The baht is likely to continue its depreciation trend in the near term after falling below 33 to the dollar, unless the Bank of Thailand sends a hawkish signal on Wednesday about a potential interest rate increase, says Kasikorn Research Center.
The Thai currency weakened to a 13-month low of 33.18 baht to the greenback on Tuesday from Monday’s close of 32.93 amid growing expectations that the US Federal Reserve may raise interest rates later this year to curb inflation risks, said Kanjana Chockpisansin, head of banking and financial sector research at the K-Research.
Fed funds futures are now pricing in a 54% probability that the Fed will deliver two 25-basis-point rate hikes before the end of this year.
Meanwhile, uncertainty in the Middle East remains elevated despite progress in peace negotiations between the US and Iran. Although Washington has temporarily allowed Iran to resume oil exports for 60 days, several key issues remain unresolved and are still subject to ongoing talks, Ms Kanjana said.
For the year to date, the baht has depreciated by 4.9%, compared with 6.6% for the Indonesian rupiah, 6.4% for the Korean won and 5.1% for the Indian rupee.
The dollar index extended its gains on Tuesday, rising above 101.00, while gold prices fell 1.6% from the previous session to $4,118 an ounce.
“Instead of gold, which is a safe-haven asset and normally used to hedge against inflation, massive capital flows have recently been drawn to the dollar given unease surrounding the US-Iran peace agreement,” Ms Kanjana told the Bangkok Post.
With the Monetary Policy Committee (MPC) widely expected to keep its policy rate unchanged at Wednesday’s meeting, in line with the Fed decision last week amid lingering inflation concerns, K-Research believes the the baht’s depreciation is unlikely to abate.
“Unless the Thai central bank clearly indicates a potential interest rate hike, citing inflation concerns, we don’t expect the baht to reverse course,” she said.
K-Research expects the Thai currency to weaken to 33.30 or 33.50 to the dollar until the US-Iran peace negotiations show clear signs of development.
“That would ease the dollar’s strength, causing the baht to appreciate,” said Ms Kanjana.
Poon Panitchpibun, money market strategist at Krungthai Global Markets, shared a similar view, noting that for the near term the baht is likely to remain under downward pressure from dollar strength until market participants scale back their expectations for further Fed rate hikes.
“While developments in the Middle East have improved in line with our expectations, supporting a more benign inflation outlook, these factors have largely been priced in by the market,” he said.
Investors should remain cautious about tensions in the Middle East flaring up again, which could result in higher energy prices and reinforce expectations of additional Fed tightening, easily exerting downward pressure on the baht, Mr Poon said.
