A glum outlook for western currency in S.E. Asia

[Guest tdperhs]

In a report in POLITICS DAILY, Editor Christopher Weber analyzes the likely effect of China allowing it's currency to strengthen against the dollar.

 

"The Chinese government is expected to announce it will strengthen its currency and make it more flexible, a move that would benefit the United States by leveling out some trade imbalances.

 

The announcement could come before China's president, Hu Jintao, visits Washington next week for meetings with President Obama, The New York Times reported.

 

China would take steps to help fight inflation domestically, but it could be a boon for the U.S. as well. Economists say a stronger currency, known as the renminbi or yuan, would make Chinese goods more expensive in the United States and make American goods cheaper in China, according to the Times.

 

The U.S. would also see benefits if, as expected, other Asian nations followed China's lead." (Italics are mine.")

 

U.S. Would Benefit from Chinese Currency Shift -- Politics Daily

 

For more than thirty months, the value of the dollar has been in a steady decline against the baht, fueled initially by the collapse of the U.S. economy at the end of the Bush era and currently by strong dollar based investments in Thai industry.

 

Weber poses the possibility that other Asian nations will follow suit. I believe that Thailand will. This will drive the value of the dollar even lower and, if the trend of the relationship between the Euro, GBP, and the dollar continue as they have been the past few months, similar misery awaits expats from other Western countries.

 

The U.S. is still perceived as being the world's biggest economy, albeit not the strongest. However, faith in the future of the U.S. economy has to be abrogated by the fact that its national debt is about equal to one year's income and its chief lenders have been countries whose cultures and economic philosophies are antipathetic to U.S. philosophies and methodology. Recent U.S. fiscal strategies have shown little improvement in responsible planning.

 

This is all very good for America's high negative trade balance and the ability of its products to compete in the American market. But it is almost a universal truth that what is good for the homeland is seldom good for its expats. Else, why would they become expats?

 

If China lets the renminbi float, I am betting that by October 1, the exchange rate in Thailand will be 28:1. That is 28 baht to one dollar, I hope.

 

Brazil is starting to look pretty good.

[Guest]

Brazil is starting to look pretty good.

 

I just spent some time there and had a blast. I will say the economy there is VERY strong. The R is tough and hard to beat at this point. Brazil keeps getting stronger and stronger and I believe a great place for investment.

[Guest fountainhall]

I agree that currencies have to gradually realign themselves. Here in Asia, the currencies of many countries have still some way to go before they reach pre-1997 levels. The baht then was 25= US$1. Whilst artifically inflated for a few years before that, the country's economy is now in a better position than it was then. Certainly the banks are. And if, as is certain, the renminbi strengthens, it is going to drag other Asia currencies up with it. The Hong Kong $ is unlikely to remain pegged to the US$ - and this has already been hinted several times by the Hong Kong Monetary Authority. Malaysia and Taiwan still have some way to go in getting back to 1997 levels.

 

But currency revaluations do not always have expected results. Remember the 1980s when the Reagan administration put massive pressure on the Japanese to revalue? It took a while, but what had once been US$1 = ¥260 soon began a long upward revision. What is it today? About ¥93! And have Japanese exports to the US declined? Stupid Question!

[Guest voldemar]

I agree that currencies have to gradually realign themselves.

Surely, Yuan appreciation will lead to chain reaction in Asia. It is unpleasant but there are easy ways to play it your way through appropriate investments. The ultimate problem for expats will arrive in the form of capital controls which are inevitable, IMHO,

in both UK and US. At best, it will mean entrappment of capital (which will lead to problems for expats in funding their retirements by pound or dollar denominated incomes)at best and ban for certain type of investments at worst case scenarios. After all, FDR banned Americans from possession the gold (except for jewlerly and collectibles).

[Guest fountainhall]

Just a general question for those who know more about currencies than I. If one lives in Thailand, obtains the bulk of one's income from overseas and is expecting the Baht to strengthen, does it make sense to buy Baht forward in your home country - and what is the longest forward period? If it's possible, then you can buy forward and then switch back into US$ or whatever prior to remitting in to Thailand.

 

Alternatively, for the longer term, would anyone advise switching to renminbi bonds which I think are now traded in Hong Kong.

[Gaybutton]

does it make sense to buy Baht forward

I'm embarrassed to admit that 'baht forward' is a term with which I am not familiar. Can you explain it?

