Analyst predicts baht uptick in H2

Weakening trend is dubbed short-term

The narrowing trade deficit and easing inflationary pressure should support the baht regaining strength against the US dollar late in the third quarter this year, reversing a short-term depreciation trend, says Siam Commercial Bank Financial Markets (SCB FM).

Wachirawat Banchuen, senior financial markets strategist at SCB FM, said the baht depreciation trend is largely temporary and does not signal a prolonged weakening.

The Thai currency recently weakened below 33 baht to the dollar, briefly approaching 33.5, driven by short-term factors rather than underlying economic deterioration, he said.

"The baht has not weakened significantly compared with other regional currencies and remains relatively stable," said Mr Wachirawat.

"The recent depreciation mainly reflected temporary capital outflows, particularly foreign selling in the Thai equity market. Once those flows subsided, the baht quickly stabilised."

The latest weakness should not be compared with the 1997 Asian financial crisis, as the current dip was largely a one-off event rather than the start of a sustained sell-off, he noted.

In the near term, SCB FM projects the baht to trade in a range of 33-33.50 to the dollar, with modest downside pressure remaining from the widening interest rate differential between Thailand and the US.

The Bank of Thailand is expected to keep interest rates unchanged to support its fragile economy, while markets continue to expect the US Federal Reserve to maintain relatively high interest rates due to persistent inflationary pressures.

Thailand's trade balance remains in a headwind after recording a trade deficit of around US$10 billion in May, followed by another deficit of roughly $5 billion last month, which has added pressure on the currency.

Despite the near-term weakness, Mr Wachirawat said he expects the baht to begin appreciating in the late third quarter or early fourth quarter as market expectations for wider US-Thailand interest rate differentials seem overly aggressive.

"Both the Fed and the Bank of Thailand are likely to leave policy rates unchanged for the remainder of the year as inflation has started to ease," he noted.

As a result, the US dollar is expected to lose some momentum, reducing pressure on the baht.

In addition, Thailand's external position is likely to improve as the trade deficit narrows and the current account gradually returns to neutral.

"These factors should help the baht recover, with the currency likely to strengthen to 32.5-33 per dollar by the end of the year," said Mr Wachirawat.

He suggested exporters hedge around 60% of their expected foreign currency receipts through spot transactions, while using options to retain some flexibility amid continued market volatility.

Importers are advised not to rush purchasing dollars at current levels. Instead, they should hedge only around 20% of their foreign currency requirements and wait for the baht to strengthen later before increasing dollar purchases, said Mr Wachirawat.