Bank of Thailand to stay on hold this year, USD/THB likely to trade higher before December FOMC meeting

The Thai central bank, Bank of Thailand, kept its policy rate on hold at 1.5 percent on 14 September, given signs of economic rebound. Moreover, the country’s household debt increased 4.73 percent year-on-year to THB 11.08 trillion during the end of first quarter. The Bank of Thailand is expected to remain on hold during the remainder of 2016 as the country’s headline CPI inflation might return to its 2016 target range of 2.5 percent, plus or minus 1.5 percent in the fourth quarter, said Scotiabank in a research note.

Last week, the BoT upwardly revised its economic growth outlook to 3.2 percent after lowering it to 3.1 percent in March. The central bank also projects exports to shrink 2.5 percent year-on-year this year after a 0.5 percent drop next year. Earlier, Thailand’s exports were projected to remain flat in 2017. The forecast of tourist arrival for 2016 is cut to 33.6 million from 34 million due to recent bombings, government attempts to tackle zero-dollar tour operators and outlook for trading partners’ economies, stated BoT.

Meanwhile, the Thai baht is expected to trade along with regional peers, such as the South Korean won, in the coming months. External factors such as the U.S. Fed’s tightening path, China’s struggling economy, the fallout from the Brexit vote, and the PBoC’s yuan exchange rate policy would continue to be main drivers of the Thai baht given their impact on cross-border flows.

In the meantime, global excess liquidity is expected to remain intact in the near future. The U.S. Fed would continue to maintain its balance sheet’s size in the year ahead, whereas both the BoJ and the ECB are likely to keep expanding their balance sheet at a stable pace. The Fed is unlikely to risk tightening too steeply.

“When market fears over Fed rate hikes fade away or if a Fed rate hike is finally delivered in December, the THB will then benefit from global excel liquidity chasing higher returns”, noted Scotiabank.

Domestically, the health of Thai King Bhumibol Adulyadej would continue to have a decisive role in influencing the country’s economy and the THB exchange rate. On the technical side, if the currency pair USD/THB firmly breaks below 34.50 support level, it might open room for additional declines in the pair towards 34.00 handle, stated Scotiabank.

The USD/THB is likely to trade higher when approaching the FOMC December meeting as the U.S. Fed would require raising the odds gradually to about 80 percent prior to 2016’s last FOMC meeting to make way for a rate hike, according to Scotiabank.

“As the THB is inexpensive now in terms of either NEER or REER, the chance of sharp falls in the THB is very low at current stage. We expect USD/THB to reach 35.5 at the end of 2016”, added Scotiabank.