Thai Government Slams on the Brakes

Good day…The big news in the currency markets yesterday came out of Thailand, where the new government decided to use currency controls to limit speculation in the Thai baht. As we have been reporting here in the Daily Pfennig, the Thai baht had out performed all other currencies this year increasing over 15% versus the U.S. dollar. Yesterday morning, Thai regulators required banks to lock up 30% of new foreign exchange deposits for a year to curb currency speculation, causing the baht to slump by almost 1%. Overnight the markets have calmed and the baht held at just below 36, where it had sank yesterday morning.

Yesterday, central bank Governor Tarisa Watanagase told a briefing in Bangkok that overseas investors buying baht starting today will only be able to invest 70% of what they transfer, and only recoup all of their funds if they keep the money in Thailand for more than a year. Those who withdraw the reserved amount in less than a year will be penalized 33% of that 30% portion, she said.

The move caught the currency traders totally off-guard, and froze most trading in the baht during the morning hours. As of this morning, spot sale transactions are being done, but the forward market is still unsettled. The major impact has been seen in the Thai stock exchange, which has dropped by over 15% overnight. In reaction to this move, the Thai government has decided to lift the lockup requirement on stock investments.

So what will this mean to EverBank investors owning Thai baht? First, we are currently unable to make a forward market in the Thai baht, so we will not be able to continue to offer Thai baht CDs or access deposit accounts. Our two WorldCurrency index CDs, which contain the baht, the Orient Opportunity Index CD and the Asian Advantage Index CD, will also not be able to be offered.

Access deposit account holders of the Thai baht will need to contact the trading desk at 800-926-4922 to give us instructions for these funds. All Thai baht access deposits will have to be liquidated prior to year-end. These funds can be crossed over to other Asian currencies such as the Japanese yen, Singapore dollar, Hong Kong dollar, or even the Chinese renminbi.

Those investors holding the Thai baht single currency CDs will need to give us trading instructions at least five days prior to the maturity of these CDs. As of right now, these CDs will need to be held to maturity, and the Thai baht can then be sold with the proceeds invested into some other currency or placed back into the U.S. dollar. Again, because of the Thai government restrictions, we will not be able to sell the Thai baht CDs prior to their maturity.

For investors in the Orient Opportunity and Asian Advantage Index CDs, we have developed two new index CDs that replace the existing exposure to the Thai baht. Holders of these two index CDs will be able to cross their maturing CDs into either of these two new CDs or can also move to any of our other WorldCurrency index or single currency CDs. Because this cross sale of the currencies has been forced on investors by the new Thai government currency restrictions, EverBank will move maturing Orient Opportunity and Asian Advantage index CDs to these new index CDs without any currency spread.

Orient Opportunity Index CDs will be able to cross their maturing CDs into the new Pan Asian Index CD, which has Australian dollars replacing the 40% exposure to the Thai baht with no change to the remaining currencies. This index will continue to give investors excellent diversification in the Asian markets with interest rates equaling the old Orient Opportunity Index CD.

The Asian Advantage Index CDs will be able to be crossed into a new Asian Advantage Index CD with Hong Kong dollars replacing the 20% exposure to the Thai baht. This new index will therefore have 40% exposure to the New Zealand dollar, along with 20% exposure to Hong Kong dollars, Japanese Yen, and Singapore dollars.

It is unfortunate that the Thai government has taken this dramatic step to reduce short-term currency speculation. But with the tremendous appreciation of the Thai baht versus the U.S. dollar during 2007, most investors will be able to sell their currency holdings at a gain. We will continue to follow the Thai baht and will keep readers informed of any new developments as the central bank has said it may adjust the curbs “if the baht doesn’t continue to be strong.”

“We may have new measures which may be more relaxed or more aggressive depending on the situation,” the assistant to the central bank governor said today. As I said above, the Thai central bank has already back pedaled in reaction to the 15% sell off in the Thai stock market, lifting the reserve requirements on stock purchases.

Other Asian currencies held steady after the announcement and will likely benefit from additional inflows originally destined for the Thai baht. The currency controls did heighten concern about investing in emerging markets, but the move did not trigger the currency collapses we saw back in 1997. As I said earlier, we will try to keep you informed of the latest news.

The Bank of Japan kept the lowest interest rates among major economies unchanged as it gathers more data on consumer spending and examines the strength of the global economy. (I remember writing almost the identical sentence yesterday!) Governor Toshihiko Fukui and his policy board kept the key overnight lending rate at 0.25% with a unanimous decision. Fukui said economic indicators in the past two months have been mixed, singling out weak inflation and consumer spending as reasons for keeping the rate low.

The big news in the United States yesterday was the release of the current account deficit numbers for the third quarter. As predicted, the deficit widened to a record $225.6 billion last quarter as the trade gap grew, and the United States paid more interest to overseas investors. The shortfall in the current account followed a revised $217.1 billion second-quarter gap. Dollar bulls tried to spin this deficit news by saying the current account deficit’s growth has slowed. I’m not sure whom they think they are kidding, even if the deficit’s growth slows at $225 billion per quarter, we need to attract $75 billion of overseas investments per month! This deficit, combined with a slowing economy and narrowing interest rate differentials will continue to erode the value of the greenback.

To no one’s surprise, confidence among U.S. homebuilders deteriorated in December for the first time in three months, as sales remain sluggish. The housing market in the United States continues to weaken, putting pressure on the FOMC to continue to hold rates steady. Today we will see the November Housing starts and Building permits, both of which are expected to be slightly stronger. Further weakness in this market could force the fed to consider cutting rates during the first half of 2007, which would be very negative for the U.S. dollar.

We will also see additional U.S. inflation data today with the November PPI expected to come in higher than last month’s negative numbers. And finally we will see ABC consumer confidence, which is usually a non-event number. Tomorrow we will get a plethora of data in the United States with the third quarter GDP, personal consumption, and Core PCE which is probably the most closely watched indicator by the fed. We will also get a report of the initial jobless claims, continuing claims, leading indicators, and the Philly Fed index. Should make for another exciting day tomorrow.

Currencies today: A$ .7831, kiwi .6934, C$ .8650, euro 1.3169, sterling 1.9638, Swiss .8219, ISK 69.01, rand 7.0357, krone 6.2061, SEK 6.8648, forint 192.41, zloty 2.899, koruna 21.04, yen 118.06, baht 35.92, sing 1.5443, HKD 7.7747, INR 44.75, China 7.8243, pesos 10.8605, dollar index 83.63, Silver $12.49, and Gold… $617.15

That’s it for today…Quite a day yesterday with the events in Thailand! Today is the birthday of Ty Keough who passes a big milestone!! Many outside of St. Louis know Ty as the former Olympic and professional soccer player and ESPN color analyst, but locally Ty and his father Harry are best known as ambassadors for the game properly named football. The two of them continue to promote, educate, coach, and volunteer their time to benefit the St. Louis community. Ty has also been a great addition to our currency desk. Happy Birthday Ty, now I can really call you an old man!!

Chris Gaffney
December 19, 2006

The Daily Reckoning