The Bank of Thailand (BoT) may get caught between a rock and a hard place, as the USD/THB turns bearish and is threatening to dip below the key physiological support at 35 baht per dollar. The USD/THB exchange rate was quoted at 35.04 baht per dollar at the close, and an intraday low of 34.997 baht per dollar, on Friday, down 2.75% since the beginning of the year. The CNY/THB didnít fair much better as the currency pair has declined 3.12% year-to-date, to close at 5.3935 baht per yuan on Friday.
The Thailand 10-year bonds were yielding at 1.97% at the close on Friday, down 21.83% year-to-date. The yield spread between the Thailand 10-year bond and the benchmark U.S. 10-year Treasury Note, yielding at 1.98% on Friday, is Ė0.01 percentage points, meaning investors are willing not to be paid a premium to hold a Thailand 10-year bond over a U.S. 10-year Treasury Note, which is typically perceived as safer.
FX currency traders could be piling onto the Thai baht, as they are anticipating further appreciation against the U.S. dollar, ahead of the March 15-16 FOMC meeting, and the BoT monetary policy meeting on March 23.
The strong baht could be supported by comments from BoT Governor Veerathai Santiprabhob, who told reporters on Tuesday that fiscal policy is a more effective tool than monetary policy, hinting to not expect a rate cut from the BoT anytime soon. The BoT also said that the bank plans to lower its 2016 economic growth forecast again, from the 3.5% stated in December, due to increased downside risks, according to Bangkok Post.
In December, the BoT cut its 2016 economic growth estimate to 3.5% from 3.7% as the bank saw no growth in exports. The central bank will review its economic forecasts at the monetary policy meeting and will release the results by March 31. The strong baht could spell trouble for Thai exports, since January exports to China, Thailand's second-biggest market after the U.S., dropped by 6.1% year-on-year in January, according to Bangkok Post. Shipments to Europe fell by 2.4%, while the U.S. and Japan saw bigger drops of 8.5% and 10.1%, respectively.
The USD/THD began pulling back from the 36.25 baht per dollar level in late January, after Bank of Japan Governor Haruhiko Kuroda told Bloomberg in Davos that the Bank of Japan (BOJ) was prepared to expand bond purchases if necessary to achieve its 2% inflation target. The BOJ is currently buying 8 to 12 trillion yen of JGBs per month, more than issued by the Ministry of Finance. Instead of an increase in bond buying, the BOJ announced after its two-day rate review in late January that the bank will apply a negative 0.1% interest on excess reserves (IOER) of financial institutions placed at the bank, effective February 16.
From our technical viewpoint, the USD/THB broke down the bearish descending triangle chart pattern at 35.2 baht per dollar and is now testing the key 35.0 baht per dollar level. If the key physiological support canít hold, the USD/THB could pull back to 34.8 baht per dollar, or the lower trendline support of the uptrend channel, and 33.20 baht per dollar, or the lower trendline support of the symmetrical triangle chart pattern.