The Baht has weakened sharply, as authorities have had to cope with the Delta variant amid heightened risks from the third wave of the COVID-19 pandemic that has proven to be difficult to control. The Baht hit a 15-month low at THB32.73 per USD during trading sessions on July 9, 2021, and risks posed by the prolonged outbreak have added pressure to Thailand's current account deficit. In KResearch's view, this is a signal of the Baht's weakening fundamentals and the risks to Thailand's economic recovery prospect for the remainder of 2021.
It must be admitted that the risk of the COVID-19 pandemic crisis is an important variable weighing on the weakening Baht. Comparing the COVID-19 outbreaks in 2020 and 2021, the recovery of the Baht in 2021 will face at least two challenging constraints: 1) the duration of the third wave of the COVID-19 outbreak is longer than the first wave, leading to a high uncertainty about the pace of Thailand's economic recovery; and 2) the unequal pace of recovery of the U.S. and Thai economies has allowed the Fed to gradually tighten monetary policy ahead of Thailand.
KResearch views that the Baht may continue to weaken and reach the level of THB33.00 per USD at some point before the end of 2021 if the risk of the domestic COVID-19 pandemic remains undiminished, and the Fed will gradually start signaling its readiness to tighten monetary policy by the end of the third quarter of 2021, as the market forecasts. However, if the US economy fails to recover strongly or encounters another pandemic wave, the market would have to reassess its forecast on the timing of the U.S. monetary policy adjustment. This would weaken the dollar and may support a return to Baht appreciation, especially if Thailand's COVID-19 situation subsides.
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