Uneasy is the currency that performs too well

The baht has experienced many past bouts of volatility. Starting in January last year, it moved from 31.9 to 30.3 against the US dollar within five weeks. In late June 2011, it fell from 31.0 to 29.7 within one month. In a big trend starting from June 2010, it moved from 32.6 to 29.5 in five months. 

There seems to be a similar big shift so far in 2013. From the beginning of the year, the baht has strengthened dramatically, with the rate moving from 30.6 to 29.2. 

And yet, this time is different. 

The past episodes of sudden baht strength were driven by dollar weakness – investors were worried about news on the United States’ monetary policy or economic prospects. Baht movements were in line with overall market shifts. 

But now, the baht stands alone. 

Since the start of 2013, the Thai baht has appreciated by nearly 5 per cent against the US dollar. No other Asian currency has moved up by as much as 2 per cent, and many (such as the Malaysian ringgit and the Singapore dollar) have even depreciated. 

Clearly, something is afoot. 

Is it foreign speculation? In the past two weeks, there have been more foreign flows into the Thai bond market, including into shorter-term bills (a sign of speculative interest). However – the size of the flows is not excessive compared with the past. 

Is it excessively high interest rates? Local rates are indeed higher than in the United States. However, Thai interest rates are actually among the lowest when compared with other Asian countries. 

Partly, the move is likely a correction from the extreme stability seen towards the end of 2012 – in the last three months of last year, the baht exchange rate barely budged. 

Part of the rationale also has to be about central bank policy. 

The Bank of Thailand has often stated in the past that baht movements should not be out of line compared with other currencies in the region. That assurance is being tested, and some even theorise that it no longer applies. 

We are therefore in an interesting time in financial markets. The next few months will show whether or not the country’s exchange-rate policy is changing – towards a much greater acceptance of outlandish movements. 

This also implies that the large-scale appreciation of the baht since the beginning of the year is not the start of a new phase of currency strength. Rather, it is an indication of a greater underlying volatility in the local foreign-exchange market. 

Experiences elsewhere show that there is never a one-way bet in regional currency markets. 

In 2012, the best-performing currency in Asia was the South Korean won, which strengthened by 8.6 per cent. So far in 2013, the won has been the weakest performer, depreciating by 4.2 per cent. Last year the worst-performing Asian currency was the Indonesian rupiah, which declined by 7.3 per cent. So far this year, it is one of the better performers, rising by 0.6 per cent. 

Such swings are common for volatile currencies. The more a currency moves, the greater the risk of a major correction – particularly if authorities are not significantly intervening in the market. 

Going forward, local players will look to any change in sentiment in global markets. For example, any new signals on the end of quantitative easing by the United States could lead to a big boost for the dollar. Greater indications of local political uncertainty could also lead to a negative shift in investor sentiment towards Thailand. 

 

Parson Singha is chief markets strategist, global markets department, HSBC Thailand.