Fed may cut rates by 50 bps Jan-end: BNP Baribas

Excerpts from Midcap Radar on CNBC-TV18 Watch the full show » Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

Sharada Selvanathan , Currency Strategist of  BNP Paribas , believes the markets will see a second wave of carry trade unwinding. She expects the US Fed to cut rates by 50 bps later this month and the Fed funds rate at 2.5% by the year-end.

The rupee will appreciate and the dollar will remain under pressure, she said.

Excerpts from CNBC-TV18's exclusive interview with Sharada Selvanathan:

Q: Host of news from the US sales data, last week's jobs data and bad news from various banks, how are you looking at things shaping up? Are you preparing for a recession, what kind of currency patterns are you looking at in the next one-month?

A: We are going to see a second wave of carry trade unwinding. The interesting thing is that there were investors who thought that much of the bad news from financial institutions had already been priced in, but what we are seeing coming from the economic side, the fundamental side, such as retail sale in the labour market is hard data is confirming the fact that the real economy is deteriorating rapidly and this explains why the Fed's Bernanke, last week was extremely dovish. He was basically signaling that there was more bad news to come, which required more Fed cut.

I think we are going to see a volatile session and with this increase in volatility, I think we are going to see investors reducing their positions and if one looks at which way these positions have been skewed, they have been skewed towards carry trades, which means as we see unwinding of carry trades we are going to see pretty steep gains in the Yen and Swiss given that they have been funding currencies for a long time.

So we are positioned or suggesting our clients to take the view that we are going to see further carry trade unwinding.

Q: What are you expecting from the Fed on January 31, and what are you expecting for the dollar-rupee?

A: In terms of Fed we have been expecting a 50 bps cut for January and this was confirmed to some extent by Bernanke's comments last week. We are expecting more Fed cuts this year, we are likely to see Fed funds at around 2.5% by the end of the year.

In terms of dollar-rupee, there's in Asia a general move towards higher inflation, which means gradually appreciating Asian currencies and the rupee also falls into the slot. Right now the rupee is trading at 39.27, we are going to see a further downside for dollar-INR because there will lot of pressure on the dollar as concerns of a recession comes through, so we see appreciation pressure for the rupee.

Q: Could you tell where dollar yen would be?

A: For yen, the break of 107.25 level was serious, which is why we had extended decline in dollar-yen. The next level I look at is 105 level.