[pong]

does it make sense to buy Baht forward in your home country -

I highly doubt if there are even forward-THB-swaps on offer anywhere in the west or at least for the general public. And If they were-it would only make sense for very large amounts- a few yearly salaries for a utter-well-paid CEO or so. This due to the high fees such swaps tend to have on both buying and selling.

I (but this is simply reasoning by what I know of it) assume about the only banks able to offer it would be Thai banks-overseas. Thats not much more as Bangkok banks branch in the USA.

The best strategy someone from the UK could do is open a Thai bank account and sending GBP (to be converted into THB by that bank) as much as you can afford -but not much more as you intend to spend locally in the next 2-3 years. At least that is what permanently in Thaild. living friends always tell me.

OTOH the THB has also strengthened already to the CNY-last sept it was exactly 5 THB for 1 RenMinBi-and last week it was like 4,8 or 4,7x or so. Only the JPY has strengthened against the THB lately.

Khun GB: this is a kind of option on buying foreign valuta at todays rate+ a margin to allow for any possible apperciation. It is much of a gamble-if that valuta will rise or fall against yours. Much the same as one can buy ''forward options'' in corn, coffee, copper or whatever commodity.

[Guest fountainhall]

Can you explain it?

Perhaps I can elaborate a little on pong's explanation. Let's say you want to send some US$ to Thailand in one year's time, but you are worried that the Thai baht will increase in value during this period and you will end up paying considerably more. By taking out a 'forward' contract, you are basically committing to buy a fixed amount of Thai Baht at today's rate - but it will be paid for and delivered to you after 12 months. So the benefit is you lock in to today's exchange rate. In return, the bank or finance company will charge you a small premium.

 

However, pong doubts if Baht forward contracts are available. I do find this strange as these are normal financial instruments of particular use to exporters. I am certain here in Thailand you can purchase US$ forward contracts. I would have thought that US importers would also wish to hedge against currency movements where they place orders for Thai goods for delivery at some time in the future. But then I am sure pong is right in saying that the premium for the small amount most of us living in Thailand on modest means would want to remit would be far too high. So we remain at the mercy of the currency markets. We just can't win!

 

Anyone have any thoughts on renminbi bonds which I am certain are available in Hong Kong, given the expectation that the renminbi is 99% certain to rise quite considerably over the next 3 years or so? Pong does mention that the Baht has risen against the RMB. Against that, it is well known that the Chinese government is definitely keeping the RMB low. The pundits are generally suggesting that it must begin a managed rise over the next few years.

[Guest voldemar]

Just a general question for those who know more about currencies than I. If one lives in Thailand, obtains the bulk of one's income from overseas and is expecting the Baht to strengthen, does it make sense to buy Baht forward in your home country - and what is the longest forward period? If it's possible, then you can buy forward and then switch back into US$ or whatever prior to remitting in to Thailand.

 

Alternatively, for the longer term, would anyone advise switching to renminbi bonds which I think are now traded in Hong Kong.

If you have access to US stock market you, in principle, can play Yuan (nondeliverable)

forwards through ETF (symbol: CYB). However, I do not recommend it, because at best it will track appreciation of Yuan versus US dollar which will probably be very small.

You may invest in small chunks though (couple of thousands dollars). The more risky (but potentially more rewarding way) is to invest in commodities which China buys on international markets in large quantities: ore, oil etc.

[Guest]

If one lives in Thailand, obtains the bulk of one's income from overseas and is expecting the Baht to strengthen, does it make sense to buy Baht forward in your home country - and what is the longest forward period? If it's possible, then you can buy forward and then switch back into US$ or whatever prior to remitting in to Thailand.

Alternatively, for the longer term, would anyone advise switching to renminbi bonds which I think are now traded in Hong Kong.

 

I suggest it might depend on what the source of your overseas income is.

If that is US/UK stockmarket investments, then why not substitute some Asian stocks instead to reduce currency risk? Obviously piling heavily into the Bangkok stock exchange brings excessive political risk, but buying into a SE Asian investment trusts brings some diversity. There are some excellent trusts around.

 

I hope to retire abroad, so have been investing abroad for several years.

 

Your idea of buying forward, then switching back to USD brings three lots of currency transaction charges, which you should very much want to avoid.

Why not just transfer cash to your Thai account months in advance, so you can at least plan ahead?

 

The Reminbi bonds idea is interesting.