Baht likely to weaken on Fed rate rise
Trump victory raises regional uncertainty
The baht is likely to weaken alongside other Asian currencies in expectation of an early rate rise by the US Federal Reserve (Fed) and protectionist trade policies implemented by US President-elect Donald Trump, says an HSBC analyst.
“The uncertainty for Asian currencies has risen after the US presidential election,” said Paul Mackel, head of emergingmarket foreign exchange research at HSBC. “Our working assumption is that the external backdrop has become less supportive.”
An HSBC report said the Fed could raise its policy rate faster than market expectations if fiscal stimulus is implemented in the US, adding that the spillover from stronger US growth may not be meaningful for Asian exporters if the president-elect takes a more protectionist stance.
“There is considerable uncertainty around Donald Trump’s policies and their impact on US growth, inflation and monetary policy, even before we consider the potential global spillovers,” Mr Mackel said.
The markets have been trying to price in the potential implications of the incoming president’s pro-growth policy proposals and his perceived trade protectionism, which has led to shifts in global capital flows and weakening Asian currencies.
“However, even at this early stage, we believe a higher risk premium is needed for Asian currencies,” Mr Mackel said.
HSBC has lowered its forecast for Asian currencies against the US dollar but the weakening is expected to be smaller for the baht and the Philippine peso as these currencies are less exposed to external factors.
The bank expects the baht to stand at 35.70 to the greenback by year-end, down from an earlier forecast of 34.60.
The Thai currency is expected to fall further to 36 to the dollar at the beginning of next year and to 36.50 at the end of 2017.
“We see the baht weakening along with other Asian currencies, although not so much for the Thai currency,” Mr Mackel said.
Among Asian currencies, the baht and the Philippine peso still face the risk of political uncertainty. The economy of the Philippines is among the most domestically driven in the region with high potential to grow, while Thailand’s current account surplus is among the most diversified towards tourism and the country’s foreign exchange management policy is highly vigilant on containing volatility.
“Thailand’s balance of payments is pretty solid — the large current account surplus will likely persist as commodity prices are expected to recover only gradually,” Mr Mackel said.
The report said that Thailand’s tourism sector appears to be more robust than expected despite the current mourning period and this may remain the case even if a general election is held next year.
Capital inflow into Thailand only resumed this year after years of outflow, meaning the effect of possible outflows on the currency in the future will also be limited, according to the report.
But the report went on to say that if the baht outperforms the region too much, the Bank of Thailand is likely to accumulate reserves and relax regulations to encourage residents’ foreign investments as its foreign exchange policy is highly vigilant on containing volatility.