Baht reversal influenced by regional trends

In less than a month, the currency has weakened Bt1, or about 3 per cent. The speed and magnitude of the move may look aggressive at first, but actually the baht is quite tame when compared to regional currencies. During the same period that the baht weakened 3 per cent, the Indian rupee weakened 6 per cent, the South Korean won 5.5 per cent, the ringgit 4 per cent and the Singaporean dollar 2.5 per cent.

The concerted weakness among the regional currencies clearly shows that the current baht weakness is driven more by regional factors rather than local.

The turning point came on April 30, when the Federal Open Market Committee (FOMC) decided to cut interest by "only 25 basis points" and expressed concern about the future threat of inflation. Prior to the decision on April 30, the market had already anticipated the possibility that the interest-cutting cycle could be nearing its end.

The US dollar started to stabilise. For the baht, it was at about 31.50 against the US dollar, but it was not until after the FOMC meeting that the greenback really started the recent rally against most other currencies.

This dollar correction is not really unexpected, given what has happened since the beginning of the year. In January, the markets were predicting a gloom-and-doom scenario for the US economy and dollar.

The foreign-exchange and interest-rate markets are notoriously forward-looking and priced in a very bearish outlook in the US-dollar exchange rate. As evidence, from January 1 to April 29, the period before the current dollar rally, the US currency depreciated about 7 per cent against the yen and the euro, about 6 per cent against the baht and Taiwanese and Singaporean dollars and about 5 per cent against the ringgit and yuan.

Thus, when the US economy began to show just a glimpse of stabilising and did not deteriorate as much as what the market had priced in, the US dollar picked up this cue and initiated its current rally.

So when trying to analyse where the baht will go from here, regional influence and direction take precedence over local factors, at least in the short term.

In the next month or two, the baht will likely remain weak above the 31.80 level. The next target for the baht at 33 looks likely. Additionally, the second quarter is the period in which Thailand's current account is usually the weakest, implying a lower supply of US-dollar inflows.