Fund managers scrambling to cover short U.S. dollar positions against the Thai baht last week pushed one-month implied volatility in the currency pair up to 4.6% from 3.8% the previous week. The fund managers were largely purchasing short-term dollar call options with strikes between THB42-42.5 to provide a protection against further baht weakness.
The previous week the fund managers were snapping up baht against the dollar in the spot market expecting it to strengthen on the back of subsiding oil prices and a predicted rate hike, which materialized last week. The baht, however, weakened to THB41.78 from THB41.48 the previous week. "This is the highest it's been all year," said Erik Herzfeld, head of fx options at JPMorgan in Singapore.
Analysts believe the weakening is temporary and despite domestic concerns in Thailand, including religious tensions in the southern provinces, the potential for the return of the avian flu virus and the specter of higher oil prices in the long term, the baht is likely to strengthen over the course of the year. Thio Chin Loo, senior currency strategist at BNP Paribas in Singapore, said, "Our conclusion is that the economy is strong enough to withstand such issues as well as further rate hikes. We don't see a sharp slowdown happening." The bank has forecast the currency pair hitting THB40 by year-end.
