Thai currency flourishing despite political turmoil

WHEN a country falls into political turmoil, it normally spells bad news for both its markets and its currency as worried investors pull out until the situation has calmed down.

Not so Thailand. Admittedly, the South-East Asian country has suffered sharp falls in its stock market – the market itself was closed for two days at the end of last week and the SET index has dropped 11 per cent since before violence broke out in the capital on 10 April.

But the currency, the Thai baht, has remained remarkably resilient against Western currencies. The Thai baht has also held up against both the euro and the US dollar. It has only fallen 1.2 per cent against the greenback while it has strengthened 9.6 per cent against the struggling euro. It even climbed to its highest level against the pound in more than 20 years, notes Stephen Hughes, chief analyst at FX provider Foreign Currency Direct.

“The baht is continuing to go from strength to strength as Thailand’s neighbours, notably China, pour money into the country in support of its beleaguered government,” he explains.

It’s not just financial help from other countries, though, that is supporting the baht, say analysts at Standard Chartered, who give three reasons for the currency’s relative resilience.

First, the market had already largely factored in the political turmoil in Thailand. This will have kept the currency relatively strong and it means we should see further gains in the baht as traders now start to price in a return to some form of stability in the currency.

Second, they expect that real money funds and leveraged funds are likely to be neutral on the Thai baht. Therefore, institutional investors are neither going to be pouring in money or rushing for exits, keeping the Thai baht trading in a relatively narrow range against the US dollar, which is the most liquid currency pair available to trade.

Third, they point to Thai economic fundamentals, which are relatively solid given large FX reserves, the growth recovery and a substantial current account surplus.

Earlier this week, the government announced that the economy grew at a storming 12 per cent on an annualised basis in the first quarter. Although analysts warn that the political unrest – which has hampered business in much of Bangkok’s financial centre over the past month – will hit growth in the second quarter, the economy should still grow at a rate far outpacing those of developed countries. And with inflation still an issue for emerging Asian countries, interest rate differentials will continue to widen and support further strength for the Thai baht.