US jobs data knocks confidence; gold trade nudges the baht

The US employment data by itself does not move the capital markets but it is an important cog in the wheel that drives the financial markets. The most important element that has been driving the world market since 2009 continues to be liquidity – specifically whether there will be additional liquidity injection via a third round of quantitative easing, or QE3. These past three months the dollar has generally been on the rise because of the strong economic data coming out of the US. This implies that the Federal Reserve will likely hold off on QE3. The Fed itself even came out to manage the market by stating that the plan for QE3 is on the backburner.  Nevertheless, the market reaction to data last Friday’s data was as expected. After all, no one can predict with certainty how the US or global economic recovery will play out. The only certainty is that if there is an injection of liquidity, money will flow to where profit can be made – property, equities, commodities and Asian currencies.  

Since December 2011, the US economy has been adding at least 200,000 jobs per month – March is the first time that it failed to do so. The March employment report also contains another sign of weakness. While the unemployment rate fell to 8.2 per cent, the reason for the decline is that people have stopped looking for work and have dropped out of the labour force. This can be taken as a negative sign as it indicates that jobs are becoming harder to find.  While this may be just one bad economic data report in the recovery trend, it does highlight and illustrate how volatile and sensitive the market can be in this uncertain economic time.

On the local scene, the baht’s rate of exchange against the dollar has been relatively stable, moving mostly in the 30.65-90 ranges these past six weeks. However, with the substantial drop in gold price two weeks ago, the baht broke through the above range and has been trading near 31.00 levels. As the price of gold drops, local investors come into buy which then prompts wholesalers to buy gold from abroad and pay for it in dollars. A large price drop for gold attracts more buyers and therefore a substantial demand for the dollar. With Thailand’s trade surplus getting smaller when compared to 2009 to 2011, the flow of payment for gold is playing an increasingly important part in determining the direction of the dollar/baht exchange rate.

The local bond market is taking a breather now and seems to have stabilised somewhat. The 10-year benchmark government bond yield has risen almost 40 basis points from 3.40 to 3.80 per cent. The rise in the interest rate has to do with three factors. First is the adjustment in expectations that the Bank of Thailand will not cut the interest rate in the remainder of 2012. Second is the rise in bond issuance in Q3 of fiscal year 2012 (April to June) – a supply of Bt175 billion, a 62-per-cent increase on the previous quarter. And last is the potential pressure on inflation from the minimum-wage hike. Nevertheless, any rise in the bond yield looks to be restrained, as the Public Debt Management Office has suggested that it might reduce supply if bond yield rises sharply.

 

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