THB Thermometer. February A member of MUFG, a global financial group

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1 THB Thermometer February 2018 A member of MUFG, a global financial group

2 Foreign Exchange Market Update Recap : January The dollar weakened broadly as growing expectations of monetary normalization outside of the U.S. gained traction whereas confusion over the Trump administration s economic policy put an extra weight. While the March rate hike by the Federal Reserve is seen as almost a done deal, it barely helped rescue the bearish dollar sentiment. Performance Appreciation The euro soared after the European Central Bank policymakers provided an upbeat view on Eurozone economic expansion, reinforcing anticipations of QE taper in September. Some ECB members though expressed concerns over the recent surge in the single currency but the negative impact on the euro proved short-lived. Outlook Gradual Appreciation ECB-Fed policy convergence, as well as improving outlook in European politics will support the euro. However, prolonged weakness in inflation could encourage players to lock in profits as a sharp rise in the euro might make the ECB more cautious about tightening plans. Performance Appreciation The yen rallied earlier after the Bank of Japan s cut in JGB purchases ignited anticipation that policy normalization could be forthcoming. Volatility also kicked in alongside fluctuations in global stock markets and yields. Outlook Gradual Appreciation We maintain our strong yen view even as the BoJ insisted powerful accommodation is here to stay. As we have mentioned before, the real-yield dynamics, Japan s hefty current account surplus together with the risk of downward correction in global stock markets should serve to boost yen demand and perhaps mitigate the impact from the move away from ultra-loose policy by other major central banks. EUR/USD Euro gained 3.5% in Jan USD/JPY Yen gained 3.1% in Jan Reuters 2

3 Foreign Exchange Market Update Recap : January The Super Baht The baht became Asia s top performer for the month, hitting the strongest level since November 2013 on broad dollar weakness, capital influx and Thailand s external surplus. Local authorities attempted to slow the pace of the baht s appreciation, with the BoT warning it would impose additional measures to combat abnormal moves. However, the underlying downtrend of the dollar was too strong to resist. The outsized move was a shocker to us and we revised our forecast profile but still expect a corrective bounce in the USD/THB. USD 3.9 billion current account surplus in December THB 5.7 billion net foreign selling of SET-listed shares in January THB 77.4 billion* net buying of Thai government bonds in January, the biggest since February * Based on outright trading value. The accumulated net buying value may double count the trading value of rollovers. USD/THB Historical Performance THB vs USD THB vs JPY 1 month 3.9% 0.9% 3 months 5.7% 2.2% 12 months 11.0% 14.9% Reuters As of January 31, 2018, - indicates THB depreciation Outlook: Near-Term Baht Consolidation Given the baht s sharp appreciation since the whole of last year, we see increasing risks of near-term correction while recent portfolio movements indicate the trend of temporary outflows. Beyond the consolidation period, the baht would resume its uptrend in light of prospects of gradual monetary policy normalization at home. 3

4 Foreign Exchange Market Update Monthly Performance 4.0% 0.0% -4.0% THB MYR CNY SGD TWD IDR INR VND KRW PHP vs USD 3.9% 3.6% 3.4% 1.9% 1.7% 1.3% 0.5% 0.0% -0.3% -2.7% Appreciation Depreciation 12.0% 6.0% Yearly Performance Appreciation 0.0% -6.0% MYR THB CNY KRW SGD TWD INR IDR VND PHP vs USD 11.9% 11.0% 8.6% 7.1% 7.0% 6.4% 5.9% -0.3% -0.5% -3.2% Depreciation Reuters, data as of January 31, 2018, - indicates currency depreciation against USD 4

5 Thailand: External Accounts Current Account & USD/THB Record high Structural surplus adds to THB appreciation pressure Exports Imports Trade Balance Current Account Reserves* % y-o-y % y-o-y USD bn USD bn USD bn Dec Nov Oct Bank of Thailand, * including net forward position, last data points: December

