Next BOT move is a rate cut; trade tensions and Brexit are still unresolved

A matter of time before BOT cuts. Trade tensions and Brexit risks are lingering.
Radhika Rao, Philip Wee06 Nov 2019
    Photo credit: AFP Photo

    Thailand: BOT cut – not if but when

    The Bank of Thailand will review policy on Wednesday and markets are split on the central bank’s next move. A slim majority (including us) expect the committee to vote for a 25bps cut to 1.25% - a GFC low, while the rest back a no change. Policymakers are seeking to balance between slowing growth, need to rein in the currency (THB is up 8% YTD) and maintain financial stability in light of rates at multi-year lows just as household debt levels stay high.

    In our view, immediate priority will be accorded to preserving growth. Rate cuts might not materially discourage THB bulls but will be a cue to signal the BOT’s discomfort with a strong THB. Non-rate FX measures will also be necessary (encourage outbound investments, exporters allowed to park earnings offshore for a pre-determined period etc.) to ease appreciation pressures on the currency, which has not only surged against the dollar but is also up 6% YTD on effective exchange rate basis. On the side, if risk-appetite improves further and safe-haven flows subside, the extent and scale of further appreciation in the THB could ease.

    Notwithstanding the limited space for further easing, 10Y and 2Y THB bond yields remain below 2%, maintaining a narrow 2Y/10Y term premium of ~20bps from 70bps at the start of the year. The economy is in midst of an economic stagnation, as a soft 1H spills over to 2H, which will leave 3Q GDP growth stay below 3% YoY for a second successive quarter. To reflect these risks, we have dialled down our full-year growth forecast for 2019 and next (see (PDF, HTML for our views). 

    FX: Trade tensions and Brexit are still unresolved

    The trade deal optimism that bolstered the Chinese yuan to an intra-day high of 6.99 from 7.03 on November 5 petered out quickly. CNY ended the session weaker at 7.00 after China reportedly pushed the US to rollback previously imposed tariffs and not just suspend new tariffs for the “Phase 1” trade deal. If US President Trump denies of a quid pro quo for tariff reductions in exchange for the China’s farm purchases and a stronger CNY, it could reinstate the tariff redline that that upended the previous trade talks in May that led to a new round of tit-for-tat tariff war. Yesterday’s trading session was a reminder that a sentiment-driven market tends to be a volatile one too.

    The British pound has been retreating after the UK averted a no-deal Brexit on October 31. Polls, businesses and bookies expect a hung parliament at the snap elections on December 12. UK voters are divided over Brexit and many have not picked the same political party at the last few polls. As far as Brexit is concerned, it has been easier to avoid a worst outcome than to find an optimal solution. But with Brexit fatigue setting in on the UK and the EU, the latitude for kicking the can is getting smaller. If the UK election does not end the political paralysis, the EU will be reluctant to re-open Brexit negotiations and consider a third extension beyond the new Brexit Day on January 31, 2020,

    Radhika Rao

    Economist – India, Thailand & Eurozone

    Philip Wee

    FX Strategist - G3 & Asia

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