Maybank FX Note: THB - No Rate Cut In Aug - 4 Aug 2015

THB: No Rate Cut In Aug

      USD/THB hit a multi-year high not seen since 6 May 2009 at 34.280 on 31 Jul. Since then, the pair has come off to hover around the 35100-level, helped in part by the broad weakness in the dollar. We expect the pair to remain above the 35-figure given sluggish domestic macroeconomic fundamentals and the government’s weak THB policy amid Fed tightening and China grow concerns. Already, the central bank has cut its growth forecast for 2015 to “slightly lower than 3%” for 2015 from 3.0% previously (in Jun) on the back of a more gradual recovery due to a slower growth path for China and other Asian economies, a shift in global trade affecting Thai exports, and lower than expected government disbursements.

      BOT monetary policy meeting is expected to be a non-event. Market and our economic team expect the BoT to stand pat tomorrow, keeping its policy rate unchanged at 1.50%, given the steep depreciation of the THB so far. Though the balance of risk is for no change, there is a possibility that the central bank could cut the policy rate to 1.25%, a level which was last seen during the global financial crisis in Apr 2009, given that negative inflation has given the central bank room to manoeuvre. A rate cut would reinforce the government’s weak THB policy as a means to increase export competitiveness and hence boosting growth. Such a move is likely to quicken the pace of THB depreciation and could see the pair move towards the 35.50-handle and beyond.

      This though is not our base line scenario. Much of the weak growth can be attributed to weak exports and slow government spending and the solution to the economic malaise points to fiscal policy rather than monetary policy. A quicker disbursement of the budget should have a greater impact on economic growth. The central bank has already cut the policy rate twice so far this year (in Mar and Apr) and the central bank might want to sit tight for now and allow these two cuts to work their way fully into the system before embarking on any further rate adjustments. Moreover, a further cut might not be taken kindly by foreign investors who so far have exited Thai equities in droves, particularly in Jul where a net THB26.42bn of equities were sold, offsetting the net THB0.81bn gains in government debt. A further rate cut could extend the sell-off.

      On the technical front, there is a potential for further upmoves for the USD/THB after a fresh 6-year high of 35.28 (31 Jul) was made amid broad USD strength. Underlying bullish momentum remains intact as indicated by monthly MACD. Further move towards 36.40 levels (2009 high and 200 MMA) cannot be ruled out. Dips towards 34.80 remains a buy.