J.P.Morgan: Capital Inflow An Unusual THB Support

J.P.Morgan note that "persistent capital inflows are supporting THB, allowing it to decouple from the sharp deterioration in Thailand's current account surplus. On CA metrics alone, USD/THB should be around 8% higher versus current levels, around a THB33-34 handle. Thai residents' repatriation of foreign assets has been an unusual, but potentially durable, currency support - triggered in part by this year's sharp decline in domestic incomes. A loss of these capital inflows risks catalyzing a weaker THB more consistent with current account dynamics. But in an environment of USD weakness we are not outright THB bears: the potential for positive news on a COVID-19 vaccine or an incremental resumption of tourism should eventually support Thailand's external balances, which already look past the worst. On the flip side, the case for sustained USD/THB declines is tempered by the increasing likelihood of official intervention. The BoT tends to follow a well-trodden interventionist path in response to TWI strength, and even after recent declines, the THB NEER is only a few percent shy of its post-1997 highs. Political unrest presents a lingering wildcard and the noise level is likely to rise further. But past experience suggests that a mix of capital flight and unwinding of foreigners' equity longs are necessary for sustained baht weakness; neither condition is yet in place From a strategy perspective, we prefer to express an UW via Thai rates; relative THB underperformance can linger, but capital inflows cap the case for outright baht shorts when the potential for further current account deterioration looks limited."