Morning Commentary: Ironic Strength

Foreign Exchange - Morning Commentary
Ironic Strength
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The Thai baht was one of the world’s top performing currencies against the US dollar in 2019 despite consistently disappointing economic growth.  This strength, against a weakening economic backdrop, serves as a case study for what has been driving currency strength and weakness in the current world of low rates and elevated uncertainty.  

Despite its poor economic performance, Thailand still stands out as a relatively high yielding currency.  Moreover, the country’s healthy current account surplus has positioned the baht as a safe haven currency.  Combined, both of these factors have continued to attract foreign fund flows despite steps from the Bank of Thailand (BoT) to head off baht strength. 

Looking forward, it appears that Thailand’s economic underperformance might finally be catching up to its currency as continued underperformance should force the central bank to downgrade its GDP forecast that is still too optimistic despite previous downgrades.  By further downgrading its GDP forecast, the central bank would also be acknowledging that the economy needs further support and opening the door to another cut. 

However, it is unlikely that the BoT will go beyond one cut—absent a more material deceleration in the economy—as it looks to preserve policy space.  Currently, the BoT requires banks to contribute 0.46% of their deposits to the Financial Institutions Development Fund, making 0.50% the effective lower bound.  What this means is that while further easing should weaken the baht, the export-oriented country will have to depend on other measures to achieve its desire for a weaker currency.     
  • Regarding Iran, not much has happened to change the overall narrative.  Iran has yet to retaliate in a firm manner, but news reports indicate that the government is evaluating 13 different scenarios to create a “historic nightmare” for the US.  Given this, the markets appear to be discounting these risks as evidenced by the intra-day equity rally in the US yesterday that has been followed up by rallies in Europe and Asia. 
  • US ISM data beat came in at 55.0, beating estimates for a 54.5 print.  Additionally, factory orders declined less than expected, falling by 0.7% against expectations for a 0.8% decline.  Finally, the US trade deficit narrowed to its smallest level in 3 years as it also beat expectations amid an easing in trade tensions with China. 
  • Canada’s trade deficit also narrowed more than expected, however last month’s reading was revised down by more than this month’s print. 
  • Australia’s consumer confidence index printed at 106.2, dropping 1.8 points from its last print of 108 and hitting its lowest level since 2015.  Further accelerating losses for the AUD was a weak jobs report and the bush fire crisis that backs the case for further easing. 
  • Euro area inflation printed in-line with expectations at 1.3%.  The acceleration in inflation was mainly driven by rising energy prices and other volatile components that may soon revert. 
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