6 Thailand: Foreign Portfolio Flows Net Foreign Position & USD/THB THB mn M2018 Stocks (154,350) 79,069 (25,752) (5,699) Bonds (24,670) 331, ,633 77,399 Bonds (TTM>1) (33,858) 41, ,976 38,950 Share of shortterm bonds 87% 53% 50% Thai Bond Market Association (based on outright trading value; the accumulated net buying value may double count the trading value of rollovers), Stock Exchange of Thailand, Bank of Thailand, last data points: January

7 Thailand: Domestic Economy Manufacturing Production (% y-o-y) Consumer Confidence Floods 2.35% Coup d'état Private Investment (% y-o-y) 12 Private Consumption (% y-o-y) % % Bank of Thailand, UTCC, last data points: December

8 Thailand: Inflation % headline inflation target year-on-year change Headline CPI CPI Excluding Raw Food & Energy Jan % 0.58% Dec % 0.62% Nov % 0.61% Ministry of Commerce, Bank of Thailand, last data points: January

9 Interest Rate Market Update Fed: Upbeat Inflation View Setting Stage for March Hike The FOMC at the Jan meeting, as expected, voted unanimously to keep the Funds rate target at %, but the tone of policy statement sounded more hawkish than that at the December meeting. The Committee tweaked the language to say inflation would move up this year to stabilize around the 2% objective in the medium term. The Fed also assessed that gains in employment, household spending, and business fixed investment have been solid, yet did not mention the impact from the tax reform. US Federal Funds and Thai Policy Rates (%) U.S. Treasury yields spiked broadly, with the 10Y-2Y spread widening as inflationary pressure in the U.S. gradually picked up while the spillover from bond selloffs in the Eurozone also lifted the curve. We now expect the Fed to raise rates three times totaling 75 bps this year versus 50 bps projected earlier. While inflation shows a more encouraging sign of moving higher, it remains relatively subdued and would take time to resolve. Net-net, we maintain our view of a flattening U.S. government yield curve. end of period Jul-17 Oct-17 Dec-17 Jan-18 USD6MLIBOR THBFIX6M Diff Reuters 9

10 Interest Rate Market Update Inflation Missing in the Economic Growth Equation The Monetary Policy Committee did not meet in January, but local authorities repeatedly warned against excessive baht moves. The BoT expressed that the central bank has been taking care of the baht to curb volatility but not for trade advantage, saying it would impose stricter measures in monitoring the baht and capital inflows. Deputy PM Somkid noted that PM Prayuth held an urgent meeting to discuss the baht s strength. Given the magnitude of the baht s outperformance and that Thailand is an export-dependent economy, we are not surprised by the recent rhetoric from the local authorities although it seems there is not much they could do admittedly. We rule out any further rate cuts to deal with the strong baht but potential measures on capital inflows remain more or less a wildcard! Thai Govt Yield Curve Thai government yields inched lower as foreign demand for local sovereign debt remained strong yet rising global yields capped the downside. Just like many other places in the world, Thailand s economy is benefitting from the cyclical upswing in global trade but the new normal of low inflation complicates monetary policy outlook. Going forward, we expect more broad-based economic growth and subsequent demand-pull factors to feed into price pressures. Accordingly, it is more likely than not that yields will drift higher and that the MPC would begin raising rates in the second half of Reuters 10

