MONEY MARKETS-Short Thai swaps dive as dollar shortage persists

Mon Jan 17, 2011 10:31pm EST
* Negative carry prompts banks to unwind paid positions
* Drop in swaps seen reversing as kimchi fund flows eyed
* Thai expected to hike rates again in coming months
By Saikat Chatterjee

HONG KONG, Jan 18 (Reuters) - Thai interest rate swaps fell
to 1-1/2 month lows on Tuesday as some banks were forced to
unwind their paid positions due to a persistent dollar shortage
in the local money market.

The dollar shortage erupted in the closing days of 2010,
prompting banks to buy dollars from the spot market and sell
them in the forwards markets, dragging forward points, baht
fixings and consequently swap rates lower .

Six-month baht fixings, which are derived from forward
dollar/baht premia and are the floating leg of IRS contracts,
have dropped by more than 13 basis points (bps) in the last four
days, pulling one-year swaps down by 16 bps to 1.67 percent on

"With forwards expected to remain low at least in the coming
weeks, there is no incentive to pay swaps, for now, even if you
expect rates to rise, as you could get killed on the negative
carry," said a rates trader at a European Bank in Bangkok.

The drop in forwards has been restricted to the very short
end with overnight forwards dropping to a minus 0.55 points at
the start of the year and currently trading around 0.04 points.
Usually it trades broadly around the 0.1 point mark.

As forwards dropped, the fixings also shifted lower which
meant that receiving short swaps, despite a surprise rate
increase last week, became an attractive proposition.
Outflows from the stock market this month have also kept up
the pressure on onshore dollar liquidity.
Net foreign selling in the stock market so far in 2011
totalled $430 million.

But the slide in short-dated swaps is unlikely to last as y
inflows from so-called maturing "Kimchi funds", or Thai funds
investing in Korean assets, are expected to increase dollar
liquidity and push rates higher.
Source: Reuters.Com