Looking ahead to a tipping point for euro crisis solution

This is the same exact price pattern that we saw in Q3 of 2011. 

    Currently the financial market is focused on Europe and news about the viability of the euro. Any positive news from the euro zone will weaken the dollar as risk appetite in the market increases. Negative news will have investors running to the dollar as a safe haven, strengthening the currency. 

For the first time since 2008, the baht will end the year weaker than it was at the start. The baht will likely have weakened around 3.7 per cent in 2011 whereas in 2009 it strengthened 4 per cent, then 10 per cent in 2010. Thailand’s current account surplus has also moderated in 2011, to US$10.5 billion, compared with a surplus of $21.9 billion in 2009 and $13.7 billion in 2010.   

The rate of increase in the Bank of Thailand’s foreign exchange reserve has also shown a slowdown compared with previous years. In 2011 the foreign exchange reserve increased by “only US$16.7 billion”. This is less than half the increase seen in 2009 ($36 billion) and 2010 ($38 billion). 

But this year, most Asian currencies were less volatile than in 2009 and 2010. The yuan and the yen were the only two Asian currencies that strengthened, at 3 per cent and 4 per cent respectively. The Malaysian ringgit, New Taiwan dollar, Korean won, Indonesian rupiah, Singapore dollar and Philippine peso all weakened between 1 and 4 per cent. 

Only the Vietnamese dong and the Indian rupee experienced outsize depreciation – of 8 and 19 per cent respectively. 

In 2012 the dollar direction against the baht is a bit trickier to forecast. Going into next year, the euro-zone crisis will likely continue to dominate the sentiment of financial markets. Based on likelihood of heightening risk concern in the euro zone, the US dollar will likely strengthen against the baht in Q1 and Q2 of 2012. 

However, the dollar is still a fundamentally weak currency and should weaken further once the risk aversion caused by the euro crisis abates. 

Kasikornbank Group forecasts that the range for the baht against the dollar in 2012 will be between 29.5 and 33.00. 

Nevertheless we continue to advise our clients to hedge their foreign exchange exposure, as sentiment can easily and quickly change due to the unpredictability and the timing of a resolution to the euro-zone sovereign debt crisis.

 

Thiti Tantikulanan is head of Kasikornbank’s Capital Markets Business Division.