Bank of Thailand's hawkish tilt adds to the currency's allure

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Mr Veerathai pointing to new baht banknotes featuring Thailand's King Maha Vajiralongkorn on July 3, 2018; he says the central bank can't go against the global trends in interest rate policy.
AUGUST 27, 2018 - 11:14 AM

Singapore

THE Bank of Thailand (BOT) is giving the baht - the most-loved emerging-market currency this month - one more reason to keep up its outperformance.

Piggybacking on a strong current-account surplus, the baht has braved developing-market doldrums and topped returns among 24 currencies tracked by Bloomberg. It is also the sole gainer in Asia this quarter.

As investors await the Aug 31 release of Thailand's latest balance of payments data, a recent hawkish tilt by the central bank is adding to the currency's allure. There is less need now for an extremely accommodative stance since the recovery in the economy is clearer, governor Veerathai Santiprabhob said on Aug 20, adding that it can't go against the global trends in interest rate policy.

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The baht's stability and benign inflation have enabled Thailand to hold interest rates at a near-record low of 1.5 per cent even as countries including Indonesia, India and the Philippines have tightened.

Mr Veerathai's comments have already prompted Nomura Holdings Inc to forecast a 25-basis points rate hike at the Sept 19 meeting. Minutes of the BOT's latest gathering showed officials discussed "conditions and appropriate timing to begin normalising monetary policy in the future".

Technical analysis also points to potential gains for the currency, as the dollar-baht's failure to breach a key resistance around 33.50 has seen the pair resume its downtrend. Dollar-baht below its 50-day moving average on Monday, and may look to test support around 32.363 - its high from May 21, given the growing bearish momentum. The pair's moving-average convergence-divergence has declined below zero, having already fallen below its signal line. A breach of the May high may see it head towards support around 32.00 in the medium term. At 32.76 to a dollar on Friday, the currency has climbed 1.6 per cent this month, after data July 31 showed a higher-than-estimated current-account surplus of US$4.08 billion for June.

At more than 10 per cent, Thailand has the second-highest current-account balance as a percentage of gross domestic product among developing markets in Asia. Only Taiwan has a better buffer. While the Taiwan dollar has been hit by foreign outflows from equities and the China-US trade war, Deutsche Bank AG says the baht offers the best value in emerging Asia.

The baht is up 1.1 per cent this quarter. It is also the only currency showing a gain for August among 24 developing-market exchange rates. That's no mean feat given that the MSCI Emerging Markets Currency Index has dropped about 2 per cent this month. BLOOMBERG