Baht gets brief 'cliff' bounce

The baht is likely to continue to appreciate in the short term due to an influx of capital from foreign investors reassured by the US deal to avert a "fiscal cliff", the Bank of Thailand (BOT) said, but it also warned that this situation may not last long.

BOT senior director Alisara Mahasandana said the baht had appreciated since the beginning of this year as foreign investors' concerns about the US fiscal cliff eased and their appetite for investment risk returned. This has resulted in capital inflow into Thailand's stock and bond markets.

"The baht gained strength during the first two days of trading on the local stock market this year. The currency is now trading at between Bt30.35 and Bt30.40 to the US dollar, compared to Bt30.60 at the end of last year. The appreciation is a result of the settlement of the fiscal cliff problem in the US, which has encouraged capital inflow into the country. Also, major currencies around the world have depreciated. This allows foreign investors to take more risks in Thailand, especially in local stock and bond markets," she said. "I cannot give any projection as to how long the 'risk-on' situation will last, as it depends on various factors. Monitoring the movement of the baht on Thursday and [yesterday], we can see that the baht has slightly depreciated compared to Wednesday, when it was up significantly. This indicates that some foreign investors have begun to show renewed concerns about the problems in the US and what may happen in the future, including the possible cut in government expenditures and the [looming negotiations over the] debt ceiling," Alisara said.

Tisco Securities senior economist Kampon Adireksombat said the baht's appreciation was due to high liquidity in global financial markets. This capital seeks investment destinations, and the Asia region is very attractive, so the flux of capital into Asia is not a surprise, he said.

But he added that the baht's appreciation is unlikely to last.

Among the factors that one should keep a close watch on is whether the US will raise its debt ceiling, as failure to pay its bills could trigger a drop in the country's credit rating. Furthermore, Europe's economic problems have yet to be completely resolved, which could prompt a weakening of the euro, Kampon said.