A double whammy from out of control twin deficits - fiscal and current account deficits and a stagnating economy had the rupee hit a lifetime low of 54.46 to the dollar today.
Jason Hughes of IG Markets tells CNBC-TV18 that commodity based currencies and Asian risk currencies are really feeling slightly more than a pinch today. Investors, both institutional and retail are far more comfortable positioning themselves long US dollar or long yen, he says.
“You look at more traditional safe havens such as gold and you think that sort of behaves much more like a risk asset over the last few months and that has put people off taking up that position,” adds Hughes.
Below is an edited transcript of his interview. Watch the accompanying video for more.
Q: Today, it’s an over 1.25% fall on several Asian currencies. Are Asian currencies and Asian equities going to get much more of a pasting?
A: It is not a pretty picture out there at the moment. Commodity based currencies and Asian risk currencies are really feeling slightly more than a pinch today. It is very much euro led. We have gone from being 1.33 on the euro at the beginning of the month to now sub 1.27. So that’s quite some fall from grace.
While we are still trying to work out exactly what's going to happen within the euro zone, you are probably going to see this sort of pressure continue in equities, risk currencies and commodities because the uncertainty that that’s driving and the low growth numbers that are coming out of Europe and other regions is not encouraging investors to dive into the market even at these levels.
Q: This sell off that we are seeing in the European equity markets, what is it that is pricing in? Is it only pricing in Greece exiting or are they also pricing in at least in part that couple of the other markets will exit and that there will be a contagion impact?
A: At the moment it is very hard to call. You have got convincing arguments from both sides. If you look at a possible Greek exit, the costs that are being associated with that somewhere in the region of 60 billion euro to France and 320 billion euro across the euro zone and that’s excluding any sort of cost to the financial institutions.
If Greece doesn’t exit and is allowed to maybe amend some terms that they have already agreed to so we can get some sort of consensus out of Greece, that could leave room for others to say – you need to allow us to change our policies and perhaps move away from this austerity driven treaty that we have had so far. At the moment it’s hard to say which way we are going to turn. That uncertainty is as much a cause of the dramatic selling that we are seeing now as the situation itself.
Q: If it indeed comes to pass that Greece decides to step out, are we going to see much more mess and disruptive moves in the currency markets? How would you prepare for it? Where could the euro go to? Would you start advising or are you already seeing foreign funds legging it out of emerging market equities and currencies to the dollar?
A: At the moment when you are looking at currencies, investors both institutional and retail, are far more comfortable positioning themselves long US dollar or long yen. They feel those are sort of safe havens as it were at the moment. You look at more traditional safe havens such as gold and you think that sort of behaves much more like a risk asset over the last few months and that has put people off taking up that position.
But there are a number of analysts that are calling for the bottom on gold to be around this USD 1,500/oz level. So potentially you might see people deciding to take positions back into that. Until we get some sort of clear resolution out of Europe, the uncertainty that remains is going to make every asset seem risky. Certainly in the short-term you need to be prepared to potentially take a bit of a loss when you are going into positions. Perhaps slowing building up a position rather than diving all in, in the first go is a better option at the moment.