Monday, October 27, 2008

How much lower can the Thai baht go?

CURRENCY MARKETS

PARISTA YUTHAMANOP

The baht is likely to continue to weaken for the near future as foreign investors continue to dump emerging market assets and export growth slows due to the global economic downturn.

The baht closed yesterday at 34.79/89 to the dollar, compared with 34.7 on Friday and 33.85 at the end of September.

Analysts said the US dollar was likely to extend gains against other currencies as US financial institutions continue to reduce their leveraging in the wake of the global crisis.

Institutional investors such as hedge funds and pension funds have also been heavy sellers of emerging market assets as investors cut losses and retreat to cash or risk-free US treasury bonds.

The one exception has been the Japanese yen, which climbed to 92 to the US dollar yesterday as investors continued to reverse "carry-trades", where traders borrow in low-interest yen to finance investments in higher-yielding assets in other currencies.

Dealers said statements by the Group of Seven industrialised countries that the yen's movements were "excessive" were all but ignored by the market. The currency rose to a 13-year high of 92.65/7 yen to the dollar compared with 94.24 last week, while the euro fell to 1.243 against the greenback as the financial crisis continues to affect the Eurozone.

For the baht, analysts said further declines were likely against the dollar in line with other Asian currencies. Falling export revenues, foreign investment inflows and tourism receipts would further add pressure to depreciate.

Nicholas Bibby, senior regional economist at Barclays Capital, predicted that the baht was likely to break 38 to a dollar in the first quarter of 2009 and stabilise in the remainder of next year.

"We expect the dollar to strengthen against Asian emerging markets' currencies. The main factor is risk aversion. Also inflows to capital accounts will subdued," he said.

Other Asian currencies, including the Korean won, Singapore dollar and Philippine peso are also trading at multi-year lows against the dollar due to capital outflows.

Another dealer noted that the baht had actually been less volatile in recent months when compared with other currencies, thanks in part to the fact that capital outflows had been ongoing since the beginning of the year.

Foreign equity investors have been net sellers of over 140 billion baht worth of stock this year, due in part to the political instability that has dominated the headlines since mid-year.

According to the Kasikorn Research Center, the baht was now down 3.2% against the dollar since January. In the first quarter, the baht appreciated 7.2% against the dollar, but has since given up all its gains over the past six months.

"Actually, the depreciation of the baht should help improve export competitiveness as the Chinese yuan and the yen have both strengthened against the dollar," said one Kasikorn Research executive.

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