Steady Thai rates advised as Fed attempts to unscramble scrambled eggs of tapering

After he dropped a financial-market bomb on May 22 during testimony to US politicians, a five-letter word is now probably the most mentioned in the financial world, and that is “taper”. This refers to the possibility that the US Federal Reserve will scale back its $85-billion (Bt2.6 trillion) asset purchases each month.

Since then, the market has raised the liquidity premium of the dollar, as seen by the benchmark US Treasury 10-year yield, which rose from 1.92 per cent to a peak of 2.73 per cent in recent times. This was predicated on fears that it was a matter of time that such a major buyer of such bonds as the Fed would give less support for a low-interest-rate environment further out in the yield curve. 

Unfortunately the adjustment was chaotic to say the least, prompting the Fed to try to unscramble scrambled eggs by advising market participants that such a reduction in the $85-billion monthly purchases would not constitute a shift in monetary policy towards tightening. 

Those who think financial markets are efficient need to reconsider. But no matter how much the Fed tries to repeat that message, it is unlikely to convince the markets, as the consensus still looks for tapering to begin at its September 17 Federal Open Market Committee meeting.

Such anxiety complicates Thai monetary policy. Research houses including us at Kasikorn Securities have lowered our forecasts for economic growth, and with a mild inflationary outlook, it seems logical that the Bank of Thailand would opt for a monetary-easing bias. Of late, customs data showed a contraction in exports of 3.4 per cent against expectations of a 1.6-per-cent increase. 

But compared with other Asian economies, Thailand’s policy rate is among the lowest. Cutting interest rates further could stoke capital flight and subsequently induce selling of financial assets such as stocks and bonds. This in turn adversely impacts the wealth effect, further weighing on economic growth. 

We view that amid uncertainties still looming over global liquidity, the most optimal decision is to stay the course, keep rates where they are and continue to look for a clearer direction in market conditions.

The markets in the last week of July and early August look to be largely sidelined, given a plethora of major US events for clues to assess the probability of near-term tapering or more distant tapering. 

July 31 features the advance reading of second-quarter gross domestic product. The market is looking for a tepid growth rate of 1 per cent. A few days later brings the August Federal Open Market Committee meeting, which typically prompts investors to adopt a wait-and-see stance.

Foreign issues aside, concerns over local politics should weigh on the baht. For the week, we look for the baht to trade at 31.00-31.40 against the US dollar. During times of a sidelined market, exporters and importers are urged to look towards hedging with forex options, as lower volatility generally means lower insurance costs. 

 

Thiti Tantikulanan, executive chairman of Kasikorn Securities, contributed this article.