Sunday, January 28, 2007

Is the Thai Baht in Play?

By Peter McKenzie-Brown Take a look at this chart. It is a foreign exchange picture of the Thai baht versus the US dollar. I wrote this article in response to the huge spike in the baht at the end of January, 2007. As you will notice, at that time something extraordinary happened to the baht: a strengthening of the baht by more than 5 per cent in only two days. In foreign exchange terms, that is huge. Volatility of this kind hasn’t happened since 1997’s Tom Yum Gung Crisis in Thailand led to the horrific Asian Financial Crisis later that year. (Although in that year, of course, the volatility was generally in the other direction.) I have drawn charts for all comparable currencies in Asia - the Malaysian ringgit, for example - and the pattern in those currencies is the same: There has been a steady rise in their values relative to the US dollar since the end of November, 2006. In the case of the currencies of such developed countries as Japan and Korea, the change in value has been marginally down. (See the charts for the Korean won and the yen). Only in Thailand is great volatility in evidence. I believe the currency could be in play. Something comparable happened in the mid-1990s, when speculators wrote so many options contracts (using a relatively sophisticated financial maneuver technically known as "covered calls") on the New Zealand dollar that the currency went through the roof. At one point in that speculative bubble, the amount of currency on contract was greater than the total the Bank of New Zealand had issued since the colony became a country. The speculators who got in at the beginning made a fortune, before the currency’s eventual, and inevitable, collapse. I am not speculating on the Thai baht. But I am speculating on an idea - namely, that if currency speculation has begun in this country, it is somehow connected to the putsch against Thaksin Shinawatra, the billionaire ex-prime minister who has been skulking around east Asia for the last few weeks. As Thailand's richest businessman, he has the most to gain from an appreciation in the baht. As an ousted former head of government, he could also benefit from destabilization of the political system here. Would continuing increases of this magnitude lead to economic and political instability? I think so. It would keep inflation down by lowering the cost of imported goods, but it would hurt the key export and tourism industries by increasing the cost to foreigners of Thai goods and services. The present military government showed at the end of last year that it is frightened of a strong baht, and made some ham-handed efforts to reduce the currency's relative value. Now those efforts are coming back to haunt them. If Mr. Thaksin is somehow behind this, what would he gain? At the very least, he could thumb his nose at the people who drove him out of office. And if the system got completely out of control, it is possible to imagine him being permitted back into the country to bring a return to order. Stranger things have happened in the last, tumultuous, year.
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