Marginal impact on rupee seen due to carry trade: UBS

Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS Japan among India’s top five trading partners BoJ's rate stance along expected lines: Deutsche Bank ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 01/06/12 Are Mutual Funds betting on Nifty?

Q: There were some fears actually in the last couple of months that maybe the liquidity flows from Japan or out of Japan might tighten a bit in the light of what the BoJ is trying to do and what the currency there is doing. Has that view turned around a bit; do you think that maybe those factors are more benign now to suggest that there could be money, which could be easing out of Japan in the next 3-4 months?

 

A: Most of the disruptions in the market that we have seen this year, particularly in May and June, when we saw a tremendous rise in risk aversion, was actually not a function of BoJ policy, it was actually a function of Fed Reserve policy.

 

People were very confused about the Fed outlook and the communication strategies of Chairman Bernanke. So probably the BoJ has not been a huge influence on the markets so far this year, to the extent that we are seeing periodic episodes of risk aversion.

 

Q: Then do you expect to see, over the next few months, the average rate of 3-4 trillion yen that you spoke about in terms of flows?

 

A: It would probably persist over next month or so, but I do agree that there are awesome risks that are growing. September can be quite an interesting month with the IMF meeting and G7 meeting in Singapore.

 

Potentially if you have volatility in forex markets, some of those carry trades financed by the yen could unwind. The impact of that would be contributing to the yen's strength.

 

We actually do have a slightly bullish forecast for the yen in one to three months. I am looking at 114 for dollar-yen. That is in anticipation of the broad dollar weakness in light of event risks in September. We are expecting a broad dollar weakness and the yen should benefit from that, and that would be quite disruptive to carry trades.