Dollar vs. Baht

[hhfarang]

It may soon be cheaper to live in the U.S. than in Thailand for people getting paid in dollars:

When the Fed fires its arsenal, we will need to be prepared

Weak US dollar is a big threat to the baht and Thai economy

The US Federal Reserve is ready to unleash another round of unconventional monetary easing. This follows its latest assessment of the US economy, which is still experiencing price deflation, as well as sluggish growth and high unemployment. The Fed said in its statement that it is "prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate".

The statement didn't say what level of inflation would be consistent with the Federal Reserve Act's directive for "maximum employment, stable prices and moderate long-term interest rates". Fed officials indicated at their June meeting that they prefer long-run inflation ranging from about 1.7 per cent to 2 per cent. That's based on the Commerce Department's personal consumption expenditures price index.

From the statement, it is clear that the Fed is aiming to combat deflation vigorously, fearing that failing to do so would risk plunging the US into something similar to Japan's "Lost Decade". In the first round of quantitative easing, the Fed bought up securities of different sorts to prop up the banking system and the housing market. This has resulted in a ballooning of its balance sheet to a record US$2.3 trillion (Bt70.8 trillion). But the first round of the monetary easing, which has witnessed interest rates falling to zero per cent, has failed to perk up the economy. Some now consider that the Fed will be firing its guns in November by buying US Treasuries to keep the interest rate in the zero per cent range. But for how much? And will it work?

In any event, the dollar can only go south. The greenback slid to its lowest level in almost five months versus the euro. Gold, which represents a hedge against inflationary expectation, has also climbed to a record high on market anticipation that the Fed will flood the financial system with further liquidity to prop up the US economy.

This monetary easing will result in further weakening of the dollar. And as the US government continues to run a massive deficit, the Fed will be obliged to come to the rescue by purchasing the Treasuries that finance the deficit, which is not likely to come down in the foreseeable future due to economic weakness, falling tax revenue and spending obligations that have dramatically increased.

With the US weakness, a sovereign debt crisis in Europe and deflation in Japan, how will Thailand cope with the policy challenge? The first thing that comes to mind is that the baht will continue its upward trend. This is inevitable. The baht could go back to the pre-1997 crisis level of Bt25 to the dollar. This is not impossible, given the depth of the US and global crisis. Many labour-intensive export industries will be forced to close down as a result.

Secondly, capital will continue to flow into Thailand and Asia, with the region still experiencing strong growth. Funds are now moving into Thailand to invest in bonds (at about 90 per cent) and equities (at about 10 per cent). In bonds, the funds will enjoy a wider margin against the US dollar rates. They will also earn an extra bonus from the baht's appreciation. In equities, the funds can also look forward to an emerging market play. Foreign funds have been net buyers recently.

This has complicated the monetary authorities' policy action. As the Bank of Thailand looks forward to normalising the interest rate to curb inflation, it risks inducing more foreign capital from the higher Thai rates. Massive foreign capital can create stock market and real estate bubbles. But the foreign capital could also move out of Thailand suddenly and create a systemic shock.

There have been rumours in the market that the banking authorities are pondering some kind of administrative control to curb the capital inflow. For now, the Bank of Thailand simply monitors the foreign exchange market closely and tries to keep the baht in line with the regional trend through its intervention programme. It will be interesting to see how the authorities react when foreign capital keeps feeding into the Thai system to create bubbles or over-valuations beyond the price fundamentals.

In the end, with the global volatility, Thailand will have to learn to rely more on the domestic economy, measures to cope with the inflow, and a monetary policy that pre-empts the inflation threat. This policy mix will have to be handled artfully to avoid painful ramifications.


-- The Nation 2010-09-26

[migrant]

It's gotten more, and more, expensive here too!

Taxes are headed up, up and up! Food prices going up only house prices are dropping. Property taxes are high and with the inept government, both fed and state, costs will only continue higher.

[Jimbob]

with so many commodity contracts written in US dollars it will be hard to predict the final outcome. The Chinese RMB will go down also?

[Dr Mike]

It is bizarre that countries that have managed their economies well, have good trade balances and managable debt are being victimised by all the counties that have been negligent.

[MrPlum]

How are insolvent countries going to reduce their debt unless they devalue?

[Spitfire]

How are insolvent countries going to reduce their debt unless they devalue?

Stop fighting wars would be a good start, and not just the US. Think they've all finally got the message though.

[migrant]

The waste that every country spends, if cut back, could probably even out the deficit in record time.

I'm not even talking about wars, but the continuous pet projects, pork and lining of the pockets that every government seems to do.

