If you're planning to travel abroad, it's important to consider the foreign exchange rate to manage your personal finances, especially as the baht is increasingly volatile against the US dollar.
If you're an importer or exporter and you don't hedge against foreign exchange rates, your business may suffer from the baht's fluctuations as the Thai currency has been the most volatile in the region this year.
Money market analysts attribute the baht's volatility primarily to the movement of the dollar, which is an external and uncontrollable factor. As a result, they recommend business operators pay more attention to foreign exchange rates and hedge to mitigate financial risks amid myriad worldwide uncertainties.
Q: What is causing the baht volatility?
According to Roong Sanguanruang, head of global markets and research at Bank of Ayudhya (Krungsri), US dollar movement usually affects other currencies around the world.
The policy rate direction of the US Federal Reserve has been a key factor affecting capital flows and pressuring the dollar movement, she said.
The Fed's aggressive rate hikes increased the policy benchmark rate by 75 basis points per move four consecutive times in the second half of 2022. The hawkish policy started in June and continued through November in an effort to contain the rising inflation rate.
Despite a strong economic recovery, the US inflation rate increased to a 40-year high of 9.1% in June last year, causing the Fed to implement its hawkish monetary policy to reduce inflation to its target of 2%, said Ms Roong.
The aggressive increase in the federal funds rate caused shockwaves in money and capital markets, leading to market volatility across the world.
The higher uncertainty caused the baht to depreciate to 38.46 per dollar in October 2022, a 16-year low.
In December, the US announced steady inflation compared with the previous month, indicating the Fed's monetary policy was having an effect. The central bank then slowed its policy rate hikes to 50 basis points, causing the dollar to fall against other currencies and strengthening the baht.
As of Jan 23 this year, the baht had appreciated by nearly 5% against the dollar, ranking as the most volatile in the region, according to Bank of Thailand data.
The US announced improving economic data and again signs of a steadier inflation rate in January. Investors adjusted their view of the Fed's monetary policy direction, predicting an end to aggressive rate hikes, even as Fed leaders indicated they plan to continue with rate increases until the middle of this year.
"The market predicts the Fed will continue to raise its policy rate at the next 2-3 meetings, potentially making the terminal rate 5.4% by mid-year, exceeding the previous projection of 4.8%," she said.
As a result, capital flows returned to US markets, including so-called "hot money" from foreign investors in the Thai equity and bond markets, said Ms Roong. This caused the baht to depreciate against the dollar in February.
As of Feb 23, the baht weakened by nearly 2% versus the dollar, second only to the Korean won, according to a Bank of Thailand report.
Even though baht movement against the dollar is in line with regional currencies, the baht was more volatile. This fluctuation was attributed to Thailand's economic structure differing from other countries, especially in the tourism sector, which accounts for up to 12% of the nation's GDP.
As countries reopened following the easing of Covid-19 infections, especially China, foreign tourist arrivals have supported the Thai economic rebound, contributing to a stronger baht.
Krungsri upgraded its foreign arrival projection for 2023 from 22.7 million to 25-28 million after higher than expected figures in the first two months.
China reopening more quickly than forecast in January is seen as a boon for the Thai tourism industry, particularly in the second half of the year. Tourism is expected to be the key driver for the country's economic growth this year.
Q: What is the outlook for the baht?
In the short term, Krungsri expects continued baht volatility because of several uncertainties, she said.
The dollar trend is still the key factor affecting the baht's movement, especially the federal funds rate, said Ms Roong.
Despite ongoing Fed rate hikes, lower increases of only 25 basis points each in January and February indicate a moderating US inflation rate.
"The baht is expected to move sideways after its decline in February and brief uptick in March," she said.
"We forecast the baht to fluctuate within a wider range of 32.50-35.50 per dollar in the first quarter this year."
Krungsri assesses the baht will strengthen against the dollar in the second half this year because of both external and internal factors. The Fed decreased the level of rate hikes and is expected to end rate increases by mid-year, said Ms Roong.
Additionally, the Thai economy is expected to continue recovering, mainly aided by a rebound in tourism, especially from Chinese travellers in the second half of the year, she said.
Poon Panichpibool, a market strategist at Krungthai Bank (KTB), warned the baht will remain volatile in the first half this year because of the direction of the federal funds rate.
Mr Poon said business operators, especially importers and exporters, should protect themselves against foreign exchange rate fluctuations amid such uncertainties.
"Recently the baht has moved in a wider range against the dollar, at around 0.50 baht per day. Importers and exporters should use forex options as a method of hedging to minimise their financial risks," he said.
A foreign exchange option, also known as a currency option, is a contract that gives the buyer the right, but not the obligation, to purchase or sell a certain currency at a specified exchange rate on or before a specified date.
Currency options are one of the most common ways for business operators to hedge against adverse movements in exchange rates.
Normally large local corporate firms hedge against foreign exchange rate risk as part of good risk management practice.
Some mid-sized companies, including importers and exporters, use natural hedging rather than financial instruments to protect against risk from higher financial costs, said Mr Poon.
KTB predicts the baht will appreciate against the dollar in the second half of this year as the Fed slows its rate hikes and the Thai economy expands.
The bank maintained its outlook for the baht strengthening to 32 against the greenback by the end of this year, despite significant fluctuations earlier in the year.
In addition to economic factors, Thailand's upcoming general election means political factors may play a greater role in baht movement in the second and third quarters this year, according to KTB.
Mr Poon warned that political uncertainty could swing the baht during this period.
Q: What is the Bank of Thailand doing to handle baht volatility?
The central bank has been monitoring the baht movement after the local currency experienced volatile swings against the dollar compared with regional currencies.
The central bank attributed the movement to investor adjustment to the Fed's rate movements following better than expected US economic data, said assistant governor Chayawadee Chai-Anant recently.
The Bank of Thailand pledged to continue monitoring the baht to ensure the competitiveness of imports and exports, though currency volatility is unlikely to affect import and export volume, said Ms Chayawadee.
The market expects central bank intervention to manage the local currency after significant baht fluctuations against the dollar during the first two months this year.
A reduction in the central bank's international reserves during this period prompted the bank to manage the baht's movement.
In addition, the Bank of Thailand implemented a new forex ecosystem with the objective of developing the Thai financial and forex markets.
With the new instrument, the central bank wants a more balanced market, with a stable and flexible baht driven by market forces, while businesses have greater access to forex hedging instruments with lower costs because of more competition among providers.
The implementation would help address structural problems in the forex market, preparing the Thai economy to cope with financial market volatility in the future, said the Bank of Thailand.
The central bank found movement of the baht and regional currencies in the past was mainly determined by external factors.
Data from the past five years indicates the baht moved in line with foreign currencies for roughly 85% of daily changes, a rate close to other regional currencies.
Domestic factors played a secondary role in influencing the currency movement, according to the Bank of Thailand.
Yet a number of important structural issues remain for the Thai forex market that led to the baht's recent appreciation and made Thai businesses more vulnerable to currency movement than their peers in other countries, said the central bank.
