FxWirePro: Roll out USD/THB NDFs of far month tenors on structural current account and neutral valuations

Short in USDTHB via 3m NDF are rolled out on account of structural current account improvement, neutral valuations. THB continues to remain top performer within EM Asia, strengthening by 8% this year and outperformance should continue over the coming months on large current account balance, foreign inflows, stable growth, and neutral valuations.

The upward march in the merchandise trade and services balance has resulted in Thailand having the second-largest surplus in EM relative to GDP (10.6% of the GDP over last four quarters) and the fourth-highest in dollar terms. Despite the THB being the top performing currency in the region year-to-date, the REER is only 3% higher than its 10-year average. FX reserves have increased by $23bn since the start of the year, and more steeply since July (by $10bn) on possible dollar buying from BoT.

However, a less aggressive approach can be adopted by the BoT if EM currencies continue to strengthen. The BoT recently talked about measures to monitor large transitions but any policy shifts would be directed at slowing, rather than reversing, the direction of the THB.

Sell USDTHB via 3m NDF The position was rolled in our Trade Monitor yesterday with the following parameters: Sell USDTHB via 3m NDF at 33.12 (spot reference) with the target at 32.10 (3.10%) and stop at 33.45 (-1%). The trading horizon is 2-3 months and it has a negative carry of 6bp/month.

Risks are foreseen to the extent of higher UST yields, CA balance, aggressive BoT, politics: Sharply higher US yields, BoT rate easing or a spike in CPI might reverse debt flows. Worsening local politics, a turn in the goods or services trade balance, or geopolitical tension could hurt THB.