Morning Commentary: From Worse to First

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

From Worse to First Share this story: Andrew Kositkun Foreign Exchange Head Trader

Yesterday brought further good news on the COVID-19 vaccine front. These positive COVID-19 vaccine developments have led to a rally in emerging market currencies. Chief among the winners has been the Thai baht, a currency that was previously one of Asia’s worst-performing currencies this year. In a world starved for yield, Southeast Asia’s bond and equity markets, especially under the assumption of a COVID-19 vaccine, represent an attractive destination for investors searching for higher returns. To this point, inflows into Thai sovereign debt have reached their highest level in 17 months despite November only being half over. According to flow data, the majority of these inflows have been at the front end of Thailand’s debt curve as a way to bet on further baht gains. Here are some of the reasons why the Thai baht could have more room to run despite its recent sharp appreciation: Unique positioning. The baht is a lightly held currency that has large balance of payment exposure to services receipts. A feasible path to a vaccine, even if it takes time to materialize, should boost tourism-related inflows and support the currency. Other lightly held currencies with heavy balance of payment exposure to travel receipts include the Hong Kong and Singapore dollars. Equity inflows. The Thai stock market has been one of the worst-performing indexes in Asia. This should attract fund inflows, as there is greater economic upside once there is a vaccine. A rising tide lift all boats. A continued recovery in Thailand’s trade surplus is expected on a regional export upswing. Of course there are some negative factors, as political noise remains a headwind with protests unlikely to end in the near future. However, while an escalation in tensions remains a lingering concern, the conditions needed for a negative FX spillover haven’t materialized. Specifically, foreigners’ equity positioning remains light, and balance of payment data doesn’t show evidence of capital flight seen during other episodes of political upheaval in Thailand. These factors have allowed Thailand’s trade surplus to remain a positive for the baht. This isn’t to say that the baht is immune to political risk. Should the situation deteriorate further and interrupt the expected recovery in tourism inflows, the bullish baht stance would have to be revisited. But for now, positive vaccine news creates a clearer path toward the resumption of tourist arrivals that should be supportive of the baht, especially if a travel agreement with China is realized. Finally, new central bank governor Sethaput Suthiwart-Narueput will hold his first meeting tonight and is expected to hold rates steady. It is possible that the bank could reference recent baht strength, but it will likely refrain from overt actions in an effort to stay off the U.S. Treasury’s report on international currency manipulation that is set to be released soon. HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: U.S. October retail sales missed expectations after last month’s big jump. Headline retail sales only rose 0.3%, or the slowest pace in six months. Market expectations were for a 0.5% increase. Core sales increased 0.2% against expectations for a 1.2% increase. Recent consumption strength and falling income due to expiring unemployment benefits contributed to today’s disappointing numbers. Unfortunately, November’s retail sales number is expected be worse in light of increased lockdown measures across the country. Pfizer has started a pilot immunization program in Rhode Island, Texas, New Mexico and Tennessee with the hopes of refining its plan for distributing its vaccine candidate. News reports indicated that a Brexit deal could be signed as soon as next Tuesday, as both sides have supposedly found a “possible landing zone.” This would be in line with market expectations for a skinny deal. While Brexit negotiating history has been filled with multiple head fakes, negotiations have reached the now-or-never stage. Should a deal be reached, lawmakers on both sides will need to ratify the agreement. European Central Bank officials have signaled that they are focused on asset purchases and long-term funding as levers for their next round of stimulus, as policymakers remain reluctant to take rates more negative. Crude prices, while down today, are up over 20% this month, as OPEC+ members signaled the possibility that production cuts could be extended by three to six months. The futures curve has also steepened, suggesting a more optimistic outlook. Minutes from the Reserve Bank of Australia’s November minutes indicated that the bank saw its current rate level as the floor with negative rates “extraordinarily unlikely.”

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