Bank of Thailand (BOT) Governor Tarisa Watanagase blamed exporters yesterday for pushing the value of the baht up to 33.46-33.47 against the US dollar by selling out their greenbacks in response to the central bank's relaxation of capital controls on Monday.
Tarisa told a press conference that some exporters sold more dollars in forward transactions than their actual holdings. "Quite a number of them over-hedged the dollar," she said. The massive sell-out pushed the baht to a new 10-year high.
Until now, exporters have been relentlessly calling on the BOT to intervene in the market to weaken the level of the baht. However, the same firms are now blamed for pushing the baht up by panicking and selling out their dollars, causing the baht to appreciate.
Tarisa said the exporters' behaviour caused the baht to appreciate rapidly and unnecessarily yesterday.
"If the exporters hadn't over-hedged the dollar, the central bank would not have had to intervene in the market. The intervention further encouraged foreign traders to take profits from the baht level at our expense," she said.
Exporters stampeded to sell their dollars yesterday in anticipation of further appreciation of the baht after the central bank's relaxation of its withholding reserve requirement for non-residents.
The BOT governor said exporters should not have panicked because the appreciating baht was spurred by capital inflows into the stock market. Instead, they should have allowed the baht to correct itself naturally after foreign investors were satisfied with returns on their investments.
"Exporters should take a cautious approach, otherwise the baht will appreciate unnecessarily, which will create more damage for exporters in the end," she said.
The baht opened yesterday at 33.72-33.75 before hitting a peak of 33.46-33.47 before midday. It closed at 33.48-33.50 against the greenback.
Apart from the exporters' massive sale of dollars, analysts have also attributed the baht's leap to continuing capital inflows into the Thai stock market, the robust trade surplus and the re-acceleration of foreign reserves. Some brokerage houses have revised their baht level forecasts to 33 by the end of the year, instead of the previous level of 34.
The Stock Exchange of Thailand (SET) rose alongside the baht yesterday, breaking the 850-point psychological barrier and closing at 858.45, up 1.69 per cent from its previous close.
However, a local broker who asked not be named warned investors not to be overly optimistic with the potential rise of the stock market.
"Normally, the market corrects itself after rising for three or four days. But now, the market has gone up for the past seven to eight days in a row without substantial corrections. What will happen if the foreign funds leave the market? Thai stock prices may tumble like falling leaves," he said.
Overall, though, investors remain bullish, thanks partly to the relaxation of capital controls because the central bank has allowed offshore players to access the baht onshore. It has allowed foreign companies and banks to seek its approval for their borrowing of baht for one month from domestic banks to extend hedged offshore positions established before December 19 last year.
The relaxation, announced on Monday, aims to reduce volatility in the offshore baht, which has been trading at a significant premium over the onshore rate because of tight liquidity brought about by the capital controls, which were imposed on December 20, 2006.
Brokerage house DBS said in a research paper that the latest measures should fuel expectations of further capital-control relaxations, which in turn should focus attention on the onshore baht appreciating towards the level of the offshore baht.
Citigroup, on the other hand, said: "We think the impact will be on the onshore foreign-exchange swap rates, and how the banks will utilise the additional dollar liquidity within the contract period." Approval for the hedging swap contracts will extend from July 16 to August 17 only.
Tarisa emphasised yesterday that the relaxation does not take effect until non-residents obtain the central bank's approval. Moreover, the relaxation measure will not put pressure on the baht because non-residents with underlying transactions before December 19 are required to perform a sell-buy swap, a transaction that does not cause movement in the baht's value.
"If the exporters had not panicked, this incident would not have occurred. Although the baht is unusually strong, they should let the currency correct itself by the market mechanism. This should weaken the baht. Then, we'll see a happy ending," Tarisa said.
The governor said the central bank would not have had to step into the foreign-exchange market if the strong baht had been purely the result of capital inflows, because it would eventually have corrected itself. But the BOT had been forced to take care of the baht because of volatility resulting from the exporters' panicky selling.
She said the baht remains in line with other regional currencies. It has been stronger by 7 per cent from the beginning of the year, compared to 1 per cent to 10 per cent appreciation of regional currencies.
The central bank is optimistic that the baht will be weaker in the second half of the year as the country's trade surplus will be lower due to a slow-down in exports and an increase in imports for investment expansions.
Investors' sentiment has already reached a turning point, indicating improving investment in the second half.
"The lowering trade surplus will reduce pressure on the baht, causing the baht to depreciate," Tarisa said.
She warned investors to take a cautious look at the Thai bourse as they could face losses from the volatile market, which has seen net foreign buying worth Bt120 billion since the beginning of the year.
Stock markets throughout the region have faced foreign inflows of US$22 billion (Bt743 billion), compared with $8 billion in the same period last year.
"Foreign investors have gone in and out of every regional stock market very quickly. Thai investors should be cautious about the stock market's volatility," she said.