I can hear you : what ? ! Another chart about the foreign currency reserves of the Bank Of Thailand, 2 weeks after the previous one ?
Yes. And believe me : it’s not over.
People are puzzled with the exchange rates. Some currencies are falling at light speed but… the THB is not moving a lot, particularly versus the USD (read here). Or more precisely : the THB is moving, but slowly, compared to other currencies.
So why is it important to study the reserves and to understand what the BOT is doing ?
The THB issue is linked to the foreign currency reserves. These reserves are a consequences of the BOT’s currency policy but also the tool to achieve or help to achieve (more or less) this policy. How come ? Simple. By selling and buying.
(Yes, it’s called “interventions”. Sorry, “currency management”. The BOT did it. And continues to do so, despite pathetic denials.)
For instance, if the BOT buys a lot of US Dollars (= by selling THB) the USD will go up, and the THB will go down. Offer and demand.
So overall, the reserves are an indicator, like a thermometer.
To summarize quickly the situation :
-the BOT was buying USD… until beginning march 2008… when the BOT removed capital controls. And when the USD stopped its free fall.
-until march 2008, the reserves and the forward positions were increasing together (the second adding more fuel to the first). Logic.
-the “peak reserves” was reached end of march, with a total of 110 billions USD. Since then, we are flat. 107 billions USD in december. So apparently, there is no pressure, no big movements.
But something has changed. A lot. The amount of the net forward positions. From 25 billions in march to 7 billions now.
What does it mean ? Official definition :
Forward positions = Bank of Thailand’s forward obligations to buy (long) or sell (short) foreign currency against Thai Baht.
For that matter, they are like a “peek” at how the reserves will behave in the future.
Here the future = between less than 1 month to 1 year maximum (the maturity). The website of the IMF gives us the details.
Here (BOT’s figures for october), we see that 50 % have a maturity up to 1 month. Only 25 % of are up to 1 year.
Let’s take an example : in january you have 100 billions USD in you reserves. Plus a net forward positions of 10 billions with a maturity of 3 months. Let’s assume you don’t touch your reserves… In april, the new total will be 100 billions + 10 billions (obligations you took in january) = 110 billions.
This is why we can speak about “peek” into the future.
In order to study those positions, we will take the net amount (= buying – selling). It’s easier. And anyway, the BOT doesn’t have -yet- a lot in short positions.
So to summarize : the net forward positions = the net amount of foreign currencies the BOT will buy in the future (against THB).
Here is a chart.
We see again the “peak” (march 2008) of the net forward positions. Since then, I think the picture is clear : we have a fall of the amount of net foward positions, and a fall of the percentage of those positions compared to the total of foreign currency reserves.
In other words, from the peak of 24 billions USD (25 % of the total reserve at that time), we are now at 7,2 billions USD (6,9 % of the total).
What does it mean ? The Bank Of Thailand reduces, almost week after week, its future positions, its commitments to buy foreign currencies (probably USD) against THB.
Let’s now have a look on the details per maturity (source IMF).
But, we shall be cautious :
TRAP NUMBER 1
-we don’t know which foreign currency the BOT is buying (for the forward positions).
TRAP NUMBER 2
-we dont’ know the composition of the foreign currency reserves (it’s a secret). Tarisa, BOT’s governor, said last may “about 60 %” were in USD. We don’t have to believe her.
TRAP NUMBER 3
-all the figures given by the BOT are converted in USD. Mark to market. Therefore, for the weekly reports, all figures are accounted with the exchange rates of the current week…
TRAP NUMBER 4
-beware of optical illusions : since the BOT said that the reserves are “about” 60 % in USD… And if we assume that the other 40 % are in Euro, and if the exchange rate USD-EUR is going down (which is the case right now), then the part in Euros of the reserve (accounted in USD) will of course increase.
We could see therefore an increase of the total reserves accounted in USD… but it doesn’t mean mechanically that the BOT is buying more USD.
We had a perfect example of this between week 05/12 and 12/12, when the total foreign currency reserves went up from 103,4 to 104,8 billions. It was probably just because the Euro went up against the USD.
TRAP NUMBER 5
-Beware of the… context (global and local). This is not a perfect and unchanging world, like any central bank would wish it was. For instance : after a dramatic fall, the USD started an upward trend last summer. Globally.
On the local front : foreigners are leaving the Stock Market (SET, read here). This is not supportive for the THB (you sell your stocks, in THB, then you exchange those THB into foreign currencies, and then you get out the country). etc. etc.
Okay, that’s very nice, you could think, but what the hell is going to happen to the THB ?
Due to the forward positions, due to the fact that since the peak in march, the reserves didn’t increase… I would say that the BOT has been a seller of USD during the previous months… To support the THB (versus USD).
But the BOT is like all the other central banks : they are surprised (horrified I would say) by the speed of the economic downturn. And its scale.
Therefore, I’m not sure we should take the actions of the BOT until now as a sign of what they would do tomorrow. I believe they could change their mind quickly.
Until now, the BOT was very adamant to control the movement of its currency. And refused to cut interest rates like crazy, despite several calls from the previous governments and even calls for devaluation.
The keyword, the motto was : stability. It’s their obsession. Was.
But we know now that the political pressure (new government) + the speed of the economic crisis + the fact that the thai exports are going to suffer… all this leads to one solution : ease the pressure by allowing the THB to go down.
It’s the asian bias. China, Japan… they have all started to intervene… They want to stop (and reverse) the appreciation of their currency versus the USD. Because it’s killing their exports (very true for Japan).
And to kill exports in an export oriented economy doesn’t sound very good, right ?
I think the BOT will -at one point- follow the same path.
Therefore, I think the THB will go down versus USD.
-But hey ! And this is the true frightening part… USA are doing exactly the same (but for different reasons, not exports). The USD is condemned to loose value. It’s inescapable (zero interest rates, massive printing of money, mountains of debts, etc.)
So you start to understand the problem : we have a freaking race toward zero, a race toward the bottom. What could happen if all the countries in the world see their currencies going down ? At the same time ? It’s insane.
-the foreign currency reserves shall be observed closely. Because they are the result of a currency policy, and one of the tools to achieve this policy (despite the denials of the BOT).
-the forward positions play the role of the coal mine canary.
-we know for a fact : the BOT has stopped last march to buy foreign currency (USD) on a massive scale. The continuous drop of the net forward positions is the proof.
-it means that one (among many others) technical support for the USD versus THB is weakening. But it’s only 1 factor of the equation. And it could change.
[ You want to know more ? I wrote an article a few weeks ago to explain the tie between THB and USD, and why the THB doesn't move a lot, compared to other currencies, why it seems insulated from the big deleverage, from the current tornadoes on the market... read here and there ]