THB: Reversion But Uptick Still Likely |
The USD/THB upswing up to 12 May
was exacerbated by the sell-off in Thai assets so far in the month of May.
Also, helping was the 25bp rate cut on 29 Apr and the Capital Flows Relaxation
measures on 30 Apr. These helped to keep the pair elevated.
Risks to the USD/THB are still to
the upside especially from the lack of external demand and expected lower
exports. On a trade-weighted basis, we estimate that the REER is currently
about 9% above its 10-year average, suggesting an overvalued THB. As well, our
fair value model suggests the USD/THB fair value to be 35.555, which suggest
room for the THB to move higher. The likely factors that drive our fair value
higher are yield differentials, NFA and growth differentials.
Given the possibility that foreign
holdings of government debt continue to unravel further, we now expect the
USD/THB to climb higher to around 34.50 by 3Q amid greater FX volatility as the
US Fed begins its rate normalization. The pair should then settle lower by the
end of 4Q to around 33.80 as global growth begins to take place, entrenched by
a recovery in the US and possibly the EU as well, which should be supportive of
Thai exports and tourism. We remain bears on the THB.
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