Q: You are expecting some appreciation on the rupee but across the region what is the call on other Asian currencies, which has been showing some amount of weakness?

A: Most weakness in Asian currencies have really subsided and unless we get another bout of turbulence in equity markets, which could happen, we think the risk appetite positioning has been curtailed significantly and the outlook looks pretty solid. The Chinese renminbi continues to print low and we expect that to continue. We are still very bullish on Asian economies. Last Friday, India’s GDP numbers surprised very strongly to the upside and we are seeing such strong growth numbers surprising across the region. That’s keeping equity markets buoyant. On top of that, most countries outside India have posted very substantial current account surpluses and that is also very positive for the currencies.

Q: How do you see the picture at this point in time among the emerging market pack? You said there is likely to be some robustness, but going forward in terms of pure percentage play how much more gain do you see coming back?

A: We would expect, in terms of percentage moves on the Asian currencies, that as things calm down, currencies like the Indonesian Rupiah are likely to strengthen the most but currencies like the rupee, which typically don’t trade in a very volatile fashion, can provide very attractive opportunities for investors. For instance, as the rupee weakened recently, we saw that implied volatility jumped to around 14-15% rates, which in India’s history has never been seen. On top of that, we have seen option volatility skew in favour of dollar calls and that is providing some very interesting opportunities in foreign exchange markets to position the rupee long via option markets.

Q: Your target of 40 is a lot more bullish than what some of your colleagues and other brokerages have set out. In fact, the range over there seems to be 41.5 and all the way up to about 42. What is making you bullish about the rupee at this point because there has been intervention by way of ECB curbs as well?

A: RBI has curbed the ECB issuance. Even if you adjust for that, we believe that capital inflows are likely to remain very strong. We have seen some weakness in that coming from equity outflows and a little bit of nervousness in recent weeks. When we break down the balance of payments, what we see is a minimal current account deficit and very substantial capital inflows, even after the ECB issuance adjustments. That’s very positive.

On top of that, RBI has tightened monetary conditions significantly, withdrawn a lot of liquidity, and pushed up the overnight rate back into the reverse repo, repo corridor. That provides a significant attraction for capital as well. We think these forces will slowly begin to start dominating and pushing the dollar-rupee down. We have seen a very significant unwind of speculative positioning that will come in as well. And then it really comes down to what the RBI wants to do. If they want to continue to accumulate reserves aggressively, which we believe they probably will, then it will curb some of the strength and that will bring volatility in the market down very quickly.

Q: What is Barclays expecting then from the Fed later this month and then somewhere down the line from RBI as well?

A: We expect the Fed to remain on hold. The Fed has intimated to the market very clearly that they do not want to cut rates and that is really a last resort. The effective Fed funds target rates, the rates that are actually trading in the money markets, is already hovering around 5%. The market is already trading with the Fed rate cut priced in. That means the Fed could cut rates by 25 bps till its next meeting, without really having much market impact.

Q: In terms of money flow across the globe, you have talked about the dollar-yen touching 120 levels by year-end. But in the near term, probably for September-October, how do you see this currency moving?

A: We think the yen is going to remain quite volatile because it is a proxy for risk appetite globally. When people become uncertain, they have a natural tendency to buy yen. That means it’s going to probably continue to trade in a wide trading range. But we are relatively optimistic about the global economy and the ability of central banks to deal with liquidity issues arising from the sub-prime problems in the US. That means the dollar-yen should have a tendency to climb back higher.