Political Drama Imperils Baht Resurgence as Traders Await BOT

David Finnerty
·3-min read

(Bloomberg) -- The Thai baht’s recent rally is under threat as markets digest the nation’s latest political drama ahead of this week’s central bank policy meeting.

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The currency has been one of the region’s best performers since the start of July - aided partly by a rebound in tourism - after hitting a near two-year low against the dollar in May. The resurgence may be derailed however, following a tumultuous period that culminated in Paetongtarn Shinawatra winning a parliamentary vote to become the new prime minister, while a court ousted her predecessor.

Her victory eases the political turmoil and allows investors to focus on economic fundamentals. The currency could face a bumpier path as she advocates for lower interest rates and hints at a thornier relationship with the central bank. There are also reports that the new government may scrap a $14 billion digital cash handout program.

“Baht price action has been a bit more muted than expected, given the recent political noise,” said Christopher Wong, FX strategist at OCBC Bank Singapore. “It remains to be seen if digital wallet will be scrapped or if there will be other replacement measures. But near term, the currency may face heightened volatility.”

Concerns over Thailand’s elevated household debt and investment attractiveness remain a high priority for market watchers. Paetongtarn, a daughter of former Thai leader Thaksin Shinawatra, also has slammed the central bank as an “obstacle” to resolving the country’s economic issues.

The baht’s recent gains against the greenback are also looking technically vulnerable. The currency pair is now in oversold territory, according to a momentum indicator, with some forecasters seeing it as weak as 37.5 per dollar by the end of the year. The baht traded at 34.5 at 8:00 a.m Bangkok time on Monday.

Traders will now turn their attention to the Bank of Thailand’s upcoming policy decision this week, with the central bank expected to keep interest rates unchanged at 2.50%. Narrowing yield differentials between Thailand and the US, as markets price in possible Federal Reserve interest-rate cuts in September, may offer support for the baht.

However, even if the BOT stays on hold, that may not be enough to stop the Asian currency from weakening in the near-term amid the political angst.

“We maintain our bearish view on the baht, looking at 36.0 by year-end,” said Jeffrey Zhang, emerging markets strategist at Credit Agricole CIB HK Branch. “Thailand’s growth could still struggle to get back to trend, and we see a risk of a lower neutral rate given the long-term structural growth impediments.”

This week’s major events:

  • Monday, Aug. 19: Malaysia July trade balance, Philippines July balance of payments, Thailand 2Q GDP

  • Tuesday, Aug. 20: RBA Aug. meeting minutes, NZ July trade balance, China 1-year and 5-year loan prime rates, Taiwan 2Q current account balance

  • Wednesday, Aug. 21: Bank Indonesia policy decision, Thailand policy decision

  • Thursday, Aug. 22: Indonesia 2Q current account balance, Malaysia July CPI, Japan Jibun Bank PMIs, Taiwan July unemployment, HSBC India PMIs

  • Friday, Aug. 23: NZ 2Q retail sales ex. inflation, Singapore July CPI, Japan July CPI, Taiwan July industrial production

(Updates with new quote)

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