Here in the states one noticable item that came about as a result of the "stimulus" that Obama pushed through is the road repairs.

Our tax dollars are spending multiple millions on road repairs. Yes, they are needed, and employe some of our public servants (picture 5 people, two working, three watching) but in this time of record deficits?

I'm a business owner and if my business is in financial problems, I don't think a new carpet is a wise, or helpful, move.

[brianks]

Yes, the U.S. has finally gotten a president who understands that wars are too costly and not to be gotten into on a whim. Now look at the mess that has been created by 8 years with the former pres. Oh, yes and the republicans think you can just add more debt to the ledger by cutting taxes. Used to be that the Dem's spent and the Republicans saved. Ever since Ronnie came in with his "flawed" economic theories to cut taxes and the income will grow, the Republicans keep falling all over themselves to cut taxes and of course reduce regulation so the rich can get richer.

U.S. needs some rational thinking person to lead but will never happen. Enough for my rant.

[Korkenzieher]

@Plum - read up on the Triffin Dilemma.

@Dr. Mike - It is a moot call. Consider where the consumers got the money to fund the growth in those supposedly well managed economies. They borrowed it! The unsustainable level of cost competition that some western economies have endured, has been more funded by their own borrowing allowing unrestrained growth in the suppliers, than by anything the supplier countries have done economically. Even Germany, held up as a shining example, is largely successful because while it's productivity has more or less not changed, those around it have deteriorated massively since the introduction of the Euro. The net effect is that Germany now enjoys a systemically undervalued currency in global terms, allowing them the same competitive advantage as that enjoyed by (say) China, and would otherwise have required a devaluation (a la UK) to achieve.

[MrPlum]

@Plum - read up on the Triffin Dilemma.

Thanks for that. It gives little comfort to the Brits since we aren't a 'reserve currency'. If I read it correctly, this means the pound can be debauched through monetization, while the dollar's reserve status protects it. There goes our pension income. If speculators are prevented from shorting the pound it might be able to maintain large deficits indefinitely. If there's a run it could get very difficult.

The dollar may be able to stay afloat unless nations needing dollars (to pay for things like Oil) move into SDRs/Gold and Oil starts to be traded in alternative currencies. Perhaps why Iran is targeted for trying to setup an alternative bourse? I read Saddam tried to do the same, selling oil in Euros.

If Oil does remains dollar-denominated and the dollar dives, watch the Oil price shoot through the roof.

The Asian economies are in better shape financially than Western nations. It made sense to me 2 years ago to move assets over here and it still makes sense today. Why sell your property and move funds back to your home country, when it's a good hedge against currency devaluation and may appreciate as the region continues to grow?

Those on UK pensions are set to suffer. The pound has tested 50bht level and set to head south again.

Another consideration is Gold. I read that the Gold market is operating in the same fashion as the fiat money market. i.e. a fractional reserve system. This is where only 10% or less of actual cash is in the banks. The rest is just vapourware. Likewise Gold. If that's the case and the demand for physical delivery increases, watch Gold take off.

This is just speculation. No-one really knows what will happen.

War may upset all calculations.

[Aussie Mark]

No Dramas here in the land of OZ .Our dollar at 97 U.S cents today.They think very shortly we will be even with the Green Back. More cheap golf clubs here in OZ

[Korkenzieher]

If I read it correctly, this means the pound can be debauched through monetization, while the dollar's reserve status protects it.

Interesting. That wasn't my take at all. The way I saw it was that paying down of dollar denominated debt was fundamentally inconsistent with a Keynsian approach to reflating the World economy! That in any sense the Bretton Woods institutions have outlived their use, with the tail-probability scenarios having been tested now after half a century, it seems to me more likely that the dollar's reserve status has to be brought into sharper focus. Zhou's suggestion of the Special Drawing Rights is floated as a solution, but I think the solution would have to be much bigger than is currently envisaged.

Sterling these days is a hostage to fortune, and largely irrelevant in the great 'cashflow model of the world'. It either tracks the dollar or the euro depending on flavour of the month. I will post a graphic later with my interpretation. I was going to put it on the long lived THBvGBP thread and was waiting for the recent low to play itself out, but will stick it here since it is just as relevant.

[Korkenzieher]

A graphic of the last years movements of THB against $ (Blue) £ (Red) and € (Green).

Currency.GIF (19.01 KiB) Viewed 1291 times

In the graphic there are several things worthy of note.

The smoothness and flatness of the Dollar rate against Thai Baht indicate just how tightly bound to the dollar the Baht really is.

