Thai Baht Pauses rally as Central Bank eyes Japan

The Baht has been dropping all week after speculation mounts that the Thai central bank will intervene to stop the speed of the THB’s appreciation. The massive gain in the last quarter was triggered by the fall of the Japanese yen as new BoJ governor Kuroda and PM Abe have carried through on the latter’s campaign promises to kickstart the Japanese economy.

The Thai Baht is the best performer in Asia. The currency has appreciated Gaining more than 5% versus the USD. It currently trades at a near a 16th year high. Economic fundamentals are strong which make for one part of the move, but the central bank has issued a warning that the currency might have moved beyond its fundamentals.

As an exporting nation the rise in its currency erodes the competitive advantage and exporters have complained to the Finance Minister to urge the central bank to try to slow down the rate of appreciation.

Foreign investors are buying bonds more than they are selling. The logic would follow that with Japan’s policy continuing, Japanese pension plans would turn to emerging markets for higher yields. We haven’t seen that fully play out yet and that is an important measure of success for the BoJ’s plan. If Japanese institutions don’t become sellers of yen, it might trigger a reversal in the mid term.

Bank of Japan quantitative easing is a factor

The actions of the BoJ are driving emerging markets to appreciate faster than they would like. Japanese QE actions are designed to reach a 2% inflation target in two years. That is a very ambitious target and by some economist’s accounts it is an unattainable one. The immediate effect from those actions was a devaluation of the Japanese yen which now sits close to 100 yen per dollar. The Group of 20 has given Japan a pass by confirming the nation is not incurring in a “currency war” because of the domestic nature of the economic policies.

The sustainability of the Japanese program and its results will be monitored and discussed. The more Japan fails to hit their aggressive target, the more the market will become a net buyer of yen and will drive the price up. In the short term there are market participants looking closely at this Thursday’s benchmark rate meeting and CPI releases as they will give insight into how well is Japan delivering on inflation.

The pension plans have not started to drop yen or have not done so at the speed expected by the market, which could signal a reversal if current levels continue. In order for Japan to reach its economic policy goals, it needs continued weakness of the yen as holders of yen sell it to invest outside Japan.

Central bank intervention is a possibility but success depends on outside factors

The main tool for the Bank of Thailand is the interest rate. Right now it stands at 2.75%. A cut would discourage investment in Thailand, but at 0.1% the Japanese rate makes even a 2% Thai rate attractive. And it could have negative effects on the local economy while the currency might remain unaffected.

The central bank has issued statements that it will not introduce “draconian” measures to curb the rise of the baht. The BoT is focused on the real economy, which might not align with the price of the currency. The Governor of the Bank of Thailand has said that the country cannot rely on cheap wages and a weak currency moving forward.

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