Thailand: Hedge your baht bets
Why should recent baht movements convince investors to hedge their foreign-exchange positions? The short answer is because the Thai baht is very volatile and its recent high volatility is likely to continue in 2022.
Considered the worst major Asian currency performer in 2021, the baht depreciated from 29.90 to the US dollar in early January to 33.90 (a 13.5% change) in early October. It has since rebounded by 3.8% to around 32.80, despite the continued strength of the dollar, as markets have high expectations for the reopening of the economy and international tourism, which should result in Thailand’s current account rebounding from a deficit in 2021 to a surplus in 2022.
Looking forward, in addition to the US dollar and foreign tourism, I believe the global oil price would be another key factor that financial markets will need to monitor to forecast baht movement in 2022. All three of these key factors will likely show unpredictable movement as well, which should result in a volatile baht in the next three to six months.
Let us start with the US dollar index, which is the value of the dollar relative to a weighted basket of its key trade partners’ currencies. The largest weight goes to the euro, accounting for 58% of the total, and that’s why keeping a close eye on US Federal Reserve policy in relation to that of the European Central Bank (ECB) is a key factor to gauge the movement of the index.
For example, recently after the Fed announced its tapering programme, reducing its asset-buying stimulus as markets widely expected, the focus has shifted to strong US labour market recovery and a longer-than-expected period of high inflation in the US. As a result, markets now expect the Fed to begin raising interest rates starting as soon as mid-2022, rather than early 2023.
The ECB, however, continues to assert that high inflation issues are not its key concern and should not rush it into following the Fed to hike rates next year.
GRADUAL FED SIGNALS
With expectations of a faster pace of rate increases in the US, the US dollar recently rose to 95.10, its highest against the euro for the year to date. The key question is, will the Fed now follow market expectations? Possibly, but in my view, it will adopt the same tactic it used with its tapering guidance. In other words, it will gradually send signals to the market rather than making a single clear-cut announcement. Hence, the US dollar index should see some volatility in the coming quarters.
Here in Thailand, the outlook for revenue from the foreign tourist recovery, which directly affects the current account recovery, has been a key focus of the markets. Data from the first three quarters of this year suggest that despite an improvement in the trade balance to a US$26.4-billion surplus, the sluggish foreign tourist recovery is a key drag on the current account, which still shows an $11.5-billion deficit.
Now that the government is allowing vaccinated foreign tourists from more than 60 countries to visit Thailand without quarantine — and the Thailand Pass system is being improved to make it less onerous for them to do so — hopes for a tourism recovery have been lifted.
But the speed of the tourism recovery for the rest of this year and into 2022 hinges on the Covid situation and travel policies in Thailand and source countries. The Covid situation is improving but remains uncertain, and travel policies depend on how the pandemic evolves. Another key factor for Thailand is when China, which is pursuing a strict zero-Covid policy, will start allowing its citizens to travel out of the country.
DON’T OVERLOOK OIL
The last factor, the global oil price outlook, has received the least attention from the markets thus far, in my view. However, with surging global fuel prices, the value of fuel imported by Thailand in the third quarter of 2021 reached $10.5 billion, rising 65% year-on-year, compared with 37% for non-fuel items.
As widely known, surging fuel prices have been driven by rising global demand on the back of reopening across the globe and supply chain disruptions, which are likely to continue at least into the first half of 2022. And if global fuel prices do not come down significantly in the second half of 2022 and Thai exports do not see a boost, the recovery in the trade balance and current account will be delayed, assuming a similar volume of fuel imports as in 2021, which is likely to be underestimated, given recent progress on reopening and vaccination.
All in all, these three key factors represent significant uncertainty for Thailand and could result in the baht’s movements remaining volatile. To manage foreign exchange risk, investors and businesses could employ forex hedging strategies. The additional hedging cost is worth paying over the coming volatile quarters.