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26 Jan 2012

Financial Markets

Fed’s New Economic Stimulus & EU Debt Crisis, 2012: Driving US Dollar (Business Brief No. 3237)

Two important factors being closely watched by financial markets globally at this time are the US Federal Reserve Bank's proposed new round of economic stimulus (which might be QE3),along with a decision to hold the Fed Funds rate near zero until late 2014; and, the EU's protracted sovereign debt crisis that may approach a particularly alarming phase unless rectifying mechanisms are implemented in a timely manner. The EU crisis has persisted for three years now, with the Eurozone struggling to resolve many complex, intermingled financial issues.
Amid fragile economic prospects for the US and Eurozone, KResearch is of the view that the abovementioned risks will inevitably cause volatility in US Dollar and Euro forex movements from time to time this year. This would likely induce some consternation in global money and capital markets, as well as exacerbating volatility in Asian currencies. Given this, KGroup has assessed that the Baht may move in a range of THB29.50-33.00/USD in 2012. The Thai currency could soften to the lower limit of our forecast at THB33.00/USD if the Eurozone debt crisis worsens, but conversely, could strengthen to THB29.50/USD if the Eurozone crisis eases and the Fed decides to launch their new economic stimulus, helping to revive investor confidence and risk appetites amid low borrowing costs for USD-denominated loans, amid a bullish outlook foreseen for Asian economies in 2H12.

Aside from forex movements, above economic risks will likely adversely affect the Thai economy and the BOT's monetary policy stance, as well. Eventually, the BOT may have to weigh their priorities between the risk of a global cyclical downturn versus the need for domestic price stability, which may be threatened by rising energy prices if the government proceeds with their energy price reforms, and/or investments in mega-projects.

Financial Markets