Central bank mulls severing baht’s gold link to weaken gains
Thailand’s central Bank is mulling breaking the baht’s link to gold as a way to weaken it without being labelled a currency manipulator by Washington. According to US Census Bureau data, Thailand’s trade surplus surpassed US$20 billion in the 12 months up to the end of November 2019. That exceeds a $20 billion cap the US Treasury sets for bilateral goods trade deficits, and means Thailand violates 2 of the 3 criteria needed to add its economy and currency to its watchlist. The baht rose 8% against the US dollar last year, the fastest appreciation among major Asian currencies. The US is Thailand’s third-biggest trading partner.
The baht more than shed those gains at the start of the Covid-19 outbreak but has since rebounded amid the gold fervour. The surge in gold prices has convinced many Thais to reduce their holdings, forcing local shops to sell in the international market. The step of exchanging dollars for baht as part of the process has been a factor in helping the baht gain about 5% from its low in March. The Bank of Thailand says it’s in talks with market participants about converting local gold trading to US dollars, including futures, to reduce the baht’s strength. Policymakers have long complained the baht’s rapid gains threaten to damage the country’s exports.
The baht has been the best performing Asian currency over the past 4 years, appreciating about 10% against the dollar. Its real effective exchange rate was at 111.4 at the end of June, versus a 10 year moving average of 103.7, indicating it’s overvalued, according to the Bank for International Settlements. The market for wholesale gold trading in baht is about US$50 billion a year, or about 5% to 7% the size of of Thailand’s foreign exchange market, according to figures from SCB Securities.
UBS Group and ING Groep have both warned that Thailand is at risk of being added to the US watchlist for currency manipulation. For its part, the BoT has repeatedly said it does not influence the currency to gain an unfair competitive advantage. According to the head of capital market research at Kasikornbank in Bangkok:
“If the BoT went about with the traditional managed float, it would place it on the radar of the US Treasury as a potential manipulator. But to do nothing would equate to the continuation of the loss in the baht’s competitiveness.”
“Whether the gold trading proposals are approved depends on the willingness of the next BoT governor to experiment with non-conventional monetary measures.”
The cabinet on Wednesday chose Sethaput Suthiwart-Narueput to become the next central bank governor for a 5 year term starting in October.
According to the chief economist at Bank of Ayudhya in Bangkok, the rule change “should help reduce baht volatility.”
“But the baht will continue to appreciate in the long term even if our real sector is in pain.”
He says the baht will strengthen to 30.75 to the dollar this year and reach 30 at the end of 2021.The currency was little changed on yesterday at 31.505, according to data compiled by Bloomberg.