Forex hedging still favoured despite currency fluctuation
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ALTHOUGH CURRENCIES this year have shown volatility and that trend is expected to continue in 2016, foreign exchange (FX) hedging by Thai traders has not changed, according to Krungsri Group
Half of the total Thai traders had FX hedging compared to 80 per cent of Japanese operators.
Tak Bunnag, head of Global Markets Group, said the cost of hedging is not high when compared to the risk of currency volatility.
The hedging cost of Malaysia’s ringgit is 2.57 per cent but it can cover the currency depreciation of 20 per cent, while the hedging cost of the baht is 1.8 per cent, covering depreciation of 8.6 per cent. Only FX hedging of Indonesia’s rupiah might not cover the currency’s depreciation because of the high level of its interest rates.
The hedging cost of the rupiah is 12.9 per cent compared to the depreciation of 9.8 per cent.
“Looking ahead, currency volatility remains a risk for business operators because of the different monetary policies of the major economies. Japan and the European Union have continually injected money through quantitative easing while the US is moving towards increasing interest rate. The baht could be more volatile in the next three months after the Federal Reserve hikes the Fed fund rate in December,” he said.
Based on the assumption that the Fed will hike its rate in December and if the Fed does not meet market expectation, the baht could reach 36-37 against the US$ in January, he added. Krungsri expects the Fed fund rate in 2016 to gradually increase to 1.25 per cent
The Bank of Thailand is expected to increase policy rate only once next year, by 25 basis points to 1.75 per cent, he said. He added that the central bank would have to be more cautious with its monetary policy because the interest rate will have a critical impact on the growth of the Thai economy in 2016.
He said the bank expects the baht to gradually appreciate in the long term, as emerging markets will continue to be attractive destinations for investors. At the end of 2016, the baht could touch 36.20 against the greenback.
Tak said the fragile global economic recovery in 2016, the export structure, the low prices of agricultural crops and the high level of household debt are negative factors for the growth of Thai GDP, which the bank predicts would be 3.2 per cent in 2016, better than the expected 2.9 per cent this year.
The growth of Thai exports will rely on the recovery of purchasing power of citizens in the US but Thai exports are facing fierce competition from neighbouring countries. Therefore, trading in Asean is a safe zone for Thai operators.
Meanwhile, the bank and the Mitsubishi UFJ Financial Group (MUFG) network in the Greater Mekong Subregion (GMS) has seen an increase in the use of emerging currencies over using the US dollar as the main currency in transactions.
Turnovers of emerging market businesses using three currencies – Laotian kip, the renminbi and the baht – serviced by Krungsri and MUFG in China and the GMS in the third quarter jumped by 109 per cent to Bt40 billion from the second quarter. Only Hong Kong and Chinese yuan business increased by 165 per cent so far this year.
The bank believes the Vietnamese dong, the Myanmar kyat and the Cambodian riel will be the next emerging currencies among traders in the region.
