The Baht has weakened rapidly amid heightened risks from the third wave of the COVID-19 pandemic, which tends to be difficult to control as authorities grapple with COVID-19 variants. As a result, the Baht hit a 15-month low at THB 32.73 per USD (during the trading sessions on July 9, 2021). Meanwhile, risks posed by the prolonged outbreak have widened Thailand's current account deficit. In KResearch's view, this is an indicator of the Baht's weakening fundamentals, as well as a risk to Thailand's economic recovery over the remainder of 2021.
COVID-19-related risks remain an important variable that has triggered the Baht's depreciation during the outbreak in 2020 and 2021. In KReserch's view, however, the potential for any strengthening of the Baht in 2021 will rest on at least two challenging conditions, namely: 1) the possibility that the third wave of COVID-19 will be longer than the first COVID-19 outbreak; and 2) divergent economic recoveries of the US and Thailand, which means that the Federal Reserve (Fed) is likely to signal tighter control over its monetary policy before the Bank of Thailand (BOT) does so.
Going forward, the Baht could weaken even more, potentially hitting THB 33.00 per USD at some point before year-end 2021 (similar to what was seen during the first wave of COVID-19 in 2020) if Thailand cannot reduce its COVID-19 risk levels, and the Fed starts to signal a gradual tightening of US monetary policy at the end of 3Q21, consistent with market forecasts. However, if the US economy fails to achieve strong recovery or encounters another pandemic wave, the market would have to reassess its outlook on the timing of the United States' monetary policy adjustment. This factor would inevitably cause the dollar to depreciate and may help the Baht to strengthen once more, especially if Thailand's COVID-19 situation improves.
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