The recent rally of the Thai baht is at risk as markets respond to the country’s ongoing political turmoil ahead of this week’s central bank policy meeting.
Since July, the baht has emerged as one of the strongest currencies in the region, thanks in part to a rebound in tourism, following a nearly two-year low against the dollar in May. However, this resurgence may be jeopardized by a recent wave of political upheaval, including Paetongtarn Shinawatra winning a parliamentary vote to become the new prime minister, while a court dismissed her predecessor, Srettha Thavisin.
“We maintain a bearish outlook on the baht, predicting it could reach 36.0 by the end of the year,” stated Jeffrey Zhang, an emerging markets strategist at Credit Agricole CIB HK Branch. “Thailand’s economic growth may continue to struggle to return to trend levels, and we foresee a potential decline in the neutral rate due to long-term structural growth challenges.”
The baht’s recent gains against the dollar also appear to be technically vulnerable. According to a momentum indicator, the currency pair is currently in oversold territory, with some analysts predicting it may weaken to as low as 37.5 per dollar by the year’s end. On Friday, the baht closed at 34.6.
Market participants are now focused on the Bank of Thailand’s impending policy decision this week, with expectations that the central bank will maintain interest rates at 2.50%. The narrowing yield gap between Thailand and the United States, as markets anticipate potential Federal Reserve interest rate cuts in September, may provide some support for the baht.
However, even if the Bank of Thailand opts for a hold, it might not be sufficient to prevent the Asian currency from weakening in the short term due to ongoing political uncertainties.
“Following recent robust gains, the baht may encounter challenges for further appreciation,” noted Moh Siong Sim, an FX strategist at Bank of Singapore, predicting the currency could trend toward 36.0 per dollar by the end of this quarter. He also highlighted that risks related to the US elections could bolster the dollar once again, particularly if a Trump 2.0 scenario unfolds.
Concerns about Thailand’s high household debt levels and its investment appeal continue to be key priorities for market observers. Ms. Paetongtarn, the daughter of former leader Thaksin Shinawatra, has endorsed lower interest rates and criticized the central bank as a barrier to addressing the nation’s economic challenges. There are also indications that the new government might abandon a digital cash handout program.
“With Paetongtarn securing sufficient votes for the premiership, the political uncertainty has lessened for the time being,” wrote Shreya Sodhani, a regional economist at Barclays, in a client note on Friday. “We now anticipate that the digital wallet plan will be discarded, which could result in delays to the comprehensive budget for 2025.”
