Thai Baht set to continue strengthening as Asian economies to benefit from China’s reopening

The Baht, which in October was trading around 38 to the US Dollar, has strengthened to 34 to the US$, and the currency is likely to continue to strengthen into 2023 as the Thai economy continues to recover and China’s reopening will help sustain recessionary fears from the west.

The Thai Baht has benefited from the surge in the domestic economy as Thailand opened its doors to foreign tourists on July 1st, 2022.

The currency has benefited from the weakening US Dollar that has seen the US Federal Reserve starting to slow its interest rate hikes that it has undertaken aggressively during 2022.

“After being lackluster in the past 2 years, the Thai Baht looks set to outperform in Asia FX in 2023 as it receives a further bump in tourist arrivals due to reopening of China’s borders,” Heng Koon How, head of market strategy at United Overseas Bank (UOB) said in a note to clients.

“The expected return to a current account surplus of 2.8% (of GDP) this year is another added boost to the THB. Taken together, we see a limited pullback in THB to 35 to US$ in H1 2023 despite a challenging global macro backdrop before a stronger recovery to 34 to US$ in Q3 2023 and 33 to the US$ in Q4 2023.”

It is not just the Thai Baht that has benefitted but other currencies all across Asia have benefitted from the gradual slowing of the pace of rate hikes, the global recession that has taken hold of nearly all countries across the world, and the sudden scrapping of China’s ‘Zero Covid’ policy in December 2022.

20-years movement of Thai Baht against US$
1-year movement of Thai Baht

“The CNY and Asian FX are expected to be key beneficiaries of China’s sudden removal of Covid-19 measures and subsequent reopening of its economy and borders; however, the process is not without risk,” Heng of UOB said.

“After near-term uncertainty in H1 2023, we expect both USD/CNY and broad USD/Asia to head convincingly lower in H2 2023. Once China successfully overcomes the latest surge in Covid-19, we see a more meaningful recovery in H2 2023, leading to a softer USD/CNY at 6.80 by Q4 2023.”

FED Rate Hikes Brings Slowdown

The US Federal Reserve has started to slow down its ramp-up of interest rates that it had undertaken during 2022 when the US Federal Reserve (Fed) led this charge by lifting Federal Funds Rate from 0.25% to 4.50%.

This prompted other major central banks such as the European Central Bank (ECB) to play the catch-up game by rapidly lifting its refinancing rate in the second half of 2022 from 0% to 2.5%.

Similarly, both Bank of England (BoE) and Reserve Bank of Australia (RBA) have also lifted their respective benchmark rates above 3%.

Even the Bank of Japan (BOJ) could not enforce its indefensible easy monetary policy any further and they have adjusted its Yield Curve Control (YCC), lifting the 10-year Japanese Government Bond (JGB) yield target policy band from +/-0.25% to +/-0.50%.

Thailand’s Monetary Policy Committee (MPC) also raised the rates from the lows of 0.50% up until June 2022 to 1.25% by the end of 2022.

Thailand’s policy rates as of December 2022

The result of the so-called series of synchronized rate hikes across the world has pushed the global economy toward a slowdown.

Heng of UOB says that there are clear signs that have emerged of a global growth slowdown, raising investor worries of a more protracted recessionary downdraft.

Global manufacturing PMIs across China, US and Eurozone have all started to contract. Similarly, Asian export growth has also started to contract.

“Although it is worth mentioning that the contraction is still relatively modest and far from the intense and sharp retrenchment in activities that was witnessed during the Global Financial Crisis (GFC) in 2008 and the start of Covid-19 in Q1 2020,” UOB said.

This recessionary fear has prompted fear of global slowdown prompting the International Monetary Fund (IMF) to issue a ‘new year’ message whereby it warned that 1/3 of the global economy will be in recession in 2023, with US, European Union, and China “all slowing down simultaneously”.

This simultaneous retreat has prompted the US$ to start to retreat from the strong showing it had in the final quarter of 2022. This pullback in the US$ towards the end of 2022 was triggered by two main drivers.

First was the growing expectation that the world was in the final innings of this round of Fed rate hike cycle.

UOB says that its forecast is for two more rate hikes, lifting Federal Funds Rate to the anticipated plateau of 5.25% by March 2023. The 2nd was the rapid and surprising reopening of China’s economy, with the complete dismantling of the zero-Covid strategy and the upcoming reopening of borders.

This triggered a sharp rise in the CNY and lifted the entire boat for Asian FX as well.

China To the Rescue

The rare protest in China against the ‘Zero Covid’ policy helped trigger the dismantling of the policy and the reopening of the borders by China.

Effective January 8th Chinese borders would be opened to all and the nearly 3-years of lockdown is likely to make Chinese tourists head out like never before.

The sudden pivot of China’s Covid-19 strategy from Zero-Covid to endemicity in December and the eventual reopening of borders across January is a game-changer for Asia FX.

Baring near-term uncertainties, Asia FX are beneficiaries of the pent-up demand from China when the economy rides past the initial waves of infections.

“We now expect Asia FX led by the CNY to recover sooner than expected, in 2H23 compared to early 2024 previously,” Heng of UOB says.

China’s pivot towards a more business-friendly “living with the virus” strategy from ‘Zero-Covid’ probably signals the end of the regime where USD/CNY stayed above 7.0 due to pessimism and uncertainty about the Chinese economy.

That said, near-term crippling of the economy due to the waves of infections working their way through China’s population will likely keep CNY on the defensive in H1 of 2023. A jumpstart of the economy in H2 2023 will then trigger a subsequent rebound in the CNY.

“Overall, we update our USD/CNY forecasts to 6.95 in Q1 2023, 7.00 in Q2 2023, 6.90 in Q3 2023 and 6.80 in Q4 2023. This is to be compared to our previous forecast made in early Dec of 7.30, 7.35, 7.40 and 7.45 respectively.”

During the 2nd half of 2023, as China rides past the initial waves of infections and reopens its borders fully for the 1st time in 3-years, Asia FX will reap benefits from a firmer China growth recovery and a release of China’s pent-up demand.

“Our macroeconomic team has recently upgraded FY 2023 GDP growth to 5.2% from 4.8% due to a sharper economic rebound this year when herd immunity is achieved,” UOB says.

“Overall, we expect Asia FX to weaken modestly against the USD from current levels in H1 2023 before recovering in H2 2023. Most USD/Asia pairs are expected to end 2023 lower than where they started the year.”


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