Baht Rises Even as Prasarn Says Rally Went Beyond Fundamentals

Thailand’s baht reversed earlier losses and advanced to a 16-year high even after central bank Governor Prasarn Trairatvorakul said the currency, Asia’s best performer this year, has started to move beyond its fundamentals.

The Bank of Thailand is ready to intervene if currency swings are out of line with fundamentals, he said April 9. Finance Minister Kittiratt Na-Ranong said today the nation’s borrowing costs are encouraging inflows and reiterated a call for a cut in interest rates. He said yesterday there’s no need for measures to tackle speculation in the baht. The exchange rate reached the strongest level since 1997 as overseas investors boosted holdings of the nation’s debt.

“The central bank may come in just for so-called smoothing operations, but is unlikely to intervene to reverse the trend,” said Shigehisa Shiroki, chief trader on the Asian and emerging-markets team at Mizuho Corporate Bank Ltd. in Tokyo. “The baht’s appreciation pressure may continue from the inflows.”

The currency rose 0.2 percent to 28.62 per dollar as of 3:38 p.m. in Bangkok from late yesterday in New York, according to data compiled by Bloomberg. It strengthened 1.5 percent from a week ago, the biggest gain in three months, and touched 28.61 today, the strongest level since a devaluation in July 1997 that sparked the Asian financial crisis.

The baht appreciated 6.9 percent this year, more than a 1.6 percent advance in the Indian rupee, Asia’s next best performer. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, climbed 12 basis points today and 11 basis points this week to 5.38 percent.

Governor’s Position

The Southeast Asian currency has climbed 2.5 percent since April 3, the day before the Bank of Japan said it would buy 7.5 trillion yen ($76 billion) of debt per month, which boosted speculation of more fund inflows to emerging markets. Global funds bought $1.7 billion more Thai government debt than they sold this month, taking this year’s net purchases to $12 billion, Thai Bond Market Association data show.

Finance Minister Kittiratt said yesterday the baht may strengthen slightly, providing an opportunity for the government and local companies to import machinery and repay overseas debt. He also said appreciation may put the government’s 2013 export-growth target of 8 percent to 9 percent at risk. A stronger currency erodes export income and makes imports cheaper.

Kittiratt complained of a lack of communication with the central bank chief stemming from their opposing economic views, a reflection of tensions over whether lower interest rates are needed. The minister said at an event yesterday that he had “thought” about removing Prasarn, while he added today that “I have many thoughts and finally they are just thoughts.”

‘Moderately’ Bullish

Prasarn has held off from cutting interest rates in the last four meetings even as the rising baht threatened to reduce Thai export competitiveness.

Bank of Japan board member Ryuzo Miyao said yesterday he expects investors based in the world’s third-largest economy to buy more foreign debt. Japanese money managers boosted ownership of baht-denominated notes by 26 percent in the first quarter to 24.4 billion yen, data from the Investment Trusts Association of Japan show.

The baht has been among the biggest beneficiaries of the reflationary flows from Japan, according to a Morgan Stanley research note yesterday. Citigroup Inc. is “moderately” bullish on the baht given supportive fundamentals such as strong foreign direct investment inflows amid deteriorating exports, according to a weekly research report.

Bonds Rise

The consumer-price index fell for a third month in March to reach 2.69 percent, the least since August and lower than the nation’s benchmark interest rate of 2.75 percent. Crude oil declined 3.7 percent this year to $88.41 a barrel in New York and reached a 2013 low of $85.61 yesterday.

The yield on the 3.625 percent government bonds due June 2023 dropped three basis points, or 0.03 percentage point, to 3.38 percent this week, according to data compiled by Bloomberg. The rate rose one basis point today.

“The Thai baht is supported by bond inflows,” BNP Paribas SA analysts led by Singapore-based Mirza Baig wrote in research note today. “We remain bullish on this currency. The next target is at 28.40.”

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