Thai baht continues to strengthen despite political risks

The possibility of political unrest ahead of Thailand’s election next month is one of the key risks facing the economy, but so far at least, the uncertainty is having little impact on the currency. The Thai baht is up 5% since the start of the year, making it the best-performing Asian currency over this period. The strong performance of the baht is down to two main factors. First, a shift in interest rate expectations in the US, which has led to an improvement in risk appetite. Second, the recent strong performance of the Thai economy, which has raised expectations that monetary policy will be tightened again this year. The strong baht is likely to add to the headwinds facing the export sector, and is one of the reasons why we expect exports to contract this year. There are signs that policymakers are becoming concerned, with Bank of Thailand governor, Veerathai Santiprabhob, recently noting that the “fast appreciation has given us cause to worry”. The upward pressure any further rate hikes would put on the baht is a key reason why we think rate hikes in 2019 in Thailand are unlikely, and we expect rates to remain on hold throughout 2019. Most other analysts are expecting at least one further rate hike this year.