(Aug 19): The Thai baht’s recent rally is under threat as markets digest the nation’s latest political drama ahead of this week’s central bank policy meeting.

The baht has been one of the region’s top performing currencies since the start of July — aided partly by a rebound in tourism — after hitting a near two-year low against the dollar in May. The resurgence may be derailed however, following a tumultuous period that included Paetongtarn Shinawatra winning a parliamentary vote to become the new prime minister, while a court ousted her predecessor.

“We maintain our bearish view on the baht, looking at 36.0 by year end,” said Jeffrey Zhang, emerging markets strategist at Credit Agricole CIB HK Branch. “Thailand’s growth could still struggle to get back to trend, and we see a risk of a lower neutral rate given the long-term structural growth impediments.”

The baht’s recent gains against the greenback are also looking technically vulnerable. The currency pair is now in oversold territory, according to a momentum indicator, with some forecasters seeing it as weak as 37.5 per dollar by the end of the year. The baht closed at 34.6 on Friday.

Traders will now turn their attention to the Bank of Thailand’s (BOT) upcoming policy decision this week, with the central bank expected to keep interest rates unchanged at 2.50%. Narrowing yield differentials between Thailand and the US, as markets price in possible Federal Reserve interest-rate cuts in September, may offer support for the baht.

However, even if the BOT stays on hold, that may not be enough to stop the Asian currency from weakening in the near-term amid the political angst.

“After recent strong gains, the baht could face resistance to additional strengthening,” said Moh Siong Sim, an FX strategist at Bank of Singapore Ltd, who sees the currency moving toward 36.0 per dollar by the end of this quarter. “US election risks could see dollar strengthening back, especially under a Trump 2.0 scenario,” added Sim.

Concerns over Thailand’s elevated household debt and investment attractiveness remain a high priority for market watchers. Paetongtarn, a daughter of former Thai leader Thaksin Shinawatra, has advocated for lower interest rates and slammed the central bank as an “obstacle” to resolving the country’s economic issues. There are also reports that the new government may scrap a US$14 billion (RM61.52 billion) digital cash handout program.

“With Paetongtarn securing enough votes for PM, political uncertainty has dissipated for now,” Shreya Sodhani, a regional economist at Barclays plc, wrote in a client note on Friday. “We now expect the digital wallet plan to be scrapped, which would imply that the full year 2025 budget faces some delay.”

Source: TheEdge - 20 Aug 2024