The Thai baht had its best day yesterday since March and has forced itself to 22-month and 15-month highs against the US dollar and Australian dollar respectively.
USD/THB fell by 0.55% yesterday to 34.15, finally breaking the 34.25 level that had held the pair up since April 3rd. And the baht has strengthened again this morning, adding a further 0.25% in gains against the American currency. As of writing at 05:05 GMT, USD/THB stands at 34.07 having rebounded from the 34 handle some two-hours ago.
Moves in AUD/THB have been similar to those in USD/THB over the past 36-hours, but of a greater magnitude. The baht flew against the Aussie yesterday, rising by 1.25% to end the day at 25.43. The baht has strengthened again this morning versus AUD, rising another 0.5% and, as of writing, AUD/THB stands at 25.31.
Baht Rally the Manifestation of Improved Emerging Markets Outlook
There is a fairly significant rally underway in emerging market assets.
The MSCI Emerging Markets Index (equities) has rallied more than 16% in 2017. In comparison, the UK’s FTSE 100 and US’ S&P 500 benchmark indices are up 5.7% and 7.8% respectively.
According to Jan Dehn, head of research at investment fund Ashmore, the current outperformance of emerging markets is due to the tapering, or expectations for tapering, of quantitative easing (QE) programs deployed by G10 central banks since 2010.
In an interview with the Financial Times, Dehn explained yesterday that funds pumped into the global economy between 2010 and 2016 via the mechanism of QE were largely invested in developed economies, such as the US and Europe.
By having so much money going into developed market assets, it was a necessary side effect that emerging markets experienced under-investment, says Dehn. Under-investment and reduced capital inflows worked to tighten monetary conditions in emerging market economies and to slow their rates of economic growth.
A reversal of this process is now under way, thinks Dehn.
Of the G10 central banks to initiate QE, the US Federal Reserve is currently the only one to have done away with it. However, there are high hopes that Europe will follow suit in 2017. In comments made last month to German news group Zeit, ECB committee member Jens Weidmann said that the time to ease up on QE was nearing and that he’d be happy if ECB bond buying stopped within a year.
With much of the normalization of monetary policy in developed economies (the end or tapering of QE) already priced in to financial markets, money has begun to flood into emerging economies. Emerging market bonds are currently outperforming every other category in fixed income investment and will continue to do so, says Dehn.
Fund inflows are easing monetary conditions in countries like Thailand, India, Mexico, Malaysia and South Africa, and this will support their economic growth.
Thailand’s improving growth story was affirmed last week when the National Statistical Office of Thailand released data showing that first-quarter GDP climbed 1.3% – the country’s fastest quarterly growth rate since December 2012 and much stronger than 2016’s Q4 GDP growth of 0.5%.
Stronger growth will also boost the currencies of these nations – the baht, the rupee, peso, ringgit and rand – because, simply, in order to buy assets in these countries, investment funds or individuals must first convert money into (buy) the local currency, and this conversion (buying) will drive the currencies higher.
Will Support Continue for Emerging Markets?
Yes, thinks Dehn.
“To put money into emerging markets you certainly need a significant value proposition, and that value proposition exists right now. We’re seeing local bond yields that are very high compared to inflation, and in the context of an improving growth story these high yields offer really good value. We are also looking at currencies that are very, very cheap,” says the Ashmore researcher.
The “very, very cheap currency” aspect of this story is an important one and will allow emerging market assets to remain attractive to foreign investors due to magnified returns.
What this means is that an American group investing in a Thai asset, for example, may experience a 20% increase in the asset’s value – let’s say from THB 50,000,000 to THB 60,000,000 – but also benefit from a significant depreciation in the USD/THB exchange rate – let’s say from 34 at the time of investment to 30 upon resale. In a case of significant baht appreciation such as this, the original dollar investment of $1.47 million (THB 50M at an exchange rate of 34.0) would be worth $2 million upon resale (THB 60M at a rate of 30) – a return equivalent to 36% and way above the 20% possible from the performance of the asset alone.
Risks to the Outlook for the Thai Baht and Other Emerging Market Currencies
The greatest threat to emerging market currencies is that of US protectionism, says Dehn.
In April, investors learned of the introduction of US import duties on Canadian lumber imports, which was perhaps the first stage in the implementation of the Trump administration’s “America first” policy.
With external trade so vital to the economic health of emerging market economies, the threat of similar duties being applied to their goods – a move which would make the goods more expensive and far less attractive to American buyers – is giving some potential emerging market investors the jitters.
Dehn is not concerned however. He believes that the Trump administration are now “pulling away” from an earlier stance which favoured US protectionism. Dehn believes that US trade barriers would only work to drive up the dollar – something that Donald Trump has said countless times is already “too strong” – and would make US bond markets “less attractive at the margin than they would otherwise be.”
Readers in need of Thai baht should consider buying the currency now, thereby positioning themselves ahead of further THB appreciation. You can find the cheapest online providers of THB travel money and THB foreign currency transfers using BestExchangeRates.com’s FX comparison calculators.
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