KBank expects more market turbulence if Fed ups key rate

“The Fed rate hike in September has been anticipated for a long time, but now the Federal Funds Futures is only giving it a 28-30-per-cent chance, so we see that the market might have a larger-than-expected reaction when the rate is hiked as we have forecast,” said Kobsit Silpachai, head of capital-market research at KBank.
The rate increase could spur further weakening of the baht to about 38 per US dollar by next year. This trend is currently helping the country’s export sector.
The baht has depreciated by about 8-9 per cent from 32.950 on January 1 to around 36 yesterday.
KBank also expects the Bank of Thailand’s Monetary Policy Committee (MPC) to maintain its policy interest rate at 1.5 per cent at its meeting next Wednesday.
“The reason we have to change our baht projection so many time is because of new factors, such as the depreciation of the yuan, and old factors that we believe will be more severe than we thought, including the Fed rate hike next week,” Kobsit told the press at a seminar that was arranged by the bank.
KBank now expects the baht to trade at 36.75 by the end of this year, as China’s yuan is also expected to slip against the US dollar by 4.4 per cent in the next 12 months.
It will be up to Fed chairwoman Janet Yellen to create confidence in the market after the increase next week.
After that, KBank expects the Fed to shift to a stop-and-go mode and unleash only two more increases next year. The federal funds rate currently stands at 0-0.25 per cent, where it has been since December 2008, Kobsit said.
“The US’s unemployment rate at 5.1 per cent right now means that its labour market is tightening. This will eventually lead to increases in workers’ incomes and inflation.
“The low level of US headline inflation [0.2 per cent in July] might be distorted because of the drop in oil prices.
“If you look at core inflation at 1.8 per cent, it means that it is no longer as low as many people have thought,” he said.
“The combination of the unemployment and inflation levels means that the Fed interest rate can now lift off with the aim to lower the level of its relaxed monetary policy.
“The market’s anticipation of only 28-30 per cent means that the market’s reaction, which creates fluctuation, might be more severe.”
Exports are still contracting and will be in the negative growth zone for the third consecutive year, but the softening baht will add liquidity to the export sector and that will support the economy this and next year.
“The talk that says the baht has to be held at around 35 to maintain financial stability would be difficult [to realise] because of factors such as the yuan devaluation and the 19-20-per-cent depreciation of the Malaysian ringgit,” Kobsit said.
“This means that the baht will have to follow on the same path or else we will lose markets from the declines of Malaysian visitors and price competitiveness against Malaysian products.”
He said the BOT would let the baht go with the market flow and the MPC would hold the policy interest rate at its next meeting because the central bank is already supporting the outflow of capital to rebalance capital flows.
Lowering the interest rate would also cause the baht to depreciate even faster, and that would hurt financial stability. A rise in the interest rate is also out of the picture because the central bank wants to support the outflow of capital.
“We expect the Fed rate hike to be next week, but it will not hike it again in December.
“We do not believe that that the Fed will increase the rate at every meeting next year, so the outflow from emerging markets will slow down but still contribute to the further deprecation of the baht,” Kobsit said.