Huge foreign demand for Re to continue: Westpac Banking

Sean Callow , Senior Currency Strategist of Westpac Banking Corp said that the weakening of the Yen has had a global impact, but he still feels that the basic correlation is still in place; the dollar-yen is positively correlated with  equity sentiment. 

The markets have shown a lot of confidence and willingness to take risks, he added. He predicted that the Bank of Japan may lift the interest rates at least once, this year.

Callow said that the market was reflecting a huge risk appetite, and there would continue to be a great foreign demand for rupee, which will keep a lid on the dollar-rupee equation. 

Excerpts from CNBC-TV18's exclusive interview with Sean Callow:

Q: What kind of liquidity impact are you seeing since there has been a sharp depreciation of the yen, are you seeing major changes in the way liquidity is flowing?

A: The weakness in yen really does have an impact around the world, that is a sure. As long as yields remain very close, a lot of the investors would be looking to be borrowing in yen. Obviously recently we are seeing some restrictions on them. Central Bank s are concerned including in India. But I think as long as we have got a basic correlations in place; dollar-yen is positively correlated with equity sentiment.

So when Asian equities are up, then dollar-yen usually eases well. So it is an indication that there is a lot of liquidity around and there is a lot of confidence and willingness to take on risk at the moment. I don't think it will last forever but that is the way it is trading right now.

Q: How are you looking at dollar-yen say in the next quarter or for that matter for the rest of 2007?

A: We are pretty close to the highest levels we see for a while. We do see the Bank of Japan lifting interest rates at least once this year, which should be supportive for the yen obviously, and perhaps some of the Japanese investors keeping their money closer to home.

But as I say the yen weakness tends to occur when people are buying risky assets such as emerging market equities. So any shock to that system such as we saw particularly in May last year and in February-March this year; would see a very sharp yen rally because the speculators have racked up very short yen positions. 

Q: In the week gone by, you have seen USD 350 million come into India by way of flows; how are you viewing the liquidity situation specifically in regards to India and how would you map out the dollar and the rupee for perhaps the next 6-8 weeks?

A: So long as the risk appetite remains strong as we are seeing at the moment excluding China , most of the markets are looking positive and to me that indicates appetite for Asian currencies in general and India won't be exempt from that.

Having said so, I think there will still be lot of foreign demand for rupee which will keep lid on dollar-rupee and with some of the inflation numbers in India a little bit lower recently, the RBI is probably more confident about its ability to put a floor somewhere around the 40 level dollar-rupee.

And so shot-term, they will be able to keep that roughly where it is and maybe push it up towards 41. But I think, so long as the risk appetite is strong, a lot of people will just be viewing dollar-rupee as sell on rallies.

Q: If you could tell us whether other currencies are also emerging as carry currencies - we hear about the Sing Dollar and the Taiwan dollar emerging as the major carry currencies?

A: That is very fair. Particularly in the past few weeks, the Singapore Dollar has come under lot of pressure because the money market yields have fallen very sharply and so a lot of people are borrowing in Sing.

Taiwan - clearly the situation there, where yields also are very low, is such that the Central Bank has taken some pretty serious action to try to stem the money leaving Taiwan.

So definitely, it is an environment where high yielding currencies are still winning out; that includes the rupee and that means Taiwan and Singapore loose out.