Baht reversal looms after trade deficit

It appears that that the baht’s sharp appreciation in July not only dampened exports but also encouraged importers to ramp up purchases. 
While exports grew less than expected, imports beat forecasts, resulting in Thailand’s first trade deficit in more than two years.
July’s trade data surprised the market and, minutes after the trade data report was released, the baht dropped quickly.
A sharp reversal in the baht’s momentum could encourage import orders to quicken further this month as companies aim to lock in relatively cheap imports. 
Meanwhile, some trade partners may delay purchases and wait for a weaker baht, in a bid to speculate on cheap exports.
Hence, the trade surplus will likely shrink and put downward pressure on the baht, creating a self-fulfilling weak baht cycle.
Besides trade data, inflation also points to a reversal in the baht’s trend.
Headline inflation has already hit bottom and is expected to accelerate in this latter half, thanks partly to the new excise tax regime. 
Rising inflation will drive the real interest rate down and will make the Thai currency less attractive, especially if the US Federal Reserve hikes its policy rate in December.
On the other side of the coin, the dollar’s downside is limited by renewed hope for Trump’s pro-growth policies. 
In October, the US Congress will begin talks on tax reform and financial deregulation, which could be a catalyst for the dollar towards the end of the year.
To sum up, the baht has rallied against the dollar throughout 2017 but the trend may soon reverse, with the trade deficit in July being a key turning point. 
The actions of exporters and importers after the baht rally ends could create a self-fulfilling baht downtrend, which may also be |supported by inflation data and macroeconomic policies in the |US. 
We maintain our year-end target for the baht at 35.6.

CHARNON BOONNUCH, the author, is the head economist at Tisco’s Economic Strategy Unit.