Economic Analysis - Surge In Reserves Does Not Necessarily Suggests Further Baht Strength - NOV 2017


BMI View: While the Thai baht continues to face upside pressure and the BoT is building up reserves at a rapid pace, we are happy to remain neutral on the baht following its impressive gains as spikes in reserves may reflect excessive speculative interest. Furthermore, with the nominal yield spread continuing to head in the US's favour and rising oil prices likely to u put upside pressure on inflation, real yield spreads are likely to turn much less favourable to the baht over the coming months.

The Bank of Thailand is aggressively buying dollars to prevent the baht from strengthening through THB33.00/USD. Favourable terms of trade, widespread dollar weakness, and domestic political stability, has seen the THB appreciate strongly this year, and upside pressure remains in place as evidenced by the surge in foreign reserves at the BoT. Reserves currently stand at a record high just short of US200bn, equivalent to roughly 45% of GDP, the fourth highest in Asia behind Hong Kong, Taiwan and Singapore.

However, we caution against assuming that surging reserves mean that the baht will continue its rise. As the chart above shows, the baht, like many EM currencies, has had a tendency to weaken following large spikes in reserves, and strengthen following sizeable reserve drawdowns. The reason, in our view, is that central banks act to stem the trend of the currency only after it has already moved into extreme levels. That is not to say that the recent spike in reserves suggests that baht weakness is imminent. However, with the nominal yield spread continuing to head in the US's favour and rising oil prices likely to undermine Thailand's terms of trade and put upside pressure on inflation, we are happy to remain neutral on the THB, after being bullish for most of the past year ( see ' THB: Turning Neutral Following Significant Gains, August 7).

Reserve Spike Not Necessarily Bullish
Thailand - Reserves And THB/USD
Source: BMI, Bloomberg

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