Dollar-rupee to trade in 49-50.50 range: Barclays Capital

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Olivier Desbarres, Director and Head of FX Strategy, Asia-Pacific ex Japan, Barclays Capital expects the dollar-rupee to probably trade in a range around 49-50.50 in the near term. In the same breath, he mentioned that any rally from here is likely to be potentially shallower than they have been year-to-date.

He added that if the market feels confident that the eurozone problems have been resolves, then the focus will turn towards some of the more positive global developments such as stronger than expected data out of the US.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: We have had a very good pullback in the rupee but in the last couple of days it seems to have run into some resistance and is pulling back closer to the 50 mark again. How would you approach it now?

A: It's a very important point at this juncture and it's worth noting that not just the rupee but other Asian currencies are running into some headwinds. The data out of China in the past 24 hours have put somewhat of a block on currency appreciation at least for the time being. This is being seen in the Singapore Dollar, the Korean Won and other Asian currencies as well.

I don't think the price action that we are seeing in the rupee is unique. We have argued for a while that we would not chase the gains in dollar-rupee below the 48 level. We feel that a good chunk of the move has already happened and that is despite the fundamental challenges that India faces. By that, I mean current account and fiscal deficits, high inflation and policy rates and growth slowdown. So, we think that at current levels, there are better long currencies in the emerging market universe.

Q: What kind of near-term range do you expect the rupee to settle into, because from the start of the year to now, it has only been moving in one direction, which is of strength?

A: As I said, we are at a bit of a crossroads, and to me, that suggests that dollar-rupee will probably trade in a range around 49-50.50. I think we can make a number of arguments there. But I think that what one can argue with a degree of certainty is that any rallies from here are likely to be potentially shallower than they have been year-to-date. We have had the big move.

A lot of the good news in Asia, Europe, Greece are already priced in and I think it just make it much harder for dollar-rupee to see the kind of force we have seen in the past five or six weeks. So I think we can trend sideways; the extent to which it precedes high will, to some extent, be dependent on global developments including what's going on in the eurozone but also what's happening closer to home in Asia.

So I think investors will be looking at these levels. They won't necessarily chase them. If we do see a bigger move higher in dollar-rupee then we may see investors perhaps putting on fresh long rupee trades. Investors perhaps will miss the initial move down to 48, but it doesn't stride me that there is massive appetite at these levels to put on fresh rupee trades.

Let's remember that there is still a tail risk of uncertainty with regards to what is happening to Greece, the PSI approval of the 130 billion euro package and the complete resolution of these issues. The market will be reluctant to chase already large gains.

Q: What's your sense of what the markets focused on at this point in time? Is it fundamentals of what the fair value of currencies could be or is it focused centrally on liquidity where we have seen an abundance of money coming into emerging markets because of the global risk-on trade. Is that the most important driver of the currency today?

A: I think in the past five or six weeks, one could argue that a number of factors have driven this rally and emerging market assets. The thinner tail risk of a sharp slowdown in global growth has clearly been an important driver. Global liquidity and expectations of global liquidity remaining strong, thanks to easy policy out of the US and the Eurozone has also been a key driver.

When you see these big moves, investors naturally tend to start looking at valuations. Where have valuations become stretched? Where is positioning perhaps a little bit more stretched? Therefore, we have been advocating since the past weeks that investors should start focusing on relative value of positioning looking at valuations. It's no longer a case of just being a long EM without looking at the country specifics.

You have to be a little bit more focused on the specific currencies, which still have room to appreciate, and of course, the eurozone issue remains very much at the forefront of people's minds. There are still a number of issues that need to be resolved. Baby steps are being made almost on the daily basis and that has kept the rally going. But I would argue that already quite a lot of that positive news has been priced in.

So again, to see big gains from these levels, you will have to see fresh news and it's now clear to me where that will come from. I don't think we are going to see any announcements on QE3 anytime soon. That's perhaps an area that markets have been focusing on hoping that any announcements of QE3 in theUS would provide another leg to this rally. I don't think that data supports the case for QE3, at least not at this juncture. So whilst policy remains loose and liquidity remains flush, I think investors will be looking for something new before putting on big trades.

Again closer to home, look at the Chinese data in the past 24 hours - higher than expected inflation and very weak import numbers. Whilst we think a lot of these numbers are due to one-off effects and will be reversed in the coming months, it has brought the market's attention back to the China story and the risk that perhaps there isn't the scope to loosen policy that people thought there was and the margin that increases the risk of a somewhat harder landing in China. Again, it is not our core scenario, but it has refocused market attention.

Q: Would you say though that the fulcrum point will remain the Euro-dollar and currencies will react around that equation? What is it that you expect to see on the Euro specifically against the dollar?

A: Well, whether we like it or not, the Euro still tops the headlines on most days. So clearly, developments in the next few days and weeks will remain key, in particular whether Greece can approve this package of fiscal reforms, whether Greece can reach agreement with the private sector on a debt haircut, and ultimately, whether Greece can secure this second bailout package of 130 billion Euros.

Again, a good chunk of this positive news has been priced in and that's one of the reason I don't think Euro-dollar will push much higher. I think in the very near-term, we could certainly grind a stronger in the Euro-dollar cross. But I think we will get to the point where a lot of the news is priced in, including the positive news about the LTRO and the market will then refocus on the structural weaknesses of the eurozone. That doesn't mean that other Asian currencies cannot outperform in this environment.

If the market feels confident that the eurozone problems have been ring-fenced and are not being dealt with, then the markets will refocus on some of the more positive global developments such as stronger than expected data out of the US. So I think there is, to some extent, a bit of a dislocation between what's happening to the Euro and what's happening to other currencies.

So we shouldn't infer that a weaker Euro is necessarily bad for the rest of the world or for Asian currencies. One needs to have more of a granular approach when looking at the Euro process.