BAY wary of baht volatility

Bank of Ayudhya (BAY), the country’s fifthlargest bank by assets, forecasts the baht will be more volatile next year in anticipation of increasing capital mobility after the US Federal Reserve’s expected rate increase next month.

The baht volatility rate is expected to increase to 7-8% next year from 6.15% yearto-date, said head of global markets group Tak Bunnag.

His comment underscored Bank of Thailand governor Veerathai Santiprabhop’s recent remark that baht volatility would be higher next year as the Fed would raise its policy rate for the first time since the subprime crisis, while other advanced economies including the European Central Bank and the Bank of Japan have indicated further quantitative easing might be used.

The baht has dipped 8.6% versus the dollar year-to-date, the third weakest in Asia after Malaysia’s ringgit dropping 20% and Indonesia’s rupiah 9.8%. Volatility of the ringgit and rupiah is also greater at 14% and 13.4%, respectively.

The local currency traded at 35.98/36 yesterday versus Wednesday’s 35.96/35.98.

BAY’s higher baht volatility projection assumes the Fed will jack up the rate by 25 basis points to 0.50% in December.

The bank also estimated the baht will weaken to 36.50 against the greenback at the end of this year, moving in a range of 36.50-37.50 next year.

BAY encouraged customers to hedge against foreign exchange risk as baht hedging costs are relatively low at 1.8%, compared with the ringgit at 2.5% and rupiah at 12.9%.

The hedging ratio of the bank’s local clients is steady at around 50-60% of total transactions, below 80% for Japanese customers.

“Although the baht has been volatile since the beginning of this year, local customers haven’t paid more attention to baht hedging. And higher volatility is predicted for next year,” he said.

Terrorism is another factor affecting foreign exchange rates for the world’s key currencies, said Mr Tak.

Despite the potential US rate rise, the Bank of Thailand is expected to keep its policy rate at 1.5% before raising it to 1.75% late next year.

BAY predicted the Thai GDP would grow by 3.2-3.5% next year, below the central bank’s forecast of 3.7%.