Rupee may see pullback to 46 36 by April-May StanChart


We have seen a fairly strong performance by the Indian rupee. At the moment, rupee has been in the range of 44.68. It is a four month high for the rupee itself. This is happening in the context of higher crude prices. It’s a bit unusual, but export performance has been very good.
Q4 is usually a good quarter for the rupee as there are a lot of dollar flows. Traditionally, exporters and people who have raised loans abroad bring back their money in Q4. It’s a common phenomenon to see a lot of dollar flows coming in March.
Anant Narayan, MD-Regional head of fixed Income & Currency Trading (South Asia) at Standard Chartered Bank, in an interview with Latha Venkatesh and Sonia Shenoy, gave his views on the phenomenon of strengthening rupee with a lot of dollar flows and whether it will extend beyond March 31.
Below is the verbatim transcript of the interview. Also watch the accompanying video.
Q: Does the strength of rupee surprise you? Do you see it going beyond March 31?
A: In the short run, it looks like the strength will continue. The market wasn’t position for a stronger rupee. Given the oil prices, global phenomenon and equity markets looking soft, people were prepared for a weakening rupee. The Q4 flows have helped on the positive side for the rupee.
There have been talks of European central bank (ECB) inflows coming in the recent past. However, having said that, towards the end of Q2 all the fundamental factors including oil prices, questions about the current account deficit, the overall balance of payments and higher dollar rates coming to an end of the quantitative easing (QE) should see dollar strengthen against the rupee towards 46 mark. In the short run, we could possibly test 44.5 mark.
Q: The 44.5 level does not see a long journey from here. What is the behaviour of exporters? Do you expect that at certain level they may capitulate? Most of the exporters have also said that they are not hedged beyond a quarter. Do you think that they might panic and sell-off?
A: They have been increasing their hedge ratio over the past few days. Every breaking level breaks in certain amount of more exporters coming in. Asians have turned the sentiment towards exporters increasing the hedge ratios.
The 44.5 mark is to far away and is a strong technical level and if that breaks, we could see 44.20 level as well. Given the overall conditions that oil prices look sticky, coming April and May we should see a pullback in the dollar towards the 46 mark.
Q: Some technical analysts are pointing that the dollar index has been weakening for quite sometime now. The dollar shorts are now at some record levels. It is a stronger than expected performance from the US markets which means that more money would flow as a currency and to dollar related asset. Would dollar bottom out sometime soon? The commodities look like peaking off. Some of the commodities have peaked off in the soft. Normally, this is a trend that goes together with strong dollar and weak commodities. Could dollar bottom out sometime?
A: We expect that to happen in the short and medium run. Interest rate differentials are driving the currency markets globally. Currency such as euro is expected to see a rate hike, quicker than US. Once QE2 gets over, the broad expectation is given the growth in the US markets; we should see the US rates going up as well.
Towards the second half of the year, one would expect that the differentials would ease off in the favour of the dollar. At this point of time, we could see a recovery at the dollar stage.
In the short-run given the expected rate hikes in the euro zone and some other zones while the QE 2 still continues in the US, we could see euro go up to 45-48. On the dollar yen though, given that one doesn’t expect Japan to bias on the monetary side, we could see dollar yen move up to 84.
Q: Forty six that you mentioned on the dollar rupee. Where do you see that in the second quarter?
A: Towards the end of June. The broad consensus seems that in the second half of the year once we have seen the 46 hump, growth could revert back into the Indian market. In this case, it would change the equations as far as capital inflows are concerned. The second half and end of the year could be a different story altogether.
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