Fundamental Analysis: Losses for the Baht on Political Instability

Fundamental Analysis: Losses for the Baht on Political Instability

The Thai baht has weakened somewhat against the dollar for the past few days due mainly to fallout from official election results. Meanwhile the Bank of Thailand has denied accusations of manipulation of currency. The Stock Exchange of Thailand has also posted large overall losses this week.

USDTHB continued its upward movement in today’s Asian session to ฿31.76. This is a week high and a full retracement of last Friday’s losses.

Controversial election causing instability

March’s general election was the first since the culmination of Thailand’s latest political crisis in 2014. Various observers, especially Human Rights Watch, criticised the conduct as unfree. Since the delayed result of no overall majority, the anti-military alliance led by the Future Forward Party has been attempting to build support for a coalition.

Future Forward’s leader Thanathorn Juangroongruangkit announced yesterday his intention to form a government. This is despite Mr Thanathorn’s likely disqualification as an MP by the Election Commission. Overall, the series of political controversies since the election has caused considerable instability for the baht. THB usually suffers during extended periods of political turmoil, as it did during the coup in 2014.

BoT insists no manipulation

The likelihood of Thailand being listed as a ‘currency manipulator’ by the USA has grown significantly this week. The Bank of Thailand (BoT) has in fact accepted that this will probably happen due partially to the country’s comparatively high current account surplus. This news in itself is neither a positive nor a negative factor for THB, but it has increased volatility for USDTHB.

However, BoT governor Veerathai Santiprabhob limited possible instability in markets yesterday. Dr Veerathai denied the accusation stridently, noting ‘If we had done [manipulation], our baht would not be like this.’ He insisted that the baht’s recent strength is mainly a result of external factors. Dr Veerathai also noted that he expects THB to remain quite volatile in the near future due to trade wars and changing monetary policy around the world.

Shares providing headwinds for the baht

This week was very negative for Thai shares. The country’s benchmark SET50 index has lost more than 30 points (about 3%) since the end of last week.

One of the most important drivers was losses for companies affected by the ongoing Sino-American trade war, especially shipping, energy and cargo businesses. Thai Airways International Plc was a big loser after it reported a decline of 83% in Q1 profits.

Politics and data in view next week

It seems probable that politics will continue to have an effect on the baht next week. Although the official announcement of a coalition is very unlikely, traders should not ignore the possibility. Such an event would lead to strong gains for THB in the short term at least.

Although data recently hasn’t had much effect on the baht, next week could be different. There are two key releases:

  • Tuesday, May 21, 02.30 GMT: annual GDP growth, Q1 (consensus 3.0-3.7%)
  • Wednesday, May 22, 03.00 GMT: balance of trade, April (consensus c.$1.2 billion)

If the consensus turns out to be correct here, the baht might appreciate somewhat against the dollar in the immediate aftermath. However, traders should take precautions against unusually high volatility around these releases.

More losses possible for THB next week

THB’s fundamentals in general suggest that the currency might continue its downward movement against the dollar. Conversely, the unlikely prospect of a political breakthrough could make the opposite direction more favorable.

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