Impending rate cut steepens Thai yield curve

As both Thailand’s Prime Minister (Yingluck Shinawatra, “elected in a landslide just four months ago” per the Economist) and economy continue to suffer (industrial production plunged 35.8% y/y and capacity utilization fell below 50% to 46.4% in October–the lowest respective prints on record as analysts ponder annual growth revisions), its markets spent the last week pricing in an expected 25-50bp rate cut from the Bank of Thailand’s (BoT) impending monetary policy decision–1w and 1m Bibor dropped 3bp and 7bp, respectively for instance, while the 14d repo rate at the last 14d BoT bilateral repo fell 3bp per observers.  And while inflation continues to creep up ultimately the discord between headline and core should allow officials some leeway to not only maintain their hitherto credible inflation-fighting creed but also help preserve an enviable current account surplus (see chart) seen by officials as an effective inflation tempering tool but now under pressure from the plunging Bhat and dithering exports.  To this end, despite some rate cut front running in the bond markets (2 and 5 year debt have narrowed by roughly 30bp during the past month) the yield curve has further room to steepen per Barclays, which cites in particular the 5y’s “ample systemic liquidity” in addition to lingering output contraction in 2012 which will likely persuade officials not to spare further easing if deemed necessary.  That said, one shouldn’t discount the role that Thailand’s net reserve coverage will also play in helping policy makers accommodate.