Strategist predicts active central bank

Bank of Thailand officials are expected to remain strongly involved in warding off baht volatility and maintaining stability amid the ongoing currency war, says one market strategist.

“They probably would be very much involved in protecting the stability of the baht, as all central banks should [do], and I don’t think there’s anything wrong with it,” Peter Rosenstreich, the Geneva-based head of market strategy at Swissquote Bank, said in an exclusive interview with the Bangkok Post.

He said similar to other Asian central banks, the Bank of Thailand had a history of protecting the baht and national interests by way of capital controls or foreign exchange intervention.

“Thailand will be one those countries that will have to take action [to safeguard the local currency’s stability], either by cutting rates or raising rates or even go into something more drastic like capital controls in order to protect their currency,” Mr Rosenstreich said.

Thailand’s current account surplus and high foreign reserves also act as a cushion against volatility in global financial markets.

The country’s current account recorded a surplus of US$1.6 billion in September, while foreign reserves stood at $158 billion as of Oct 30.

Besides raising interest rates, the central bank attempted to stabilise the baht’s depreciating value during the 1997 Asian financial crisis by purchasing baht with its US-dollar reserves.

The central bank also imposed capital controls in December 2006 to limit the baht’s rapid appreciation against the greenback and prevent speculative investment in the domestic capital market.

The Bank of Thailand adopted a managed-float exchange rate regime in 1997 and an inflation-targeting regime in 2000, aiming at market forces to determine the baht’s value.

Under the managed float, the bank does not target a fixed level for the exchange rate but rather stands ready to intervene in the case of excess volatility, particularly resulting from speculative capital flows.

Aggressive rate cuts, verbal intervention, foreign exchange intervention and capital controls are the prevailing symptoms of the ongoing currency war, Mr Rosenstreich said.

“This type of environment is lending itself to focusing [central bank] policy on devaluing the currency,” he said. “If one country does something, you will generally see a reaction in another.”

Although aggregate movement in central banks’ balance sheets is undramatic, a spike in those balance sheets on a monthly basis signifies how central banks around the world have been engaging in a currency war through foreign exchange intervention, Mr Rosenstreich said.

In his view, Thailand is in a slightly better position than Malaysia or Indonesia in terms of financial stability.

The baht’s value is expected to reach 35 against the greenback at year-end, as the US Federal Reserve is expected to delay its interest rate normalisation until next March due to the current “soft patch” in the US economy, Mr Rosenstreich added.