Is the baht still volatile after renewed stability versus the US dollar?
Volatility of the baht has been very much in the news this year - especially in the first three weeks of January, when it swung from 30.60 to the US dollar to test the Bt29.67 level. Since then, the currency has corrected to 29.80-90. The exchange rate now looks as if it is back to a consolidating and range-trading mode.
This renewed stability versus the US dollar should not obscure the fact that the baht is likely to remain volatile against other major currencies such as the yen, euro and pound sterling.
Of course, that is because those currencies have been extraordinarily active against the dollar. In particular, the yen and the pound have both been on big weakening trends - the yen since November and the pound since last month.
The background factor is the same for both the yen and the pound - markets have assessed that both countries may be undertaking game-changing moves on inflation.
After all, the core reason for the yen's strength in the past five years when it roared from 124 to 75 was that unlike the rest of the world, Japan's inflation has been mostly negative since late 2008. This means that a fixed amount of yen can buy more goods now than five years ago. Internationally, this means that one yen is worth more, in terms of other foreign currencies.
The new Japanese government's priority is to push inflation to at least 2 per cent as soon as possible. If Japanese inflation does become normal by global standards, the yen should weaken, particularly since no other macroeconomic variables - such as the current account, interest rates or economic growth - seem to be supportive.
Actually, there are real doubts about Japan succeeding in creating inflation. But the current momentum for a weaker yen is so intense that most traders are, for now, unwilling to bet against the move.
Yen weakness against the dollar, and thus against the baht, appears to be here for a while. Nevertheless, the yen's move cannot be sustained unless the Japanese authorities can soon show concrete results in upcoming inflation figures.
The British have been more subtle in their rhetoric, but with similar results. Their exchange rate has moved from $1.626 to $1.549 since the beginning of the year, a decline of nearly 5 per cent. Note that unlike the yen, the pound is quoted in dollars, so a move down indicates pound weakening.
This has been due to the Bank of England moving away from its long-standing policy to target inflation at less than 2 per cent. Now, the BOE is talking about "flexible inflation targeting", which apparently means that it is no longer targeting inflation at all. It now admits that inflation will be above its 2-per-cent target until at least 2016.
The BOE also expects economic growth to be poor over the period. All this adds to pressure for continued weakness in the pound and a move down to test the $1.50 level.
These currency movements are also interesting in light of Thailand's own debate on foreign-exchange policy. Much of this discussion has concerned issues such as interest rates or regulatory controls on inflows. But the recent moves show that inflation is an underrated background factor that influences foreign-exchange markets more than interest rates.
And this shows the trade-offs faced by policy-makers. Much greater local inflation would certainly lead the baht to weaken - but much higher prices would also have a negative general impact on the economy.
Parson Singha is chief strategist for global markets, HSBC Thailand.