Thailand cannot rule out currency speculation in the future as speculators always find new loopholes in the BOT's barriers to it. In the latest round of speculation, traders have enjoyed making twin profits from selling and buying back bonds with the widespread expectation that the baht will continue to appreciate. This new and unexpected speculation strategy has really made the central bank angry with non-resident speculators.

The latest practice starts with non-residents selling dollars within the country to gain baht liquidity. Then the speculators lend commercial banks the baht with bonds as collateral, under a commitment to sell the bonds back to banks. Once they get some profits, they receive the baht on the bonds' due date and sell it for dollars before leaving the country. At this stage they reap both interest and foreign-exchange gains from the more expensive baht against the greenback.

Such speculative transactions have caused the baht to rapidly hit its highest point in nine years. Actually, the method is not new: it is the same kind of speculation done using the repurchase-agreement transactions earlier prohibited by the BOT. It is the non-residents (NRs) that make it appear different. Under the repurchase agreement, NRs are prohibited from lending baht with bond collateral under a certain agreement to sell the bonds back.

The latest baht speculation does not need an agreement as the NR just commits to sell back the bonds.

"The purpose of the transactions are the same as the prohibited repurchase-agreement transactions. The transactions are so large they have caused the baht to appreciate rapidly over the past few days," BOT senior director Pongpen Ruengvirayudh said on Friday.

For speculators, the appreciating baht is currently attractive enough to make them jump into the speculative battle by any means they can find.

Aside from this, they profit by only buying the baht, putting it into non-resident baht accounts, or even holding the cash in hand and waiting for further baht appreciation. Once the baht is stronger, they simply exchange the baht for more dollars.

The baht has always been speculated upon when the market expects a clear trend of either appreciation or depreciation. The speculative methods vary, depending on the channels that arise for making a profit. Speculation on the weakening baht occurred in the 1997 economic crisis, while speculation on the stronger baht began in 2003.

Back in 2003 when the baht was on an appreciating trend, NRs saw a big chance to make a profit and actively reacted, as they are doing now. They sold dollars and then bought bonds or lent baht to commercial banks. On the due date, they took back the baht and then bought cheaper dollars. The central bank introduced anti-baht speculation measures in September 2003 by limiting banks' borrowing from NRs for contracts of less than three months without an underlying transaction, to a ceiling of Bt50 million. The limitation also covers transactions including direct borrowing, short-term debentures and sell-buy swaps.

The measure was not strong enough to discourage speculators' eagerness for the big cake as the baht had appreciated continuously. NRs then found another easy speculative system by selling dollars and simply putting the baht in the accounts. When the baht was stronger, they withdrew the money and bought the cheap dollars back, just as they do now.

That is why the BOT in October 2003 took more aggressive action by prohibiting NRs from parking their money in any kind of non-resident baht account with outstanding amounts of more than Bt300 million each at the end of the day.

A thief always runs faster than a policeman. NRs found another loophole as the existing measures covered only banks. Soon they discovered securities companies as another speculative channel and begun speculating on the baht again. In June 2005 the BOT introduced a Bt50-million limitation for short-term borrowing covering the securities companies.

Back to the financial crisis when the baht was on a depreciating trend: since 1996 speculators had lined up to attack the baht, which was fixed at the rate of Bt25 to the dollar, after they realised the baht was overvalued given the then high current-account deficit. Many measures were launched, but they could not provide defence against the aggressive speculation by hedge funds, leading to the big change in Thailand's currency regime to the managed-float system in July 1997.

As the market was still at the fine-tuning stage, seeking the baht's equilibrium under the new regime, speculation remained high in the wake of the baht flotation, pushing it up to more than Bt50 per dollar.

During this period, speculators borrowed baht from banks to buy dollars. When the baht depreciated, they sold the dollars for the cheaper baht. When the baht became stronger for a period, they bought dollars back with the profits.

In January 1998, the central bank ruled that banks could not lend an NR baht liquidity of more than Bt50 million without underlying transactions. The limited lending covered direct loans, buy-sell swaps, interest-rate swaps and repurchase agreements.

This measure should have been more successful - if banks had complied with it.

However, in 1999 the BOT found that some banks had not followed the rule in actual practice as some of them still did prohibited transactions with NRs. So the central bank had to issue the regulation again. In 2000 the BOT threatened to prohibit all transactions in the repurchase market by any bank that did not strictly obey its regulation. Since then speculation on the baht has calmed.

Like the police on the trail of a thief, the Thai central bank cannot ensure that its anti-baht speculation measures will be 100-per-cent effective as profiteers are always ahead of the regulator.