Financial Markets (Trading) report.
(Fig. 1: THB/USD (Yahoo FInance, n.d.))
Figure 1 shows the exchange rate of THB/USD from July 2019 to July 2020. THB has been rather stable against USD with minimal peaks and troughs for Q3 and Q4 of 2019 with a slight appreciation in October 2019. It only started to plunge in Q1 2020 mainly due to the Coronavirus outbreak which impacted the world. However, it started to pick up from Q2 onwards.
Relative Inflation Rates (Historical Analysis)
(Fig. 2: Thailand and United States’ Inflation Rates (Trading Economics, 2020))
(Fig. 3: Demand-Supply Model of THB in relation to Inflation Rate)
Thailand’s inflation rate hit 0.3% (Yumi Teso, 2019) in October 2019, which was relatively much lower than US’s inflation rate at 1.8% (Reuters, 2019). This causes capital inflow to surge by foreign investors as a low inflation means a higher demand for Thai exports due to competitive prices in the world, shifting THB demand curve to the right. On the other hand, this resulted in lesser imports as overseas goods are now relatively expensive within the domestic market, hence decreasing the supply of THB, shifting the supply curve leftwards. Consequently, THB appreciates against USD, which is evident in the slight appreciation accounted in Q4 2019.
Relative Interest Rates (Historical Analysis)
(Fig. 4: Thailand and United States’ Interest Rates (Trading Economics, 2020))
(Fig. 5: Demand-Supply Model of THB in relation to Interest Rate)
Due to the Coronavirus outbreak in the beginning of 2020 , Thailand’s interest rate plunged to 1% in February 2020 (Suttinee Yuvejwattana, 2020) to mitigate the effects on its economy compared to US’s interest rate that was kept at 1.75% (Jeff Cox, 2020). Investors shunned from Thailand due to its relatively unattractive low interest rate, discouraging capital inflow, decreasing the demand for THB, shifting its demand curve leftwards. However, this encourages capital outflow as Thai investors want to venture overseas to take advantage of higher interest rates, increasing the supply of THB, shifting the supply curve rightwards. This caused THB to depreciate greatly against USD in Q1 2020 due to the pandemic.
Commodity Price (Historical Analysis)
(Fig. 6: Demand-Supply Model of THB in relation to Commodity Price)
Gold is a commodity that is exported by Thailand. Gold price has been on the rise due to surge in global demand amidst the ongoing pandemic as it is perceived to be a stable tangible asset which is not easily depreciated (Hannah Denham, 2020). Thai gold exports are on the rise as a result (Reuters, 2020). As gold price is set internationally, importers will continue importing gold from Thailand to meet global demand, hence this increases the value of Thai exports along with the demand for THB, shifting its demand curve rightwards. As gold is getting harder to mine compared to the past as the easy-to-process ores have already been mined (Alistair Macdonald, 2020), this also means that supply of THB has decreased, shifting the supply curve to the left. This results in an excessive appreciation of THB against USD in Q2 2020.
Relative Inflation Rates (Forecast)
(Fig. 7: Demand-Supply Model of THB in relation to Inflation Rate)
In June 2020, Thailand is currently facing a negative inflation rate of -1.57% (Bangkok Post, 2020) compared to US’s inflation rate at 0.6% (Reuters, 2020) which are expected to last for quite some time due to the global economic downturn. This will attract foreign investors to take advantage of Thai exports due to competitive world prices now, increasing demand for THB, shifting the demand curve rightwards. This also causes lesser imports as overseas goods are relatively pricier now, resulting in the decreased supply of THB, shifting the supply curve leftwards. This makes THB appreciate against USD instead.
Relative Interest Rates (Forecast)
(Fig. 8: Demand-Supply Model of THB in relation to Interest Rate)
In June 2020, Bank of Thailand (BoT) still left its interest rate unchanged at an all-time low of 0.5% (Suttinee Yuvejwattana and Chester Yung, 2020) while United States reduced its interest rate even lower to 0.25% (Jeff Cox, 2020), both with no plans to change the interest rates anytime soon. Investors are now attracted to Thailand instead with its relatively higher interest rate, encouraging capital inflow, increasing the demand for THB, shifting its demand curve rightwards. This discourages capital outflow as overseas market is not as attractive now, decreasing the supply of THB, shifting the supply curve leftwards. This eventually causes THB to appreciate against USD.
Commodity Price (Forecast)
(Fig. 9: Demand-Supply Model of THB in relation to Commodity Price)
BoT is trying to curb the appreciation of THB by revising its gold trading rules (Lilian Karunungan and Suttinee Yuvejwattana, 2020). However, this is likely to be futile because BoT has been voicing this concern for years, but the situation does not seem to improve. As a result, demand for gold will still soar, leading to an increased demand for THB, shifting the demand curve rightwards. Moreover, gold is getting harder to mine thus supply will be lesser compared to the past, hence supply curve of THB will shift leftwards. This ultimately still results in THB strengthening against USD.
