Baht strengthened significantly over the past 2 days, bringing USD/THB from 29.6 to 29.15 in quick succession. This development is strange given current risk aversion climate brought about by Cyprus’s bailout plan. It is obvious that USD is increasing in strength due to safe haven flows, as evident via the declines seen in EUR/USD, AUD/USD and GBP/USD just to name a few, which makes Baht strength all the more peculiar. To deepen the mystery further, there wasn’t any fundamental news that suggest economy in Thailand is stronger. On the contrary, Thailand’s CEO Sentiment Index which was reported on Monday is heading towards another decline. Private sectors continue to express concerns about the strength of Baht, though Bank of Thailand is having none of it, saying that current strength is in line with what the rest of the South East Asian currencies are experiencing. Governor Trairatvorakul said earlier Today that recent appreciation was “too quick”, though the strengthening is not the result of foreign capital inflow, but rather an accurate reflection of Baht’s value.
This is a strong statement, and one that is virtually unheard of these days. Central bankers are busily occupying themselves by saying that their currencies are “overvalued”. Accordingly to BOJ and RBNZ, both their currencies have been over valued by more than 10%. How they derive the actual percentage is anybody guess, but the underlying intent is clear: Central Bankers do not want to see their currency strengthening – Weaker the merrier thank you very much. Hence it is confusing to see BOT actively expressing a hawkish stance when calls for him to push baht lower continue to get louder.
The result of a hawkish BOT is clear: no market intervention when Baht strengthens, resulting in strong bearish breakouts in USD/THB. In previous years, BOT will actively engage in market operations to buy USD whenever the Baht strengthens. Such actions are commonly done Asian Central Banks such as Bank of Taiwan and Monetary Authority of Singapore whenever they want to influence currency rates. However, as BOT is ok with such appreciation, we’re looking at a strong downtrend forming, with little or no pullback.
From a technical perspective, price is currently trading within a descending Channel. Stochastic readings is appearing to peak soon just as price approaches the Channel Top, suggesting that a rebound towards Channel Bottom is likely. Nonetheless, if USD strength prevail due to extreme global risk aversion (perhaps a catastrophic failure of Cyprus and the Euro-Zone), USD/THB may be able to push higher above and away from the Channel, though Kumo overhead will continue to loom and provide resistance. Ultimately, price may need to recover beyond 29.5 (above Kumo and back to the pre sell-off levels) for the overall bearish bias to be invalidated. Judging by the sensitivity to safe haven flows (or the lack thereof), we may need something even larger than Cyprus to break Baht bears.
Daily chart shows a continuation of the downtrend that was seen early 2013, where Bank of Thailand was nowhere to be seen as well. However, Feb and early Mar saw Bank of Thailand softening their hawkish stance, and Gov Trairatvorakul was willing to meet with private business owners to hear their plight. This supported USD/THB as traders and speculators thought that BOT may step in soon. However, that didn’t materialize, which brings us to current price levels. Interestingly, current sell-off is finding support around the 161.8% Fib extension of Jan’s decline. Stochastic is also entering Oversold region which may bring relief to USD/THB bulls. This does not translate to a bullish outlook mind, as we could simply see price trading sideways just like what happened in Feb. Even if price manage to trade higher, Kumo will provide resistance while talks of a true bullish recovery may only happen if price manage to clear the 29.9 ceiling or preferably 30.0 round number.
Fundamentally, there are good reasons to believe in a stronger Thai economy in the future. Fitch has only just recently upgraded Thailand’s credit rating to BBB+. Finance Minister and Deputy Prime Minister Kittiratt Na-Ranong has also said that economy has improved in Q4, and will continue to improve with the 2-trillion-baht infrastructure investment project. 2013 GDP growth is expected to be around 6%. It seems that things are looking great for Thailand, but the runaway baht may come back and bite them eventually if it eats into profitability of exporters.
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