Emerging Asia hit by biggest exodus since 2008.

[colt1911]

https://www.bangkokpost.com/business/ne ... 8#cxrecs_s

Where will the Baht go from here? What do you think Jimbo?

[JimboPSM]

https://www.bangkokpost.com/business/ne ... 8#cxrecs_s

Where will the Baht go from here? What do you think Jimbo?

Sorry for the delay in commenting but, having spent some four months on the road this year, I’m still in catch up mode.


While there is much about the cash outflows which is opaque and makes accurate judgements of them extremely difficult, there were developments from the Fed both on Quantitative Easing (QE) at the end of last year and in March this year on the Fed interest rate which provides a rationale not only as to why the outflows of cash have occurred but also why they may yet continue for some time to come and with them they carry a large positive, albeit only temporary, impact on the USD/THB rate.

One extremely important and inexplicable omission from the article is the impact of cash outflows relating to the unwinding of QE – while it is nigh on impossible to separate and quantify the constituent parts of the cash outflows it should have had, at the very least, a mention.

A major problem in quantifying the impact of QE related cash outflows from Thailand is that no one, to the best of my knowledge, has been able to identify the original QE related cash inflows to Thailand. We only know that particularly large inflows started nearly a decade ago which, at the time, were “described” by the authorities as “capital investments” that were a vote of confidence in Thailand.

While QE has undoubtedly worked (so far), it will only be after it has been fully unwound that it can be fully judged – until then there is a considerable knowledge gap in understanding its strengths, weaknesses and unintended consequences.

Something like QE is going to be needed again as, with the moronic rolling back of the protections that were implemented post 2008 financial crash, the probability of another “Great Recession” has increased dramatically.

The physical outflows (from whatever source) from Thailand have been unusual in that they have been both sufficiently large and mainly in one direction (the US) that the impact of them has been clearly visible in the movement of the USD/THB rate.

What has also been unusual is that the movement in the USD/THB rate has mainly been generated by the physical degree of cash outflows rather than more customary economic data driven algorithms that drive the rate movements that we see on a daily basis.


These are the main developments behind the outflows:

1. US Interest rates:

a. Fed – there have now been six increases by the Fed since the election; the fifth of these increases on 21st March 2018 moved the Fed rate to a premium (positive interest rate differential) against the BoT rates for the first time since January 2008 (see chart below).

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b. US Treasuries – the ten year rate broke through the 3% barrier on 24th April (for 2 days), on 9th May (for 1 day) and 14th May (for 9 days), 12 days in total. While only of short durations, it is actually significant as the 3% barrier had previously been viewed as unbreachable in 2018. It has not only changed perceptions regarding the US budget deficit and long term debt financing but also that of the trajectory of Fed interest rate movements.

It should be noted that US Treasury yields are also affected by the confidence of investors in the competence of an administration to manage the US budget deficit & long term debt and by yields of competitive triple A rated financial instruments (all governments around the world are similarly affected).

This is a chart from “MarketWatch” of the movement in the interest rate on 10 year US treasuries in 2018.

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Below is a chart from “MarketWatch” of the interest rates on US Treasuries from one month to thirty years compared to what they were a year ago.

Especial note should be made of just how much the interest rates has increased from a year ago on all but the thirty year note!

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There is a term for what has been happening to the shorter term interest rates in the chart above – flattening.

This flattening will get a lot of economists along with every US bank and major US financial institution to really sit up and take notice (if they are not already doing so).

The reason they will be taking notice is that, once the yield curve has fully flattened there is a very real danger that it then becomes inverted.

Historically, the inverted yield curve in the US has been a precursor of recessions – and, based on the historical frequency of recessions we are already past due the next one.

Links to information on the inverted yield curve can be found here:

• https://www.marketwatch.com/story/an-in ... 2018-05-07

• https://www.investopedia.com/terms/i/in ... dcurve.asp
  
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Much greater detail behind the MarketWatch charts shown above can be found here:

• https://www.marketwatch.com/investing/b ... trycode=bx
  
  For info: MarketWatch is part of the Dow Jones Group.
  
  .

In Thailand the combined impact of the positive interest rate differential of the Fed against the BoT and the marked uptick in US Treasuries translated into outflows of:

• Hot money chasing higher interest rates.

• Carry trade money chasing higher interest rates.

While there still appears to be room for the USD to appreciate further in the short to medium term, the problem is that there is nothing that is currently apparent that can sustain it.


2. Unwinding of QE:

Without knowing what the scale was of QE that worked its way into the Thailand economy it is nigh on impossible to estimate:

a. How much of the outflows relating to QE has already occurred.

b. How much is the balance is that remains.

c. What the time frame will be for the remaining balance to be cleared.

