The Thai baht has been a runaway success among Asian currencies this year. — surging more than 6 percent while the US-China trade dispute has punished peers such as the South Korean won and Chinese yuan.
There are two reasons it could rise even more.
First the Thai baht has proven to be the preferred Asian hedge against global trade frictions. Sheltered by the country’s current-account surplus and record foreign reserves.
While US-China trade sentiment has recently appeared to improve. A stiff test is approaching with high-level talks due to start in Washington early next month.
Given that expectations are now relatively optimistic, there appears to be increasing scope for disappointment. — all the more so as US President Donald Trump is notoriously hard to predict. Any setback should pave the way for the baht to outperform.
A second reason for possible baht strength is much closer to home.
The Bank of Thailand is to review policy on Wednesday. — a month after cutting interest rates for the first time in four years.
The 25 basis-point reduction on Aug. 7 caught economists by surprise. But had already been priced into currency forwards.
This time around, the six-month implied rate on baht forwards is just nine basis points below the 1.5 percent policy rate. — compared with 56 basis points before the August meeting, implying that further easing is much less likely.
Most economists surveyed by Bloomberg also expect the Bank of Thailand to stand pat.
Although the central bank has said it is worried about baht strength, these concerns might have been alleviated last week. By the more hawkish-than-expected stance taken by the US Federal Reserve on Wednesday to prop up the US dollar.
At the same time, a buildup in Thai household debt could give policymakers an additional reason to stay on hold.
The Thai authorities have taken a number of steps in the past few months to try and restrain the baht. Including reducing the supply of short-term bonds to discourage fund inflows. — and cutting the limit on outstanding non-resident baht accounts.
These have had little effect so far, and there are no signs they will have any more success in the near future.