Bloomberg News

Thai Swaps Reach Two-Year High on Rate Outlook; Baht Drops

June 08, 2011

June 8 (Bloomberg) -- Thailand’s interest-rate swaps touched the highest level in more than two years on speculation the central bank will add to its four interest-rate increases this year to tame accelerating inflation. The baht dropped.

The one-year swap rate climbed for a third day after Bank of Thailand Governor Prasarn Trairatvorakul said yesterday inflation remains a risk factor for the economy. The central bank boosted the one-day bond repurchase rate on June 1 by a quarter of a percentage point to 3 percent after a government report the same day showed inflation accelerated to a 32-month high of 4.19 percent in May.

“Market players continue to see the possibility of further rate hikes in Thailand,” said Hideki Hayashi, a global economist at Mizuho Securities Co. in Tokyo. “Asia’s economy, including Thailand, remains solid and inflation is still on an uptrend.”

The onshore one-year interest-rate swap, the fixed cost needed to receive a floating payment, added 1.5 basis points, or 0.015 percentage point, to 3.26 percent as of 3:21 p.m. in Bangkok, according to data compiled by Bloomberg. The rate earlier touched 3.285 percent, matching yesterday’s highest level since November 2008.

The yield on the 3.125 percent bond due December 2015 was unchanged at 3.48 percent.

Political Risks

The baht declined after overseas investors cut their holdings of local shares before elections on July 3. Global funds sold $163 million more Thai stocks than they bought in the first two days of this week, according to exchange data. The currency fell 0.2 percent to 30.33 per dollar.

Several demonstration leaders charged with terrorism for their role in last year’s protests are running for the opposition Pheu Thai party, which is being led by Yingluck Shinawatra, fugitive former leader Thaksin Shinawatra’s sister. About 100 people have been killed following disputes over the last election in 2007.

“Uncertainty over how the election will turn out is weighing on the baht through stock sales,” Mizuho’s Hayashi said.

The election may reignite street protests in Bangkok and investors should take advantage of any retreat in the baht to boost holdings of the currency, according to Credit Suisse Group AG.

“Any devaluation related to political events won’t affect our longer-term forecast for the baht,” Santitarn Sathirathai, a Singapore-based economist at Credit Suisse, said in a telephone interview. “If you have street rallies and the baht underperforms other Asian currencies, or dips by about 1 percent in that time, it’s definitely a good opportunity to buy.”

--With assistance from Suttinee Yuvejwattana in Bangkok. Editors: Ven Ram, Tony Jordan

To contact the reporter on this story: Yumi Teso in Bangkok at yteso1@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net


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