Note: I made reference above to the temporary nature of some increases in the USD/THB rate, this referred principally to increases attributable to the unwinding of QE and the hot and carry trade monies chasing higher interest rates all of which are essentially one-offs that only produce temporary rises.

A bit of a refresher on QE

The origins of QE goes back to the 2008 Financial Crash and the Great Recession that followed - Quantitative Easing (QE) was by far the biggest and most innovative step taken to mitigate its impact.

Better explanations than I can give of what Quantitative Easing (QE) is can be found here:

• https://www.investopedia.com/terms/q/qu ... easing.asp

• https://en.wikipedia.org/wiki/Quantitative_easing

A major, but unintended, consequence of QE was a large outflow of funds from the US and a large inflow of funds into Asia; once the monies fell under the control of Wall Street, due to the fungibility of money, instead of being used to bolster the US domestic economy as intended, substantial amounts flowed out of the US in search of profits for the few instead of safeguarding jobs for the many (so no change there).

It should have been readily apparent from the shift in US manufacturing (i.e. jobs) to Asia prior to 2008 that relying on US corporates, Wall Street and the 0.1% to do the right thing for US domestic jobs with all the QE monies would, to some degree, be an exercise in futility.


So where is the Baht now and where is it going from here?

I commented on another thread on 4th December 2017 (when the USD/THB rate was 32.6) that “the risk of the USD/THB rate returning to its pre 1997 rate of 25(ish) can no longer be viewed as the really remote possibility that it was just a few days ago and members would be well advised to consider planning for that possibility accordingly”.

Developments since then have only served to increase the confidence level that I had in making that comment at the time I made it.

The development that most increased my confidence in the projection was learning how the tax cuts package was constructed (as with Bush 43) to specifically benefit US corporates, Wall Street and the 0.1% at the expense of everyone else, as (apart from those without highly selective amnesia and/or wilful ignorance) we have history as a guide to show just how well it worked last time.

It didn’t take long to see that, despite all the glowing rhetoric (aka BS) “justifying” the tax cuts, behaviourally nothing has changed with the corporates, with Wall Street and with the 0.1% since the Bush 43 years – which means that, at a time when the next recession is not far round the next corner, the budget deficit and long term debt is being substantially increased – fiscal irresponsibility on steroids.

These two charts show how the USD/THB rate has moved in nominal and percentage terms since the election on 8th November 2016.

• USD/THB nominal daily movements since 8 Nov 2016

  

• USD/THB % daily movements since 8 Nov 2016

  

Note how, in the above charts, the USD/THB rate improves:
• After the Fed rate increase on 21st March 2018 moves the interest rate differential into positive territory for the first time since January 2008
• After US 10 year Treasuries breach the 3% barrier on 24th April 2018.
• After the Fed rate increases again on13th June 2018


As I have raised the possibility of the USD/THB rate falling to 25 (ish), here are a couple of charts that have been modified to incorporate a straight line projection of how a fall of the USD/THB to 25 would look.

• USD/THB annual average movements

  

This is a chart that shows both the daily movements of the USD/THB rate and the average rate for each year – it helps illustrate why, for my purposes of economic analysis, I don’t put much weight in short term movements due to the degree of statistical noise, volatility and range of movement in each year.

• USD/THB annual average and daily movements comparison

  

As can be seen in both the above charts, the straight line projection to 25 is remarkably similar to the actual fall experienced during the Bush 43 administration. Note however, when making comparisons with the Bush 43 line that there is a difference, the projection in both charts starts from 2016, not 2017; this was chosen as the 2016 election failed to produce in 2017 the customary post election year bounce for the USD.


While there are a multitude of factors that affect the exchange rate, other than the cash flows and interest rates I have commented on above, there is nothing of any substance that I have seen that indicates that any of them have been of material significance in recent months.

A ray of hope for the USD/THB rate?

There is an area that I continue to review and is one that may provide potential for an improved USD/THB rate.

It is the relative difference between the movement of the US Dollar Index and that of the USD/THB rate since July 2014 (at the end of June 2018 the difference was some 18%).

It is a difference that is so large and has occurred in such a relatively short period of time that (so far) I have found it difficult not to conclude that some substantial part is due to the THB being overvalued – however, although I find the evidence is quite compelling, it is only circumstantial...….. and, with the overwhelming presence of smoke, mirrors and Teflon, I certainly won't be holding my breath waiting for the overvaluation (if that is what it is ultimately proven to be) to be reversed.

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