The Thailand SET tumbled 1.71% for the week as the Bank of Thailand (BOT) made a surprise cut in its benchmark interest rate by 25 basis points to 1.75%. According to Bloomberg’s survey, only six of 22 economists, including KGI Securities and Credit Suisse, were expecting the rate cut by the BOT on Wednesday. The BOT seemed not to have much choice but to cut the rate as Thai inflation turned negative in January and February.

The 10-year Thailand Government bond yield surged to 2.88% prior to the BOT rate cut decision and closed at 2.83% on Friday, up 3.66% for the week. There is a direct relationship between the bond yield and interest rates, meaning that as interest rates rise, bond yields follow. A weak economy and lower inflation pushes real interest rates and bond yields higher. 

The rising 10-year Thailand Government bond yield could signal that the bond market is concerned about the health of the Thai economy and the diverging monetary policies, meaning that the BOT just announced their rate cut while the U.S. Federal Reserve is preparing for a rate hike.

According to Barron’s, foreign investors have sold U.S. 284 million in Thai stocks so far this year after dumping U.S. $1 billion worth in 2014. The capital outflows and foreign investor selling might be slowing down a bit as the yield spread between the U.S. 10-Year Treasury, now yielding 2.1175%, and the Thailand 10-Year Government bond has widened to 0.7125%.

One should be aware that the U.S. dollar index (DXY) broke out the psychological head resistance level of 100 for the first time in over 12 years this week. USD/THB is now trading at 32.91 baht per dollar, up 1.02% for the week. If the USD/THB breaks out the 33 baht per dollar level, the exchange rate could head to the 36 baht per dollar technical resistance, set in April 2009.

The strength in the DXY reflects the signs of an improved U.S. labor market as the U.S. Department of Labor’s Job Openings and Labor Turnover Survey (JOLTS) report, released on Tuesday, showed that U.S. companies had 5 million job openings at the end of January, the highest level since January 2001.

The strong job openings report came on the heels of last Friday’s release of the February U.S. employment report by the Bureau of Labor Statistics (BLS), the U.S. Department of Labor, showing that the U.S. economy added 295,000 jobs and the unemployment rate ticked down to 5.5% in February, exceeding economists’ expectations of a 240,000 jobs gain and an unemployment rate of 5.6%.

Bullish DXY bets are also coming from currency traders who are anticipating that the EUR/USD will head to parity as the markets are in doubt that the latest ECB QE bond purchase program will prompt any meaningful economic recovery or counter the threat of deflation as the ECB hopes. Greece’s debt crisis is on the front burner again as Greece’s government is using tactics to slow down negotiations.

From our technical viewpoint, a bullish falling wedge has now emerged in the Thailand SET chart pattern. A “potential” head-and-shoulders pattern with a neck line at about the 1548 level has also emerged. The formation of a right shoulder in the next several weeks, if it should happen, could signal a major correction in the Thailand SET. 

The Moving Average Convergence/Divergence (MACD) is still bearish and signaling a sell. The Relative Strength Index (RSI) of 38.45 isn’t quite oversold yet as a RSI below 30 is considered to be oversold. 

The next headline risk is the Federal Open Market Committee (FOMC) meeting on March 17 and 18. The Fed may remove the term "patient" from its Fed monetary statement which might spook the global financial markets, particularly the emerging markets. 

As the Fed said, the interest rate hike decision will be determined "on a meeting-by-meeting” basis depending if they are "reasonably confident" that inflation will pick up towards the Fed's annual 2.0% target.