Bank of America (NYSE:BAC) (BofA) strategists of Thai Baht’s (THB) surprising resilience, reaching its highest level in nominal effective exchange rate (NEER) terms since the 1997 crisis. This strength comes despite Thailand’s weakening manufacturing data and a notable interest rate gap between the US and Thailand. The resilience of the baht has been puzzling to many, as economic fundamentals typically suggest a softer currency.
The market consensus and various economic indicators point towards a deterioration in Thailand’s export competitiveness, and equity inflows have been lackluster. Traditionally, significant interest rate differentials would lead to capital outflows, which would apply downward pressure on the currency.
However, the current strength of the baht cannot be fully explained by tourism revenues alone, indicating a divergence from standard economic expectations.
Analysts at BofA believe that a substantial portion of the gains in Thailand’s NEER-based currency valuation can be attributed to the depreciation of the Japanese yen. As the yen weakens, it artificially inflates the baht’s NEER, suggesting that the Thai currency’s robustness is more a reflection of external currency movements than domestic economic conditions.
The Thai Baht is particularly sensitive to global oil price changes, considering Thailand’s energy trade deficit, which amplifies the impact of oil price fluctuations. Additionally, the baht has a strong correlation with gold prices, which is influenced by Thailand’s local gold market dynamics and financial flows. The US dollar’s varying strength adds another level of complexity to the trajectory of the baht.
BofA analysts also highlighted the presence of unaccounted for or underreported inflows in Thailand’s balance of payments, which have been persistently positive in the "errors and omissions" category.
These inflows could lead to further appreciation of the baht, potentially harming the manufacturing sector due to an overvalued currency, a situation reminiscent of the Dutch disease. This raises concerns for both policymakers and investors regarding the long-term health of the economy.
The Bank of Thailand (BoT) has historically engaged in sterilized interventions to control the strength of the baht, resulting in the accumulation of substantial foreign exchange reserves. Currently, the BoT seems more inclined to allow market forces to dictate the value of the baht, intervening primarily to curb volatility.
This approach by the BoT underscores the challenges inherent in the "impossible trinity," which involves the trade-offs between monetary autonomy, capital mobility, and exchange rate management.
Looking ahead, BofA analysts suggest that the near-term risks for the Thai Baht lean towards depreciation due to factors such as a seasonally weaker tourism sector, dividend repatriation, and the potential imposition of US tariffs.
Nonetheless, external influences, particularly those related to US macroeconomic conditions, the dollar, and commodity prices, are expected to continue driving volatility in the baht’s value.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.