11 Forecast Factors in Focus Lingering Anti-Dollar Mood: The ongoing combination of policy tightening outside of the U.S., continued global economic growth, and the U.S. political drama look set to keep dollar selloffs intact. The Bank of England meeting on Feb 8 will be of good interest as to whether the remarks would further support this underlying trend. Still, caution over near-term position adjustment could lead to a reversal in capital inflows to emerging markets should there be any surprises such as inflation overshoot in the U.S, negative political shocks in the Eurozone, among others. MPC Meeting: Feb 14. While we expect the MPC to stand pat and keep monetary policy accommodative, we see a higher chance of more cautious communication from the MPC given concerns over the surge in the baht and perhaps the effect on the already low inflation environment. Fed Chair Powell s Testimony: Mid-Feb. As the Powell Fed era officially begins, how the new chairman of the U.S. central bank expresses his stance on deregulation and monetary policy outlook will draw market attention. Global Politics: Developments with regards to infrastructure policies and budget resolution in Washington, Italian elections and Brexit negotiation, as well as the selection process for the next BoJ Governor and two deputy chiefs, could add to market volatility too. FX USD/THB USD/JPY JPY/THB Jan 31, Q1/18F Q2/18F Q3/18F Q4/18F JPY/THB is per 100 yen, * USD/THB based on Bangkok closing rate, USD/JPY on New York close Policy Interest Rates Current end-q4/18f USD Fed Funds % 2.17% EUR Refinance 0.00% JPY O/N Call -0.10% THB 1-day R/P 1.50% 1.75% As of February 2,

12 Economic Projection 2016A 2017F 2018F Real GDP growth 3.2% 4.0% 4.2% Private Consumption growth 3.1% 3.2% 3.5% Private Investment growth 0.4% 2.0% 3.4% Public Consumption growth 1.7% 2.1% 3.8% Public Investment growth 9.9% -1.1% 11.8% Export Value growth 0.1% 9.7% 6.6% Import Value growth -5.1% 14.7% 8.6% Current Account (per GDP) 11.7% 10.8% 9.1% Headline CPI Inflation 0.2% 0.7% 1.2% Fiscal Policy Office, as of January 29,

13 Contact Persons Global Markets Analysis Section Roong Sanguanruang Pote Siripoonsap Bank of Ayudhya Public Company Limited (A member of MUFG, a global financial group) <Head Office> 1222 Rama Ⅲ Road, Bang Phongphang Yan Nawa, Bangkok Thailand <Global Markets Group> 54 Harindhorn Tower, 54 North Sathorn Road, Silom, Bangrak, Bangkok Thailand This report has been prepared by The Bank of Ayudhya Public Company Limited, (A member of MUFG, a global financial group), (the Bank ), for general distribution. It is only available for distribution under such circumstances as may be permitted by applicable law and is not intended for use by any person in any jurisdiction which restricts the distribution of this report. The Bank and/or any person connected with it may make use of or may act upon the information contained in this report prior to the publication of this report to its customers. Neither the information nor the opinion expressed herein constitute or are to be construed as an offer or solicitation to buy or sell deposits, securities, futures, options or any other financial products. This report has been prepared solely for informational purpose and does not attempt to address the specific needs, financial situation or investment objectives of any specific recipient. This report is based on information from sources deemed to be reliable but is not guaranteed to be accurate and should not be regarded as a substitute for the exercise of the recipient s own judgment. This report is based upon the analysts own views, therefore does not reflect the Bank s official views. Historical performance does not guarantee future performance. The Bank and/or its directors, officers, and employees, from time to time, may have interest and/or underwriting commitment in the relevant securities mentioned herein or related instruments and/or may have a position or holding in such securities or related instruments as a result of engaging in such transactions. Furthermore, the Bank may have or have had a relationship with or may provide or have provided corporate finance or other services to any company mentioned herein. All views herein (including any statements and forecasts) are subject to change without notice and none of the Bank, its head office, branches, subsidiaries and affiliates is under any obligation to update this report. The information contained herein has been obtained from sources the Bank believed to be reliable but the Bank does not make any representation or warranty nor accept any responsibility or liability as to its accuracy, timeliness, suitability, completeness or correctness. The Bank, its head office, branches, subsidiaries and affiliates and the information providers accept no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report. The Bank retains copyright to this report and no part of this report may be reproduced or re-distributed without the written permission of the Bank. The Bank expressly prohibits the distribution or re-distribution of this report to Private Customers, via the Internet or otherwise and the Bank, its head office, branches, subsidiaries or affiliates accepts no liability whatsoever to any third parties resulting from such distribution or re-distribution. 13