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The SET closed at 1,479.31 on Friday, down 0.38% for the week, as the USD/THB exchange rate hit another fresh multi-year and intraday high of 34.267 baht per dollar and closed at 34.228 baht per dollar, up 0.88% for the week. The Thai baht has been under selling pressure since mid-April after the Commerce Ministry said that Thai exports are expected to grow only about 1% this year, and not the 4% previously forecasted.
Since April 22, the USD/THB has surged 5.71% to date, while the SET has slid, coincidently, almost the same amount of 5.74%. Since there is no such thing as coincidence in the financial markets, the strong correlation between the USD/THB and SET suggests capital outflows from the financial markets, as a result from the weakening Thai baht.
In fact, Thailand's central bank announced at the end of April that the bank encourages more capital outflows to weaken the baht by allowing Thai citizens to freely purchase foreign currencies for deposit up to a limit of $5 million, from $500,000. Thai citizens also can purchase properties abroad up to a value of $50 million per year, from $10 million.
One may want to pay attention that during the months of January to June of this year, the average net sells for foreign investors of the SET was about 2.611 billion baht a month, according to the SET market data. Foreign investor selling has been accelerating as the net sells have already registered 17.764 billion baht since the beginning of July, almost seven times the monthly average net sells in the past six months. Foreign investors make up about 23% of the trading volume on the SET exchange
More selling pressure this week could be coming from currency talk downs and weakening economy outlooks announced by Thai government officials. Deputy Prime Minister Pridiyathorn Devakula told Reuters on Friday that he'd like to see the baht depreciating a little more. Mr. Devakula also added that the baht is almost at the right level now, but declined to give a target level for the currency.
The currency talk down came on the heels of comments from the Bank of Thailand Governor Prasarn Trairatvorakul, who told reporters on Thursday that he expected that economic growth could be worse than 3% this year, if the drought has not been taken into account. Last week, the University of the Thai Chamber of Commerce cut its 2015 growth forecast to 2.68%, from 3.2% earlier, because of the drought.
Thailand's Finance Minister Sommai Phasee said on Wednesday that the economy is expected to grow 2.6% in the second half of this year, a slower pace than the first half. Mr. Sommai didn’t say what the GDP for the first half of this year was. Exports are likely to contract for the third straight year, down 1.7% this year compared to a 0.2% rise forecasted by the ministry in April.
More pressure for the USD/THB exchange rate also came from aboard as the Asian Development Bank said on Thursday that they cut their economic-growth forecast for Thailand to 3.2% from 3.6% forecasted in March, citing weak first-quarter growth, continued deterioration in the consumer confidence index, and the contraction of merchandise exports. Fed Chair Janet Yellen’s semiannual testimony in front of the U.S. House Financial Services Committee on Wednesday, made it very clear that the Fed is going to raise the rate between September and December this year.
The 10-year Thailand Government bond yield printed at 2.86% at the close on Friday, up 1.42% for the week. The yield spread between the U.S. 10-Year Treasury Note, yielding at 2.347% at the close on Friday, and the Thailand 10-Year Government bond, narrowed to 0.473%. Narrowing the bond yield spread and depreciating the Thai baht could spur capital outflows. A sinking 10-year Thailand Government bond yield could signal that more rate cuts from the Bank of Thailand are coming.
From our technical viewpoint, the SET is moving in the short-term falling wedge chart pattern with the trendline support at 1,455. The concern is still that the SET is moving in a lower high (L-H) chart pattern since it peaked in February, meaning every high is lower than the previous high while every low is lower than the previous low. This lower high chart pattern signals a continuous bearish downtrend. The H5 level at 1,498.17 may now emerge.
The downside risks exist as Thailand’s economic growth is facing more downgrades and hits from capital outflows. Again, if the 1,469.11 level, or the 61.8% Fibonacci retracement level can’t hold, all bets will be off. In the event of a long-term falling wedge breakdown, the supports are at 1,375.99, 1,307 and 1,110.
The fact that the equity market is forward-looking and has traditionally been viewed as an indicator of the economy, a large pullback in the SET could be reflective of a future recession, or vice-versa. As the SET continues to slide downward while the Thai baht continues to weaken, the market may be signaling that a weaker baht will not improve Thai corporate revenues and profits. |
