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More sentimental market means less predictability of the baht

In contrast to 2013, the baht opened this year with a rapid weakening trend. At dawn on January 2, 2014, the currency stood barely above 32.7 to the US dollar. About 24 hours later, it lost 1 per cent of its value, breaking the 33 barrier, the weakest level since the end of February 2010, and wiping out its gains from the second, third and fourth rounds of the US quantitative easing (QE) programme combined.

Taking all factors together, one could easily conclude that the only direction the baht's value is moving this year is down. Whether you take into account the Fed's QE tapering, which begins this month, trimming its monthly asset-purchase programme to US$10 billion, or the protests on the streets of Bangkok, which have now culminated in a "shutdown" of the city, the outlook for the baht is not exactly bright.

These together form a push-pull force on cross-border capital flows, in effect putting more pressure on the baht. The Fed's tapering in itself will lead to unwinding of liquidity positions across emerging markets, hence pulling capital out of the region even if the economy has strong fundamentals and growth. Domestic stability (or lack of it), on the other hand, acts like a pushing factor, sometimes even pre-empting the pull factor, as was evident last year in Indonesia and India.

Yes, the trend can be predicted. But by how much and when remain the difficult questions. The reason for such difficulty is ironically simple. While the pull force on capital flow can be viewed as a fundamental factor, the push factor of political unrest plays a lot more on market sentiment and less on the fundamentals.

Some analysts will argue strongly that political risk factors are indeed fundamental, to which I agree, but the impact of an uprising and protest like the current one cannot be quantified under the typical framework of political-risk analysis. It becomes practically impossible for financial or economic analysts to outguess these political leaders whose cards are kept very close to the chest. Even they, the government officials and protest leaders, are deciding things on a daily basis.

To sum it up, this means we can comfortably conclude that the likely trend for the baht this year will be weakening, but no one really knows how fast it will fall and how far.

Neither does Thailand provide quite adequate incentives for short-term investments. While investors this year will ponder where to leave their money and where to pull it out, it seems that we have been making their decisions easier with both an underperforming stock market and negative returns on carry trades.

Our year-to-date stock performance in US dollars is at the bottom of the Asian table, losing 4.5 per cent, beating only a couple of Chinese indices and Mongolia's, and doing worse than most Latin American markets. In local-currency terms, its performance isn't much better.

Thailand's carry-trade return is also poor, for short positions both in dollars and yen. The year-to-date loss for dollar short positions is around 0.86 per cent, mostly from the weakening baht, again at the bottom of the table. And for those who were hoping that Japanese liquidity would help prop up the baht for the duration of this year, carry trades with the yen as the short position have lost a whopping 2.64 per cent, again because of the weakening baht.

Hence against the backdrop of weak sentiment on the currency, it becomes harder for any fundamental white knight to counterbalance the sentimental direction.

It is not a surprise, then, that after tracking currency performances across the region since the beginning of the year, we find that the baht didn't fare well against its peers. While it has lost close to 1 per cent against the dollar, the closest movers were the Korean won and New Taiwan dollar, both of which lost only about two-thirds of a per cent. Other previous worst performers such as India's rupee and Indonesia's rupiah are now up against the greenback, by 0.45 and 0.9 per cent respectively.

The baht has weakened along the line of its fundamentals, but at a pace driven by rapid deterioration of sentiment. Will it continue its wild ride over the next couple of months? With sentiments in the driver's seat, we think it will. Until the political dust settles, tools for fundamental analysis are useless for now.

And if sentiment factors continue to determine the currency's direction for the duration of this year, you may have to start consulting psychologists (and political scientists) instead of asking economists and analysts about where the baht is heading next. Our professions just aren't trained for that.

Views expressed in this article are those of the author and not of TMB Bank or its executives. The author, Dr Benjarong Suwankiri, head of TMB Analytics, the economic-analysis unit of TMB Bank, can be reached at tmbanalytics@tmbbank.com.


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