Chin Loo, senior currency strategist at BNP Paribas finds that the US dollar against Asia as well the unwinds in dollar Asians and the exit out of Asian assets have been fairly extended already.
The euro rose against the greenback after Greece opinion polls showed support building for Greece’s New Democracy party. Market participants trimmed some of their massive bets on the euro's downside as concerns eased that Greece would exit the euro zone in the near-term.
Chin Loo, senior currency strategist at BNP Paribas finds that the US dollar against Asia as well the unwinds in dollar Asians and the exit out of Asian assets have been fairly extended already. She now sees the dollar’s strength against the Asian basket of currencies appearing stretched.
The overcast nature of the market as it is right now will mean that the US dollar will continue to hold on to its value as a safe haven currency, so any pullback in the dollar will be fairly limited until we see more clarity out of Greece and where Europe heads from there, says Loo.
On the upside, she sees the euro facing tough resistance at 1.28 to the dollar.
Below is an edited transcript of her interview to CNBC-TV18. Watch the accompanying video for more.
Q: Do you think the long dollar trade has gotten very crowded at this point or do you believe that in the absence of any bold policy responses from Europe it would still be a good idea to go long on the dollar?
A: A long dollar trade is specifically crowded against the euro as in that short euro positions are at extreme levels but against other currencies for example, the Aussie and Kiwi, speculative investors just turned net short on these commodity currencies. Against Asia as well I do think the unwinds in dollar Asians and the exit out of Asian assets have been fairly extended already. So against the Asian currencies, the dollar’s upmove seems to be fairly extended.
Q: What are you making of the volatility as well as the rapid depreciation that we are seeing in the Indian rupee? How is the Indian rupee placed at this point?
A: Clearly, we stack India up against other Asian countries. India needs much more US dollars than for example Singapore because of the current account deficit situation in India vis-à-vis a very large surplus not only in Singapore but also Malaysia, Taiwan and several other Asian countries including China, where it doesn’t need that much of dollar financing as India does.
On that metric itself, India does need a lot of capital inflows to cover the current account deficit otherwise the rupee will weaken. So on those metrics the rupee is vulnerable to capital flight. On other metrics for example, given the fairly structurally high inflation in India it’s been quite difficult for the RBI to ease monetary policy aggressively to try to stall or prevent a sharp kind of collapse.
Whereas in China’s case for example, there has been much more talk about potential easing down the line, because inflation in China has eased and that allows the PBoC to take some action in terms of providing the economy with some relief. So, clearly investors are now turning towards a less positive eye on Indian asset market performance vis-à-vis elsewhere where there is some room for both monetary and fiscal policy to act to support growth.
Q: The last time when we spoke with you, you indicated that the rupee would go to 56 and immediately after that it did. Do you think there is potential for it getting back to 56 and even breaching that on the upside? What kind of targets are you working with?
A: The main problem forecasting targets in the very short-term is a lot of it depends on Europe in terms of short-term view so it is a wildcard where Europe is concerned and while that wildcard remains it’s quite difficult to pick a top for the dollar rupee. I think the market will continue to be very sensitive to developments out of there and in the run-up from now all the way to Greek election there are still storm clouds on the horizon which will be difficult to ensure more sunny views of markets right now.
The overcast nature of the market as it is right now will mean that the US dollar will continue to hold on to its value as a safe haven currency, so any pullback in the dollar will be fairly limited until we see more clarity out of Greece and where Europe heads from there.
Q: What sort of levels do you think the euro will possibly work with up until June 17 because we have already tested lows of around 1.24 on the euro? Do you think that would be a sustainable level because there are talks of it going down to at least 1.19?
A: A downside is quite hard to pick because if we throw up the risk scenario of Greece exiting the euro zone or what happens then to the EU at large, then certainly the downside is open to all targets because of the meaning of a Euro breakup for the euro dollar.
But on the upside, I would think that the euro would face some strong resistance at about 1.28 and until we get more clarity out of Greece, even the Spanish banking sector is having some issues now with Bankia coming under public rescue, certainly any correction in the euro dollar will face a tough resistance at 1.28 and any upticks will be met with selling interest.
Q: The yen has actually appreciated in the last one month by about 1.5-2% odd. Is there a different trajectory that you are expecting the Japanese yen to see?
A: I think the yen will be sort of sidelined while the activity remains on some of these risk currencies. The yen really hasn’t been one of the currencies which traders have traded in a big way, because as long as Japan is a net capital exporter and Japanese investors are not willing to bet in the market, the yen will not move.
The focus is squarely on currencies which have had some appetite shown by risk investors. For example, commodity currencies as well as emerging market currencies and these will remain the focus of attention as markets reposition and deliver from some of these risk trades.