“Managed float system keeps Baht stable
The baht has been stable for the past one or two months under the Bank of Thailand’s managed float exchange rate system, according to BoT Governor Tarisa Watanagase.
The U.S. dollar has traded between Bt34.50 and Bt34.65 for the past month due to possible dollar buying by the central bank.
Despite trade- and equities-related inflows, the BoT was able to curb the baht’s appreciation as trade volume is limited by controls on speculative inflows, while investment in local debt must be fully hedged via foreign exchange swaps.“
(Nation)
The naiveness of this news illustrates what the BOT is doing.
1-Intervention
The BOT is indeed buying USD, in order to curb the value of the THB. And by the way, because USD is loosing its value (anyway), the BOT records… accounting losses.
And interventions are easier due to capital controls, decided last december, because they create a small volume market, isolated.
2-Manipulation
The “managed float exchange rate system” is nothing less than manipulation. This is why we have 2 rates : the “on shore rate“, the one that BOT is looking at, very proud. And the “off shore“.
Today : 1 USD = 31.60 at off shore rate (we broken the bottom record last march, by the way). And 34.50 with the on shore rate.
That’s a 9 % difference !
Off shore rate shows only one thing : the real value, or the market value, of the THB.
THB and most of the asian currencies (Yen, RMB) are undervalued, against the USD. But since most of the asian economies are pushing their exports, they need to depress (or at least to curb the increase) their currencies.
This is one of the main imbalances that pose a threat for the world economy.
We have the Chinese Model. Easy. “It’s like that” policy. Total control. To distract a little bit the US authorities (and some US MPs), the Centrak Bank has a “floating range” for RMB, regarding its valuation. The increase of RMB is very… very… very slow. People might disagree. But we have no choice. China is too big.
You have the Japanese Model. Hypocrisy and free market. With a zero interest rates policy and a massive yen carry trade.
Subtle because the market mechanisms cause the depression of the currency. Yen carry trade is easy. Japanese individuals and companies take loans in Yen (zero interest) and after exchange those Yen against any high yield currency (you can make 5.5 % on AUD for instance, or more with NZD).
And the Thai Model. Mixing of hypocrisy, face, controls, “wait and see”, and amateurism.
But there is one problem. Thailand can’t be compared with its large neighbours China and Japan.
I doubt that the country can afford this kind of policy over a long period time.
However, the concern (even the dilemna) of BOT is perfectly understandable. You can read a speech of Tarisa in june about this issue (“Panel Discussion on Financial Globalisation, Capital Flows, and Challenges for Central Banks“). Very interesting.
Basically, they DON’T KNOW how to handle this (new) phenomenon.
Thailand’s economy is so small, that any inflows of money from the outside can totally destabilize the country, its currency and its economy, like any outflow of money did destabilize the country in 1997.
How ironic.
Ten years ago, BOT was fighting to keep a stupid exchange rate (1 USD = 25 THB). And now, it’s the contrary. They are fighting to curb the increase of THB, against the USD. Outflows before, inflows today…
The big problem is : we have 2 mega trends on the currency front right now in the world :
-massive inflation of money supply, all over the world, therefore huge amount of money that can come and go, looking for a place to work, or to park.
-and the USD that is more and more fragilized (for a lot of reasons, impossible to describe here), putting an up pressure over all the other currencies (mechanically).
Therefore, for a small asian country like Thailand, to face those trends, along with the aim to keep export engine running at full pace, is like trying to find the Holy Grail.
Complicated at least. 
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