Baht gains slightly after Fed keeps US policy rate steady

The Thai currency gained by 0.9 per cent yesterday, to 33.59 against the US dollar, after closing at 33.62 on Wednesday.

"The US dollar depreciated after the Fed’s meeting, which has contributed to the slight appreciation of the baht, but the movement is normal and is in line with other currencies in the region," said Bank of Thailand spokesman Chirathep Senivongs Na Ayudhya.

Kasikorn Research managing director Charl Kengchon said Thailand would briefly escape the pressure from potential capital outflows. The baht movement would mainly be influenced by US economic indicators, he added.

Federal Reserve chairwoman Janet Yellen on Wednesday said the interest-rate decision was still up in the air and that she wanted "more decisive evidence" that the US labour market was healing, and that wages would increase beyond their current "subdued pace".

While an increase in the Fed funds rate from the current level of 0-0.25 per cent is anticipated in September, the Fed lowered its 2015 economic growth forecast for the US economy to 1.8-2.0 per cent versus the range of 2.3-2.7 per cent that was projected earlier.

Tim Leelahaphan, Maybank Kim Eng Securities (Thailand) economist, said the comments Yellen made after the Federal Open Market Committee (FOMC) meeting were "less hawkish than expected" but the securities firm maintains that the Fed rate increase will lift off in September at the earliest.

"The FOMC has revised down the US economic projection and it has revised down the path of the rate increase, while Yellen has also commented that its decision on the interest rate would be data-dependent, so the overall comments seem to be toned down," he said.

Maybank expects a 50-basis-points increase in 2015 and 100 basis points in 2016, and the momentum of the increase will be in a "go-stop-go" motion. The US policy interest rate has been in the range of 0-0.25 per cent since 2008.

Izumi Devalier, an economist at HSBC, said the important thing regarding the Fed rate increase was how quick it would be and where it ended up, and there was still a lot of uncertainty there.

Rate hike expected in Dec

"We expected the Fed to raise the interest rate in December, but in a very gradual manner, and that should be good for Asia’s economy, as a very gradual rate normalisation in the United States means that there will be less volatility in Asia," she said.

HSBC expects an increase of 25 basis points this year and 50 basis points next year.

One risk that people should be keeping an eye on is a "very sharp and abrupt steepening" of the US long-term bond yield curve as the yield curve is quite flat. The short-term interest rate is zero and the 10-year yield is fluctuating at 2-2.5 per cent, but there are signs that the curve has steepened a bit and it could move up quite sharply in the future from a variety of factors, Devalier said.

"If the negative term premium becomes positive and if that happens in a very aggressive manner, it would be very disruptive for many Asian economies that have current-account deficits and high-level foreign ownership in portfolio debt, such as Malaysia and Indonesia," she said.

Thailand is not one of the countries at risk at the moment as foreign ownership in Thai government bonds is only at 11 per cent and the Kingdom is expected to have a current-account surplus of around US$12 billion this year, she concluded.