(update july 11, 2007. The Big Max Index has been updated. Available on the website of The Economist)
Since 2006, the THB is gaining strenght against USD. Or we should say : the USD is weakening…
In december, BOT (Bank Of Thailand) took some harsh measures in order to curb the value of THB (capital controls).
The effects on the stock exchange market and on the confidence of investors were desastrous. And it gave birth to a dual valuation : on shore rates, and off shores rates. Since, the BOT has lifted the main controls.
Despites the very poor economic achievements of the junta, despites the real slowdown of the economy… THB continues to be steady. It’s because the USD continues to be under pressure.
As for today, THB remains undervalued compared to USD (36.5). Like most of the asian currencies (it’s obvious for the 2 main : chinese RMB and japanese Yen). It’s likely that THB will continue to increase. That’s for the theoritical trend.
However, there is the issue of political situation. This is the tricky part, that many foreign investors don’t want to take in account, or can’t see. A full political crisis in the country would definitely affect the THB (money would flow out the country, in panic mode).
Here is an original index : the Big Max Index. That allows comparison, based on a single product, global, the Big Mac burger.
Big Max Index (31 january 2007, The Economist).
Burgernomics is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. Our “basket” is a McDonald’s Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.