The Sterling and Euro rates have tended to move in lock step and still shadow each other pretty closely, implying that Sterling is pretty much a hostage to fortune and not significantly directly traded.

However, note:
1) The period late May to early June coincides with the election in the UK and the onset of the Sovereign debt crisis in Euroland, focussed at that time on Greece. Note how Sterling breaks up from the low point and out-performs the Euro in the period since then.

2) Note particularly how Sterling and the Euro have bucked the general trend of the dollar against the Baht. With the recent low being higher the May-June lows, this seems to confirm that there is a significant turning point here.

3) It is significant, in my opinion, that the Dollar did not take part in the (general) rallies of £ and € against the Baht between June and August; and that since the pull back in August, the $ has accelerated downwards losing 6-7% in less than 2 months compared to the 3-4% over the year to that point.

So, how do I interpret what I am seeing.
Firstly, £ has been shadowing € until recently but it has broke free. While still tracking in parallel, it is outperforming and is likely to as long as there is an overhanging debt issue in Euroland.
Secondly, that against the Baht, Euro and Sterling have probably bottomed out.
Thirdly, the Dollar is slowly going to hell in a handbasket.

Warning: Your interpretation may differ, this is not investment advice, all personal opinion etc. etc.

[Spitfire]

I'm no financial wizard Korky, but would it fair to say you're optimistic about the Pound/Euro and not the Dollar?

What's your slant on all this austerity? Seems to be two camps, sort out the debt to make things like it was before the recession, and number two, keep on spending/borrowing as if we don't then the recovery will not really happen.

It's hard to get a straight bloody answer on it or is it just internal vote catching for the mood of the day?

However, it's interesting that the two opinions seem to be divided by the Atlantic.

Any pointers?

I know we are only talking personal opinions an all etc.

[Korkenzieher]

Actually Spitfire, I am not Euro positive at all. I see Euroland as the long-term loser but we could still be talking over a period of years to decades. The US will undoubtedly manage to massage its exchange rate down somewhat. The danger is in a dollar collapse. That benefits no-one, so is unlikely. Any game of brinkmanship will end with the Chinese blinking first. They either accept that their trade over the last decade gets devalued a little, or lose a massive amount unwillingly.

Euroland however has other issues and they directly concern the austerity measures. It is quite reasonable to see the austerity measures in southern Europe and Ireland as an attempt to prop-up the solvency of the northern European banking system. One of the great under-told truths of Europe's rescue package is that it relies on the ECB buying corporate debt through the southern banks by proxy. It is a much more risky strategy than the US/UK approach which is debt monetisation of their own sovereign paper. The respective governments are not likely to default on their debts held by their own central banks! Any significant economic dislocation in southern Europe could see exactly that kind of default - from corporates to sovereign - and it is that Damoclesian Sword that worries me.

As for pointers, well, no idea, but I will explain a little of how I get to the ideas I do.

I'm no expert but I do find myself thinking in directions that others don't seem to. What I do is start at the top with 'Great Forces'. In terms of great forces pushing things around, I tend to think of - for example - Trade, Resources and Social Policy. There are other forces pulling - greed, fear etc, but the great forces create the climate. They create the framework within which governments of varying types and colours conceive policy to address largely the same issues. Other folk might come up with different ones. As a generalisation, trade covers globalisation, trade tarifs, doha and all that. Resources covers the commodities, water oil, food and so on. Fairly obvious. Social Policy involves taxation / havens, welfare, pension, climate theory etc. and is the less obvious one to predict. Framing these different forces isn't a clear cut thing, and I have drawn inspiration from a number of different sources for looking at the workd in this way. As a specific reference I would point you at the book 'Systems of Survival' by Jane Jacobs.

I am anticipating the next great argument will be an attempt to shift trade issues into a social welfare context, and that anticipated shift colours a lot of my thinking. The demographic timebomb is ticking and those self same governments will need to globalise their local policies to shift the blame - Europe: 'Ah, but our costs are greater because we look after our older people with pensions etc.' Asia: 'We don't need pensions because our family units are strong and the young take care of the old and weak'. You see how it goes.

I fully intend and expect to retire in Asia. The social pressure in Europe particularly, building inexorably over the next decade will cause a lot of people like me to do likewise, if they haven't already. It will be resisted by government because it means us taking accumulated assets away from those governments, who will be increasingly under pressure to seize them by more and more creative means. Go West Young Man - the birth mantra of America - will soon be replaced by Go East Old Man, where the nominal increase in age profil over the next couple of decades in Asia will not significantly impact on societies ability or otherwise to allow its residents and citizens to retire in relative comfort.

All my opinion. Nothing more.