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An EM FX momentum juggernaut - The Thai baht closes out its best month since 1998

Dec 2, 2022

Amid a broad USD sell-off throughout November we’ve seen the Thai Baht (THB) emerge as a superstar performer and a true momentum FX play – in fact, we saw the THB appreciate 7.4% vs the USD, recording the best monthly gain since 1998 – Taking this further, we can see the THB was the third best performing global currency in November, only modestly underperforming the NZD and KRW.

The technicals suggest a deeper move to 34

Looking at the technical set-up, after reaching 38.5 on 20 October we’ve seen price retrace over 50% of the Feb to Oct rally – we’ve seen the bear move slice through the 200-day MA (35.28) with incredible ease and there hasn’t been any support seen into the long-term average. Clearly, the trend is a trader’s friend and rallies will likely be used to initiate new short positions – however, given the positive divergence seen between price and the RSI, there is a risk of an oversold counter rally for traders to work short orders.

For now, however, the medium-term target sits at 34.0 and one could use a mechanical stop to exit shorts positions on a 3- & 8-day EMA bullish crossover.

Fundamentals are broadly supportive of THB appreciation 

Broad USD weakness has been behind the bearish trend but there are domestic factors which have seen traders attracted to the THB, and fundamentals have mattered. While we are sympathetic that Thailand’s high inflation has likely peaked at 6%, we also think the US inflation rate is likely to fall faster in 2023 – importantly, relative growth dynamics have been a tailwind for the THB with Thailand’s Q3 GDP running at a compelling 4.5% YoY and the fastest pace in more than 12 months – a resurgent tourism sector is clearly supporting growth, with estimates that foreign visitors will rise from 9.5m in 2022 to 21m in 2023.

In a world where growth is slowing and, in some cases, skirting a recession, Thailand is looking like a clear outlier and bright spot for 2023.

We can also look externally and see a better feel towards China’s economic prospects – granted, the national Covid case count is still rising, but we’re seeing incremental steps to ease the pandemic restrictions and aim to fully reopen by Q223 – China will see subdued growth in 1H23 but should accelerate through 2H23 and if this thesis is correct, this should support the THB and play into stronger economics for Thailand.

Relative interest rate settings working against the THB

From an interest rate perspective, we’ve seen the BoT (Bank of Thailand) lift rates by 75bp (or 0.75%) since June, although at 1.25%, this current policy setting pales insignificant to fed policy – if we look ahead future rate expectations, we feel the risk is the BoT hike rates to 2.5% by Q323, while the Fed could take the fed funds rate to 5% by Q223. Given this interest rate differential and negative carry regime, traders will pay swaps on long THB positions – subsequently, the THB is one where traders need to feel confident that the capital appreciation will outweigh the cost of holding over a period.

Put the USDTHB on the radar 

Given the compelling growth dynamics, the Thai baht is certainly a currency for the radar in 2023. As with any emerging market currency, bid-offer spreads can be wider than say EURUSD or USDJPY, but the compensation to the cost is the potential movement – the potential for a 2% move in USDTHB is clearly far more achievable than any G10 pair.

Of course, liquidity plays a key role here, but this can hold positive and negative consequences for traders – as we’ve seen since October, if short the cross and have been long THB, it has worked out well amid the dramatic moves.

Naturally, we question the possibility of a sustained USD turn around. Price will reveal and this is where traders will need to react, but it feels like the path of least resistance over time is for lower levels.