Prediction (July – December 2020)
In the next 6 months till the end of 2020, I predict that THB will appreciate against USD as the determinants forecasted above are in favour of THB.
References Alistair Macdonald, 2020. Gold Is Flying High, But Getting Harder To Mine. [Online] Available at: https://www.wsj.com/articles/gold-is-flying-high-but-getting-harder-to-mine-11597579201#:~:text=Gold%20miners%20are%20riding%20high,the%20ground%20is%20getting%20harder.&text=While%20that%20isn't%20an,drilling%20in%20less%20hospitable%20places. Bangkok Post, 2020. Central Bank Sees Low Level of Inflation. [Online] Available at: https://www.bangkokpost.com/business/1953332/central-bank-sees-low-level-of-inflation Hannah Denham, 2020. 5 Reasons Gold Prices Are Soaring. [Online] Available at: https://www.washingtonpost.com/business/2020/08/05/5-reasons-why-gold-prices-are-soaring/ Jeff Cox, 2020. Fed Officials feel rates are likely to stay where they are, minutes show. [Online] Available at: https://www.cnbc.com/2020/02/19/fed-minutes-january-2020.html Jeff Cox, 2020. Fed Sees Interest Rates Staying Near Zero Through 2022, GDP bouncing to 5% next year. [Online] Available at: https://www.cnbc.com/2020/06/10/fed-meeting-decision-interest-rates.html Lilian Karunungan and Suttinee Yuvejwattana, 2020. Thailand's Gold Plan May Curb Baht Without Incurring US Anger. [Online] Available at: https://www.bloomberg.com/news/articles/2020-07-28/thailand-s-gold-plan-may-curb-baht-without-incurring-u-s-anger Reuters, 2019. US Consumer Prices Increase More Than Expected in October. [Online] Available at: https://www.cnbc.com/2019/11/13/us-consumer-prices-rise-0point4percent-in-october-slightly-higher-than-estimates.html#:~:text=The%20Labor%20Department%20said%20on,after%20climbing%201.7%25%20in%20September. Reuters, 2020. Gasoline, Food Boost US Consumer Inflation in June. [Online] Available at: https://www.cnbc.com/2020/07/14/us-consumer-price-index-june-2020.html Reuters, 2020. May Exports Fall 22.5% y/y, But Gold Shipments Surge. [Online] Available at: https://www.bangkokpost.com/business/1940324/may-exports-fall-22-5-y-y-but-gold-shipments-surge Suttinee Yuvejwattana and Chester Yung, 2020. Thailand Holds Rate at Record Low to Support Virus Hit Economy. [Online] Available at: https://www.bloomberg.com/news/articles/2020-06-24/thailand-holds-rate-at-record-low-to-support-virus-hit-economy Suttinee Yuvejwattana, 2020. Thailand Cuts Rate to Record Low as Virus Outbreak Hurts Economy. [Online] Available at: https://www.bloomberg.com/news/articles/2020-02-05/thailand-cuts-rate-to-record-low-as-virus-outbreak-hurts-economy Trading Economics, 2020. Thailand Inflation Rate. [Online] Available at: https://tradingeconomics.com/thailand/inflation-cpi Trading Economics, 2020. Thailand Interest Rate. [Online] Available at: https://tradingeconomics.com/thailand/interest-rate Trading Economics, 2020. United States Fed Funds Rate. [Online] Available at: https://tradingeconomics.com/united-states/interest-rate Trading Economics, 2020. United States Inflation Rate. [Online] Available at: https://tradingeconomics.com/united-states/inflation-cpi Yahoo FInance, n.d. THB/USD. [Online] Available at: https://sg.finance.yahoo.com/quote/THBUSD%3DX/chart?p=THBUSD%3DX#eyJpbnRlcnZhbCI6IndlZWsiLCJwZXJpb2RpY2l0eSI6MSwidGltZVVuaXQiOm51bGwsImNhbmRsZVdpZHRoIjoxNy4yODg0NjE1Mzg0NjE1NCwiZmxpcHBlZCI6ZmFsc2UsInZvbHVtZVVuZGVybGF5Ijp0cnVlLCJhZGoiOnRydWUsImNyb3NzaGFpci Yumi Teso, 2019. The Thai Baht Reached A New 6 Year High Here's Why It's Surging. [Online] Available at: https://www.bloomberg.com/news/articles/2019-10-25/the-thai-baht-reached-a-new-6-year-high-here-s-why-it-s-surging
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