Dollar news calms fears, brings wild times

The baht was in a tight range of 30.30 to 30.80 against the US dollar in February. For the year, the baht has appreciated 3.0 per cent, ranking third among strengthening Asian currencies after India’s rupee and Malaysia’s ringgit. There was substantial capital inflow into Thailand in January and February with around Bt40 billion flowing into the equity market while the fixed income market swelled even more substantially by around Bt165 billion. 

The quickening inflow came in response to the announcement by the Federal Reserve in late January that the US dollar interest rate would stay low until 2014. This signal comforted investors over liquidity levels and prompted them to seek higher returns outside of dollar-denominated investments. And with Asia continuing to see higher growth as well as higher interest rates, it makes sense that capital is continuing to flow into this region.   

Despite the foreign capital inflow in the local bond market, it seems the government bond yield might have bottomed out. The bond yield curve has been incredibly flat: the difference between two-year and 10-year bonds is only around 0.15 per cent, signalling that investors are chasing higher yields by investing longer term. These past two weeks, the yield shot up around 0.25 per cent across the curve. Part of the reason has to do with the Bank of Thailand signalling that it was watching the rise in oil prices, and also that Thailand economic data – Business Sentiment Index, Manufacturing Production Index, and capacity utilisation rate – showed meaningful improvement in January. The signalling likely dashed any hope of a further rate cut at the next Monetary Policy Committee meeting on March 21. Furthermore, the fact that the policy rate is at 3 per cent while the headline inflation is around 4 per cent adds to the argument that the current policy rate is already accommodative enough.   

Gold also had a wild week last week when it inched higher to almost $1,800 an ounce from its low of $1,500 in December. Then, Federal Reserve chairman Ben Bernanke, in his semi-annual testimony before Congress, acknowledged an improvement in the US economy. However, it was not what he said, but rather what he did not say, that caused the gold price to drop $100 overnight. While Bernanke maintained the need for a “highly accommodative” monetary policy, he didn’t give any sense that QE3 would be launched anytime soon.   

In the ’80s, the rising price of gold was driven by rising inflation. Not so now: these days gold is rising on the declining value of the dollar. Before the Lehman crisis in 2008, gold was rising because the dollar’s value was falling – the US was running a chronic current and fiscal account deficit. As gold is priced in dollars, when the greenback’s value dropped, gold rose inversely. In 2009 when the Federal Reserve began to inject money into the system through quantitative easing (QE), gold rose more forcefully as it meant that the Federal Reserve was debasing the value of the dollar on an unprecedented scale. Printing more of it is the easiest way to devalue a currency. Gold, however, can’t be debased. You can only increase the amount of gold the hard way – by mining it.   

Consequently the market sold gold aggressively in the wake of Bernanke’s testimony, which contained no mention of another round of QE.

Nevertheless don’t count out further QE from the Fed. The European Central Bank is in the midst of massive QE itself, though it prefers to call it a “long-term refinancing operation”.

 

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