Baht, other currencies inch up after Fed keeps key rate

However, uncertainty regarding the timing of an increase of the federal funds rate remains and the capital outflow from emerging markets is expected to continue, said the Bank of Thailand.
The baht had appreciated by 0.51 per cent from its opening value of 35.762 per US dollar to 35.577 as of 2.30pm yesterday, but there was no significant change in the Stock Exchange of Thailand, whose main index had risen by just 3.04 points to 1392.47 on a market value of Bt16.207 billion in the same period.
Currencies in India, Malaysia, Japan, Taiwan and South Korea had strengthened by 0.88, 0.58, 0.49, 0.36 and 0.27 per cent respectively as of 2.30pm.
“The effect from the decision [by the Fed] on the capital flow will not be severe, as the question [when will US rates rise] still remains and its direction did not change. The issue is still going in the same direction and it is a matter of when, since the direction did not reverse and I do not think [the Fed] will do quantitative easing Mark 4,” Prasarn Trairatvorakul, the central bank’s governor, told the press after attending the second day of the “BOT Symposium 2015”.
Regarding the Monetary Policy Committee’s policy space after the Fed decided to maintain its benchmark rate, Prasarn said nothing had changed as “the question is still there and will continue to be monitored while the uncertainty remains in the market”.
Chantavarn Sucharitakul, assistant BOT governor, said the Fed had maintained US interest rates as the market expected because it was waiting to assess the continuity of the US economic recovery, as well as for increased confidence that its inflation rate would reach the target of 2 per cent.
Moreover, the Fed has given due importance to the slowdown in China and emerging markets and the possible effects on the US economy.
“The Fed rate increase might have been delayed, but the fluctuation in the world’s money markets is expected to continue from the risk in the global economic recovery, and especially the Chinese economy,” she said.
“The BOT will continue to monitor the global money markets closely and the private sector should be careful and ready, since the exchange rate still has a chance to fluctuate in both directions. It should consider using exchange-rate risk-management tools to lessen the negative effect that might result,” she added.
Tim Leelahaphan, economist at Maybank Kim Eng Securities (Thailand), said Fed chairwoman Janet Yellen’s comments, the Fed’s press conference and its forecasts of key economic indicators were largely dovish, but benchmark rates would now likely be maintained until December, since there was no press conference for the bank’s November meeting.

Credibility cost
However, the “credibility cost” to the Fed means a rise is unlikely to be delayed beyond this year, he said.
“They have been telling people that they will [raise the rate] and if they keep on delaying it, they will lose credibility – and this is very important for them. From this, it is very difficult to see them delaying it any further than December,” he said.
This means there is some capital flow coming back into Thai bonds and shares, but the effect will be temporary, since the market still believes the Fed will increase rates this year, he added. United Oversea Bank Group, meanwhile, now expects the first Fed rate increase to take place in December, with the Federal Funds Target Rate reaching 0.5 per cent by year-end, and 1.5 per cent by the end of 2016.
The group has ruled out the lift-off taking place at either the Fed’s October or November meetings because that might lead to a repeat of the US government shutdown and crisis over the US debt ceiling, which could complicate Fed monetary-policy decision-making, as happened to Yellen’s predecessor, Ben Bernanke, in 2013.