From July 10, 2007 Bangkok Post
Bangkok Post : Business news
The baht continued to gain ground against the US dollar yesterday, reaching a new 10-year high at 33.77/8 to the greenback. The gain came as the Bank of Thailand announced that it would allow foreign investors to renew swap contracts with local banks for certain transactions over a one-month window. The move aims to reduce the gap between local and offshore rates. The baht was quoted at 31.65 to the dollar in offshore trade.
Most Asian currencies closed higher yesterday against the dollar on expectations of stronger economic growth and continued capital inflows into the region. Regional equity markets also closed higher, with Sydney, Mumbai, Hong Kong, Jakarta and Seoul all closing at all-time highs.
Suchart Sakkankosone, the senior director for the central bank's exchange control and credits department, said hat foreign investors could now hedge their currency exposure for certain transactions with local banks.
The rule change would help reduce the gap between the onshore and offshore markets, he said.
The baht has effectively been split between the onshore and offshore markets since last December, when the Bank of Thailand imposed stringent capital controls to curb ''hot'' capital inflows that had led to a 15% appreciation of the baht in 2006.
Mr Suchart said the regulatory change would help foreign banks and non-resident investors who had undertaken currency swaps with hedging in the offshore market. These markets came under pressure due to low liquidity following the 30% reserve rule on inflows imposed on Dec 18.
The central bank would now allow foreign investors to hedge their exposure in the domestic market for transactions matched with an underlying investment as long as that investment originated before Dec 19, 2006.
Investors unable to complete the transaction within the timeframe could apply for an exemption from the central bank.
Mr Suchart said that onshore swaps for qualifying transactions would be exempted from the 30% reserve rule, and could be taken from July 16 through Aug 17.
He said the thin liquidity in the offshore market meant that investors closing open positions faced higher financing costs due to the baht's scarcity. This in turn resulted in further pressure on offshore rates for the baht to appreciate, which had a psychological impact on domestic rates.
''Before the 30% reserve rule was imposed, there was no rule that hedging had to be made with Thai institutions. As a result, some foreign investors undertook hedging transactions with foreign institutions,'' he said.
Mr Suchart stressed that foreign investors could sell dollars onshore to close contracts only to match their actual investment transactions priced at existing market rates.
The offshore contract could only be closed with an onshore contract at the maturity date of the original deal, he added.
The Dec 18 rule required foreign investors to set aside a 30% reserve for inflows into certain asset classes.
But the rule has been made largely moot, with exemptions offered for foreign direct investment and equity investments. The central bank has also waived the rule for inflows fully hedged against currency risk.
Usara Wilaipich, a senior economist with Standard Chartered Bank, said the measure would help to narrow differentials between onshore and offshore baht exchange rates.
''In the end, the measure will help to improve sentiment. The closer gap between the two markets should prove supportive for the central bank's lifting of the 30% reserve requirement in the future,'' she said.
But a local treasurer, who asked not to be named, said the measure could result in more Thai currency circulating in the offshore market.
''The measure would help to bring the offshore baht rate and swap premiums closer to the onshore market. But it may fail to address the long-term problem,'' he said.
The measure would increase the central bank's workload as it limited the screening process to a one-month period.
''The central bank should allow investors to obtain baht liquidity gradually, instead of setting 'golden minutes'. There could be limitations as to how well the central bank could screen cases,'' the trader said.
Thiti Tantikulanan, the head of capital markets at Kasikornbank, said that recent trends indicated that the baht would continue to appreciate.
The currency could possibly reach 33.70 to the dollar by the end of the week.
''The baht is likely to continue to strengthen due to strong fundamentals. For instance, Kasikorn Research Center projects the current account surplus this year to be as high as $12.5 billion,'' he said.
Mr Thiti said the central bank's rule change yesterday would have no real impact on the currency, noting that the baht continued to strengthen in intraday trade.