price.

 

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