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30 Oct 2006

Financial Markets

Baht Appreciation Reflecting US Dollar Anxiety: Market Showing Confidence in Thai Economy (Business Daily No.1889)

Recently, the Baht appreciated more than many major regional currencies:
Appreciation in Currencies vs. US Dollar
Currency Exchange Rates
Oct 30, 2006
End of
2005
% Change
vs.
US Dollar
USD/THB
36.750
41.015
11.6
USD/YEN
117.35
117.92
0.5
USD/Sing Dol.
1.5593
1.6627
6.6
USD/RMB
7.8881
8.0682
2.3
USD/TWD
33.140
32.760
-1.1
USD/KW
944.30
1,007.40
6.7
EU/USD
1.2720
1.1840
7.4
Source: KASIKORN RESEARCH CENTER
The stronger Baht is mainly attributed to capital inflows, even though Thailand's economic fundamental factors have been negatively affected by some factors, especially by domestic politics. In the first 7 months of 2006, non-bank net capital inflows were as high as THB370 billion, compared to THB180 billion in the same period of last year. Most of these capital inflows were FDI (foreign direct investment) and portfolio investments.
In October, the Baht was boosted by foreign investors' net buying position in the Thai stock markets after they had carried on a net selling position from the end of September to the beginning of October, following the coup on September 19. The fact of foreign investors resuming a net buying position shows confidence toward Thailand's economic outlook and domestic politics.
Moreover, the stronger Baht is also being supported by a general view among forex traders that the currency has advanced less than regional peers since the economic crisis in 1997, especially in comparison to the South Korean Won and Singaporean Dollar, despite these currencies quickly returning to normality after the 1997 economic crisis in close concert with each other (comparing the currency values at August 1999, findings show that the Won and Singaporean Dollar appreciated by 25.8 percent and 6.2 percent, respectively, while the Baht had strengthened by only 1.7 percent). Therefore, this gives the market the view that the Baht is likely to strengthen further.
For the rest of 2006 through to 2007, KASIKORN RESEARCH CENTER views that the Baht will receive a boost from the softening of the US Dollar, particularly as the Fed seems to have finished with raising their policy interest rate. Meanwhile, the US economy is obviously tending to slow and US GDP growth in Q3 dropped to 1.6 percent quarter-on quarter annualized from 2.6 and 5.1 percent in the previous two quarters. As a result, it is expected that the Fed will lower their policy rate next year in order to help restore the US economy. It is also forecast that capital movements as a result of the market view that the Baht should be able to strengthen further, as will the Chinese Yuan to control an overheating Chinese economy, together may be important supporting factors for the Baht.
On the factors supporting Thai economic growth, although Thai economic growth in H2/2006 will likely be around 3.0-3.5 percent, against the 5.5 percent in H1/2006, it is expected that the GDP growth of Thailand will rise to 4.0-5.0 percent in 2007, from the 4.0-4.5 percent of 2006, which will boost the Thai Baht, as well. Although Consensus Forecasts has conducted a survey on dealers' opinions toward the Baht where it was projected that the Baht would reach THB37.80/USD and THB 37.12/USD at the end of 2006 and 2007, respectively, KResearch is of the opinion that the positive factors mentioned above will help the Baht to manage a firmer standing than the estimates made by them. If the Baht advances in 2007 half as much in as in 2006, it should reach THB 35.1/USD.

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