Demystifing the culprits behind the indomitable Thai currency
AS OF TODAY, the Thai baht has almost reached its two-year high with a spectacular (almost) 8 per cent year-to-date return against the US dollar. Surprisingly, if anyone googles how most analysts talked about Thai baht’s trend last year, they won’t find a single analyst expecting appreciation of Thai baht.
For instance, Thai baht was forecasted to end the 2nd quarter at Bt36.3 baht per US dollar. However, in reality, the Thai baht ended that quarter Bt2.3 per US dollar lower. So what went wrong? Which invisible factors were responsible for such miserable forecasts?
Prior delving further into the Thai baht’s resilience, let’s revisit the idea of the weakening Thai baht, coined by various analysts last year as “Reflation Trades” and “Trump Trades”.
Since Trump won the US presidential election in last November, the market went full-throttles on a theme that pro-growth agenda from the Republicans such as tax reforms and massive infrastructure projects will boost both the US economic growth and inflation. Dual surges in growth and prices level will then promptly urge the Federal Reserves to increase their interest rate. Importantly, brightening prospects of the US economy will lure fluxes of capital inflows, hence, result in strengthening the US dollar.
Believing that 2017 will be an auspicious year of bull-runs for the US dollar, no one saw that the dollar bears would take control of the market. In fact, the market were in love with the dollar such that “Long” dollar was the most crowded trade until the end of April this year. Nonetheless, the market intensified unwinding of long dollar positions as soon as the risk of the European Union breaking apart evaporated after Madame Frexit lost in the French presidential election in April. With robust Eurozone economy which sent Euro towards two-year highs and failures of Trump’s administration to push any “promised” pro-growth/pro-business agenda, “Short” dollar gradually became the 2nd most crowded trades. Yet, these external factors still fail to unfold a full story of the “unstoppable streaks” of Thai baht.
Like any asset, the “price” or exchange rate of Thai baht should be governed by interactions between “supply” and “demand”. One of the economic indicators that could provide such information is “Balance of Payments” which records economic transactions in Thai economy. The Balance of Payments consist of two parts 1) Current Account captures the net transactions from trades and services like tourisms and 2) Capital and Financial Account which tells capital inflows and outflows from Foreign direction investments (FDI), Thai direct investments (TDI) and portfolio investments.
Typically, foreign portfolio investments attract attentions from market participants. Foreigners’ decisions to buy or sell local assets could be explained by a global factor like a state of “Trump Trades” or “Reflation Trades” as inflows to the US market could mean outflows from Thai financial markets. In the past, one could assume that foreign fund flows could drive Thai baht in either direction since four years ago foreign portfolio investments were about $5,253 million whereas trades and services flows were merely $3,812 million. However, as fundamental of Thai economy getting shinier, a size of foreign portfolio investment flows was incomparable to gargantuan revenues from exporting goods and services (tourism) on the current account.
In the 1st quarter of 2017, Thai baht gained 4 per cent against the dollar and foreign investors’ appetites for Thai baht weren’t solely responsible for Thai baht’s moves. During that period, Thai exports recovered tremendously on improving global trade outlooks. In addition, Thai tourisms also rebounded and generated large demands for Thai baht. Both activities on the current account were $17,532 million and dwarfed foreign inflows of about $2,935 million. Evidently, shadowy culprits behind invincible Thai baht so far were massive net exports and flourishing Thai tourisms. After successions of double-digit exports growth, analysts expected that Thai exports will expand around 5 per cent (revised up from 3 per cent made earlier this year). Moreover, with rising numbers of tourists growing 7.4% to 35 million this year, the Thai current account surplus will persist at least for this year.
Hence, it is getting impossible for Thai baht to be weakened to near last year peak of Bt35.80 per US dollar. Thus, Thai exporters should continue to hedge their FX risks, otherwise, their profit margins could be devoured by the invulnerable Thai baht.
Views expressed in this article are those of the author and not necessarily of TMB Bank or its executives. POON PANICHPIBOOL is Economic Specialist at TMB Analytics. He can be reached at [email protected]
