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Scotiabank: Thai Baht to Continue to Outperform in Asia

Scotiabank analyst Qi Gao pointed on Wednesday to “solid fundamentals” and Thailand’s large current account surplus as reasons for the Thai baht to continue its reign as Asia’s best performing currency.

Thailand’s current account surplus is now an impressive 11.5% of GDP and the country’s economy is growing at its fastest pace since 2013, at 3.7%.

While the Canadian bank sees USD/THB falling no further than 33.0 for the time being – rates on Wednesday were close to 30.30 – the Thai baht will appreciate against currencies like the Indian rupee, Taiwan dollar, Indonesian rupiah and Korean won before the year is out.

Against the dollar, the Thai baht is so far up 7.1% on the year as foreign investors have poured cash into Thailand’s equity and bond markets in search of higher yields. The Thai baht had strengthened to 33.04 on September 7th – a twenty-eight-month high in baht buying power at the time.

The Thai baht fell on Tuesday however, by roughly 0.5% against the dollar following hawkish comments from Federal Reserve Chairwoman Janet Yellen and ahead of Wednesday’s announcement from the White House on a long-awaited tax overhaul.

Yellen told an audience in Cleveland that “it would be imprudent to keep monetary policy on hold until inflation is back to 2%” and the Trump administration is likely to roll out plans to cut corporation tax to 20%, from 35%, and cut the highest rate of personal income tax to 35%, from 39.6%.

A reduction in corporation tax would “make the [US] economy far more competitive and drive…a surge in capital spending,” says Fortune’s Shawn Tully.

With that in mind, the Thai baht declined as traders adjusted their positions to reflect a higher probability of a US rate hike in December. The probability of a quarter-point hike at the Fed’s December meeting now stands at 76%. Probabilities are derived from pricing in CME Fed funds futures.

Against the euro, the Thai baht climbed for a second day on Tuesday and is noticeably higher than it was on Monday morning. The baht has benefitted from political uncertainty in Germany following Sunday’s general election. Despite Angela Merkel winning a fourth term as German Chancellor, a big drop in support for her CDU-CSU party bloc means that Ms. Merkel must now potentially spend several months negotiating with the FDP and Green Party in order to form a coalition government.

As of 6am GMT on Wednesday, the Thai baht had strengthened by 1% against the euro since Monday’s open. EUR/THB traded at 39.10.


Bank of Thailand Meets

No surprises are expected at today’s meeting of the Bank of Thailand, scheduled for 2:30pm local time (GMT +7).

The bank is expected to maintain interest rates at 1.5% even though the Fiscal Policy Office is urging the BoT to lower rates by as much as 50 basis points in order to limit the baht’s appreciation and assist Thai exporters.

Perhaps a bigger reason for the BoT to consider lowering interest rates is inflation, which remains a problem in Thailand. Price growth of 0.32% in the year to August puts inflation well below the lower threshold of the BoT’s target band of 1-4%. High levels of household debt are, however, limiting the BoT’s ability to cut the cost of borrowing further, making any change on Wednesday highly unlikely.

Interest rates have been on hold in Thailand since 2015.

Please note that the opinions of our authors are their own and do not reflect the opinion of Best Exchange Rates and should not be taken as a reference to buy or sell any financial product.

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