LAST week the Vietnamese authorities devalued the dong by 3.4 per cent against the US dollar, the second adjustment to the currency in three months. But, its Asian neighbours are not going to follow its lead, and some currencies could actually appreciate in the coming months.
The Bank of Thailand specifically ruled out a devaluation, which is sensible, says Kevin Grice, senior international economist at Capital Economics, because Thailand’s economy is actually stronger than that of Vietnam. The Vietnamese authorities justified the devaluations of the dong as a way to boost exports, which were hurt by the global economic downturn. In contrast, Thailand’s exports are more sophisticated – they include technology and capital goods, and trade in these goods has been fairly resilient.. A strong economy should increase pressure on the baht to appreciate over the long term.
Inflation reached 4.1 per cent in January. Grice points out that upward pressure on prices could fall in the near- term as base effects wear off, which could lead the central bank to delay hiking rates in favour of a stronger currency: “I think the Bank of Thailand will be happier to see the baht appreciate because the domestic economy hurts more from higher interest rates than it does from a stronger exchange rate.”
The Bank of Thailand should remain relaxed about gradual appreciation of its currency. An appreciation of the Chinese renminbi would be the most likely catalyst for a more rapid appreciation of the baht. Although there have been rumours this could happen, it has yet to come to pass.
For now, a long Thai baht trade is a good way to get exposure to the Asian growth story. You can trade the baht against the US dollar. But it is worth remembering that spreads on baht trades can be relatively high – GFT offers 16 points – this is because of the inherent risk involved in trading emerging market currencies. It can also mean some big upside gains if you are willing to hold the trade and wait for this period of risk aversion to subside.