Treasury Outlook

But that has not been the case with the baht. It has been stuck trading in the tiny range of 33.90-34.10 for the past two months. Many people believe that the central bank is putting all its efforts towards sustaining the currency level within that particular range.

Evidence to support that thesis can be seen in the increase in international reserves, which last quarter rose by US$10.6 bil¬lion. Some have even mentioned that 34.00 is a psychological level, below which policymakers do not wish the currency to trade.

We will not argue whether that is true or not, but the point is that some play¬ers in the market, especially SMEs, might be too comfortable with the tiny range and forget to look at the fundamentals, which eventually will reflect the fair value of any currency.

Pressure for baht appreciation remains, and comes from both inter¬nal and external sources. On the internal side, surpluses in the cur¬rent and capital accounts have pres¬sured the baht since the beginning of the year. The current account alone recorded a surplus of more than $10 billion in the first five months. Another $1 billion in capital inflow has been seen in equity markets.

However, this factor might exert less pressure (less, but still a factor!) on the baht going forward, as the cur¬rentaccount surplus is expected to decline.

There is low probability that there will be a significant increase in capi¬tal inflow anytime soon, given that the outlook for the economy is still far from full recovery and that the Bank of Thailand is cutting growth projec¬tions for this year.

External factors will play a key role for the baht in the near term. As we mentioned in our previous col¬umn, many indi¬cators suggest that the liquidi¬ty crunch in global financial markets has been stabilised, thanks to gov¬ernment and central bank actions around the world, especially in the US.

The almost zero interest rate pol¬icy and the huge supply of dollars pumped into the market have less¬ened the value of the greenback. Given the historically high level of US public debt, we have a good idea which way the greenback is headed, and this will put pressure on the baht in the medium term.

Having a stable exchange rate is good for those with exposure in the foreignexchange market, but it would be wise to remain alert and not become too comfortable with the stability of any financial market index today, especially exchange rates.

Historical evidence suggests that every time we have a "snake in the tunnel" pattern in currency move¬ments, it will be followed by a sharp correction.

Nattawut Sachabudhawong is Senior Financial Economist, Treasury Division, Siam Commercial Bank