The Bank of Thailand (BOT) has scaled back the auction size of short-term bonds this month in what was seen as an attempt to curb the rapid surge of Thai Baht which hit a six-year high on Monday.

The central bank has not explicitly said that the reduction of short-term bond supply is aimed at overseeing the movement of Thai Baht. However, the market has interpreted the move as the attempt to slow the capital inflow.

“The Bank of Thailand’s short-term bond supply reduction may be one of the initials steps to curb the movement of the Thai Baht,” said Kasikorn Research Center.

The Baht rose to hit a six-year high at Bt30.52 on July 1, before it was slightly weaker to around Bt30.8 per dollar on Tuesday in response to the news about the central bank’s decision to reduce the short-dated note supply in July.

The central bank reduces the supply of short-term bonds, including three-month, six-month and one-year bonds. The size of three-month and six month bonds will be cut by Bt5 billion per week in July. The supply of one-year note issuance will be cut by Bt10 billion.

Safe Haven

Ms. Thitima Chucherd, an economist of the Bank of Thailand, attributed the rise of Thai Baht to the fact that the capital inflow has moved to safe haven assets in Thailand.

She said in her recently-released paper that, during the financial turbulence on the market, international investors tend to apply risk-off approach by selling their assets to avoid risks in one market and holding assets such as bonds denominated in safe haven currency.

For example, when US President Donald Trump announced on May 5 to impose punitive tariffs on USD200 billion worth of Chinese goods, the volatility index shot 25 percent. Investors sold off their assets and bonds in certain markets and park their money in markets seen as safe haven. Thailand saw an inflow of capital into bonds and stock markets for two months in a row.

International investors viewed Thailand as safe haven because of Thailand’ strong economic fundamentals, backed by current account surplus and prospects in attracting foreign direct investment thanks to the government’s mega projects and the Eastern Economic Corridor.

These factors pushed up the value of Thai Baht in spite of a series of turbulences in financial markets which prompted central banks in some countries with current account deficit such as Turkey, Argentina and Brazil, to tighten their monetary policies. Indonesia raised interest rates six times by 175 basis points last year to defend the rupiah currency.

Thailand has become one of the best performers even though Thailand has been slow in raising the policy rate. The central bank increased the interest rate to 1.75 percent in December last year, the first increase since 2011.

Even that, international capital continued to flow into Thai-denominated assets, driving up the value of Baht. This is despite the fact that Thailand’s bonds, both short term and long term, are perceived as low-yield debt instruments.

Fragile emerging market

Nonetheless, Ms. Thitima cautioned that these factors can be temporary. If there is any incident prompting investors to change their perception on Thailand from safe haven to fragile emerging market, Thailand may also face sudden outflow of capital which can exacerbate into a crisis as well.

She suggested that Thailand must closely follow and understand the pattern of capital movement to avoid risks in the financial markets because they can impact Thailand’s asset prices, Thai companies’ ability to raise funds, trade and investment sentiment as well as employment opportunity.

Already, the strong Baht has taken a toll on Thai exports which are expected to record a zero or even negative growth this year.

Kasikorn Research Center also suggested that close attention should be paid to the trade talks between the US and China which will have repercussions on the economic outlook. If Washington and Beijing cannot settle their differences, the US Federal Reserve may cut rates to support the US economy, affecting the value of the US dollar and consequently Thai Baht.

Moreover, although the Monetary Policy Committee’s meeting last month decided to keep the rate unchanged, there were concerns that Thai Baht might advance beyond its fundamentals.