There are many events stacked up in the month of June. While globally there is Greece elections result on June 17, domestically there is the RBI meet on June 18. In an interview to CNBC-TV18, Olivier Desbarres of Barclays Capital says, Greek elections are too close to call at this stage. "The markets can be very volatile, very nervous ahead of the elections," he adds.
According to him, the next two-three weeks are key for global risk appetite. “If we don’t see more coordinated, more potent measures from US and particularly Euro zone policy makers, I think the risk is that we will see rate sensitive currencies such as the euro, rupee and the Australian dollar renew their weakness. We still maintain a medium-term view that euro-dollar will push towards 1.20 and ultimately 1.15,” he adds.
Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying video.
Q: We have seen the euro go down all the way to 1.22 and then make a brave attempt at 1.26. How are you interpreting the events of the next few days? We haven’t got a very positive statement from Ben Bernanke or atleast the markets don’t think it is positive enough. Do you therefore see that it will be the turn of the euro to once again revisit 1.22 sometime soon?
A: W certainly started the week on a strong footing. The market was expecting and hoping that policy makers across the US, Euro zone and China would deliver measures, which would ultimately deal with some more pressing issues facing the world, particularly in Europe.
I think markets have ultimately been very disappointed. That is reflected in the price action of the past twenty-four hours. Yes, we did have a positive surprise from the Chinese Central Bank. But I think there are some question marks as to how potent this measure will be to support Chinese growth or atleast global growth.
We have had ultimately very little from the Fed or the Euro zone policy makers. Bernanke was far more neutral than markets had hoped for. So, he did not provide the boost to global risk appetite which was expected. The ECB remained packed; it didn’t do anything either with the rates or unconventional measures. The Bank of England as well followed the similar route by ultimately doing very little. So, markets are waking up today and wondering when these measures will come.
Also, there is still hope and expectation that will be tested in coming weeks. So, I still think that the next two-three weeks are key for global risk appetite. If we don’t see more coordinated, more potent measures from US and particularly Euro zone policy makers, I think the risk is that we will see rate sensitive currencies such as the euro, rupee and the Australian dollar renew their weakness.
Q: So, if in the next two-three weeks, we do not get any signs or hints of a monetary stimulus then what is the kind of downside we are looking at?
A: I think to be clear the stimulus doesn’t necessary have to be purely monetary. Markets ultimately are holding out for the hope that policy makers in Europe will come up with new measures to ringfence the problems that we are seeing in Greece and Spain. It could be euro bonds, it could be a return to the ECBs securities markets programme (SMP), it could be the introduction of a pan European deposit and insurance scheme, it could be the use of European Financial Stability Facility (EFSF), these are all the measures that are being talked about in the market.
If policy makers fail to take any of these boxes then I think there will be a growing concern that solvency and liquidity issues in Europe will feed off each other and will ultimately continue to put downward pressure on growth. In that scenario, there is no reason to believe the euro-dollar couldn’t revisit 1.22 and continue south. Broadening that discussion, there is no reason to think in that environment, the rate sensitive currencies going to revisit the levels we had a week or two ago and again weaken further. We still maintain a medium-term view that euro-dollar will push towards 1.20 and ultimately 1.15.
Q: Immediately, what are you watching out for? Are you expecting the euro to take a beating as early as next week itself as we get closer to the Greek election weekend?
A: I think trying to come up with a rock solid forecast for currencies in next two weeks is going to be an extremely tricky exercise. I think analysts are going to have to remain extremely nimble in their views. There is a great deal of event risk. We have got the Greek elections on June 17, we have also got the FOMC meeting three days later and then 10 days or so after that we have got the EU Summit. All three events and other data points and events on the calendar could really go either way.
I sincerely think that the Greek elections are too close to call at this stage. The opinion polls are very unclear as to whether we’ll see a more pro-reform government coming to power or whether we’ll see a government who wants to renegotiate the terms and conditions of the package coming to power. So, the markets can be very volatile, very nervous ahead of that election. Even in the week following that election, we may still not know the exact composition of the government. We may have to wait for the end of the month until we know who is in power and where do they stand in terms of Greece membership to the Euro zone and more specifically where do they stand in terms of adhering to the fiscal austerity package set by the IMF and the EU. So, what we can say with perhaps a greater degree of uncertainty is that there will most likely be some volatility. We may see investors, to some extent, wanting to stay little on the side until they have greater clarity over these key events.
Q: How does the Indian currency stand in the entire emerging market currency basket? For example, if there is some amount of disappointing or weak data, is it likely to underperform compared to the rest of the emerging markets? What is your medium-term view on the Indian currency, any targets?
A: Certainly, President suggest to us that if we do get disappointment on the policy front then the rupee is likely to underperform other Asian currencies and trade more in line with other high beta high yielding emerging market currency such as the Brazilian real, the Turkish liras, the Mexican peso.
I don’t think that there is a specific level that the central bank and government are defending. Yes, the measures they introduced in the past month suggest that they want to slowdown any rupee weakness. But I don’t think we should see 56 as a hard sealing. The central bank and the government will have to make a judgment call as to whether it’s justified to introduce more measures to defend the currency and environment of weak global risk appetite. They’ll have to make a decision as to whether it’s sensible to perhaps use more FX reserves to defend a currency which perhaps is weakening in line with the rest of the EM universe. So, again we will probably see volatility in that cross. I think it would be naive to think that we can't breach certain levels. The government and central bank will have to be flexible in their approach to currency management.
Q: So, you wouldn’t even want to think that you would be buying the rupee at 56 plus, that’s the level that the RBI defended earlier. You wouldn’t want to think that the rupee can't perhaps get stronger than may be 54-53. There isn’t any working range at this point, you would just play with the events, right?
A: The decision of whether to buy the rupee at 56 would very much depend on the global backdrop. If we do see certain measures by policy makers to stabilise the situation in Europe and support growth then the rupee is at attractive level to go long. But if we get to 56 because markets are unconvinced that policy makers have the solutions at their disposal then I think dollar rupee can trade higher. So, again we’ll have to examine both the domestic situation in India, which remains concerning in some respects, but also look at the global risk picture in which the rupee is performing. This isn’t an analysis that we are making as strategists, but that policy makers are making on a daily basis.