Morgan Stanley Squares Off Against JPMorgan on Baht

Depending on whether you listen to Morgan Stanley or JPMorgan Chase & Co., the imposition of martial law in Thailand will either send the baht tumbling to levels last seen in 2006 or put an end to its losses.

Morgan Stanley yesterday reiterated its prediction that the baht will weaken 12 percent by year-end to 37 per dollar as the political crisis pushes the country toward a recession. JPMorgan was more optimistic, confirming an overweight recommendation on the currency, amid bets the army’s move will help end months of street protests.

The disparity of opinion on the outlook for the currency mirrors the mixed signals coming from Thailand’s economy. While an official report this week showed gross domestic product shrank in the first quarter, the nation has the biggest cumulative trade surplus for more than three years, and exports are rising.

“The market tends to be complacent about Thai politics, it’s not the first coup,” Paul McNamara, a London-based investment director at GAM U.K. Ltd., which manages $129 billion in assets, said yesterday by e-mail. “It’s not just noise, the chances of something terrible happening are rising. But until we see convincing spill-over to the real economy, I think the fallout will be limited.”

Paring Decline

The baht is the only one of 12 Asian currencies tracked by Bloomberg to drop versus the dollar this month, slipping 0.4 percent. It has retreated 4.3 percent since the anti-government protests started at the end of October, the worst performance in the region.

The currency fell as much as 0.6 percent yesterday to 32.660 per dollar, before paring its retreat amid speculation of intervention by the central bank. It climbed 0.1 percent today to 32.493 as of 1:06 p.m. in New York.

“Our target of 37 is very achievable,” Geoffrey Kendrick, Morgan Stanley’s head of Asia currency and interest-rate strategy in Hong Kong, said yesterday in a phone interview. “The economy is in a massive hole. Thailand is certainly going to have a technical recession in the first half.”

Thailand’s army chief declared martial law yesterday, telling local television that the move wasn’t a coup and would help end the street protests that led to Yingluck Shinawatra’s removal as prime minister this month.

The violence has driven away tourists and hurt the economy, with a May 19 report showing GDP shrank 2.1 percent in the first quarter, after growing a revised 0.1 percent in the previous three-month period.

Airport Shutdown

Thailand’s last quarter-on-quarter recession was in 2009, when anti-government protesters shut down Bangkok’s main international airport for more than a week at the height of the global financial meltdown. The baht tumbled 17 percent against the dollar in the five quarters ending March 2009, the sharpest decline since the Asian crisis of the late 1990s.

Money poured out of the country yesterday. Overseas investors sold $256 million more Thai shares than they bought, the heaviest net sales since November, and pulled $61 million from bonds, exchange data show. Global funds have withdrawn about $1 billion from local debt and equities in May, snapping two months of inflows.

Others are optimistic about the baht’s prospects.

“I’m not worried about the baht, I’m looking for levels to buy,” Rajeev De Mello, who manages $10 billion as the head of Asian fixed income at Schroder Investment Management Ltd., said by phone yesterday from Singapore. “The main support of the baht in the past has really been the trade side. On the investor side, the people who wanted to get out of Thailand have already gotten out.”

‘Baht Appreciation’

Westpac Banking Corp., Australia’s second-biggest lender by market value, expects the baht to strengthen about 3 percent by year-end to 31.4 per dollar. The median estimate in a Bloomberg survey of 24 strategists is for a decline to 33.

“Foreigners are excessively underweight baht assets, and covering this positioning on any reduction of political risk would trigger baht appreciation,” Daniel Hui, the head of emerging-Asia currency strategy at JPMorgan in Singapore, wrote yesterday in a report.

Yesterday marked the army’s most direct involvement in Thailand’s politics since 2006, when then-premier Thaksin Shinawatra, Yingluck’s brother, was removed in a coup.

Surviving Coups

Thailand has had 11 coups since direct rule by kings ended in 1932, and the currency has ridden out most of them. Martial law was last invoked in April 2010, and a month later the baht had risen 0.3 percent against the dollar, the best performance in Asia. It was little changed in September 2006, when Thaksin was ousted.

The country has been without a fully functioning government since December, when Yingluck called snap elections in a bid to ease the unrest. To Australia & New Zealand Banking Group Ltd., that will lead to a drop in the baht of about 4 percent this year to 34 per dollar.

“Politics definitely is the biggest risk at present, and there are negative effects on the economy,” Khoon Goh, a Singapore-based senior strategist at ANZ, said in a May 19 phone interview. “We’ve already seen portfolio outflows. The risk is that foreign-direct investment slows down sharply if investor concern over the political situation intensifies.”

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