Baht Is Going On?

Foreign purchases of Thai stocks have pushed the currency to the highest since the Asian financial crisis, eroding overseas earnings of the nation's food producers and manufacturers. Thai baht had the biggest gain in more than five months on speculation that exporters accelerated buying of the currency after it rose beyond 34 to the dollar. In NY, the quote for the baht went as high as 31.36 to the dollar. The baht has gained some 8% against the dollar so far this year. The appreciation of the baht stemmed from capital inflows by investors in the stock market. To get a sense of perspective, the yuan has only risen by 7% against the dollar since July 2005.

Capital inflows were affecting the entire region any move by the central bank to weaken the baht against the market trend could spur even greater inflows and speculative activity. In any case, regulators expected the baht to weaken in the second half of the year as exports slow and the current account surplus shrinks.

The SET has been one of the hottest markets in the region this year, with the main market up 23% over the past three months. We have to remember that last year the country was held back by problems with the army leadership and Thaksin. That left SET out in the cold and the index under performed most of its neighbours. Now its their revenge. From January to July 6, a total of US$22 billion in capital has poured into Asia, helping push many regional markets to all-time highs. The Stock Exchange of Thailand alone has seen foreign investors hold a net buy position of 120 billion baht for the year to July 9. Exports have been the main engine for economic growth this year, rising some 18% in US dollar terms for the year to date.

Dr Tarisa said the central bank would target the interest rate policy at inflation rather than exchange rates, adding that the relationship between interest rates and currency rates was uncertain. ''There is no certainty that an interest rate cut would result in fewer inflows,'' Dr Tarisa said. The central bank's Monetary Policy Committee will meet next week to decide whether to change its one-day repurchase rate, now set at 3.5%. A regulatory change on Monday allowing foreign investors to borrow baht locally to settle offshore hedging positions had not affected exchange rates.

Bank of Thailand governor Tarisa urged exporters to refrain from panic selling of US dollars as the baht took its advance to almost 3 percent in July. Anything to do with the baht will trigger a sense of unease among other smaller Asian nations. Many will still remember the 97 implosion started by the Thai baht free fall. Japan, meanwhile, said it had doubled the amount of foreign currency reserves it makes available to Thailand to shield against a possible financial crisis. As mentioned before, Japan is really a good friend (read Additional Lessons From 97 Implosion), now Japan did not even wait for things to become problematic before jumping in to help calm the waters. Under the bilateral arrangement, Japan will now offer up to US$6 billion from its foreign exchange reserves to Thailand in the event of a currency crisis. A similar currency crisis like 97 is very unlikely because the fundamentals in Thailand and rest of Asia are quite different. Still, its good to monitor the situation.