Expect no big rally in rupee; euro to be weak: Barclays

Nick Verdi, Barclays Capital, say that Draghi's comment is a sign that the ECB is much more open now to policy action via bond purchases. There is speculation that the ECB is poised to announce something akin to the Federal or the Bank of England's version of quantitative easing. We think that it’s a little too early for that type of step to be taken yet.

There is a possibility that we move a little higher on euro-dollar. If the ECB, does indeed, announce any formal bond purchase that is ultimately negative for the euro. Equally, if it does nothing then the risk premium in terms of holding euro increase as well.
From here, we only see a weaker euro.
Our near-term target for Dollar-INR is up to 56. From a flows perspective, FDI remains pretty good and equity flows as well, but foreign bond flows remain fairly weak, so well within the quotas set by the authorities. If you add in our view of being long dollars and risk aversion continuing to increase as we move through the summer then we are not looking for a significant rally in the rupee anytime soon. Below is the edited transcript of his interview to CNBC-TV18. Q: What do you see happening now in Europe? Has the best been juiced out of Draghi’s comments? Will the market wait for action and only then take the next move?
A: I think anticipation could build now into the run up to the ECB meeting next Thursday. Judging the comment of ECB President Draghi it would be unusual if the ECB pre-committed as it were to policy action. The comment is a sign that the ECB is much more open now to policy action via bond purchases.
In terms of what it could do, it could reactivate the Securities Markets Programme (SMP) which was used last year to purchase Spanish and Italian debt. If it has the agreements of European governments it could move towards using the European Financial Stability Facility (EFSF) to purchase sovereign debt.
At this stage the path of least regret for the ECB is by reactivating the SMP. There is speculation that the ECB is poised to announce something akin to the Federal or the Bank of England’s version of quantitative easing. We think that it's a little too early for that type of step to be taken yet. Q: Would you give euro a higher probably that it would possibly move on the downside that is to levels of around 1.15 etc., 1.19 rather which was spoken about as near-term ranges or do you think that it would sustain at the current levels or maybe even move up?
A: There is a possibility that we move a little higher on euro-dollar. Positioning is still fairly short on the euro judging by some of the futures data and if we do have more positive currents over the weekend that could help markets in the early part of next week.
But really we would like fading any euro strength here. If the ECB, does indeed, announce any formal bond purchase that is ultimately negative for the euro. Equally, if it does nothing then the risk premium in terms of holding euro increase as well.
From here, we only see a weaker euro. A more interesting question is whether euro crosses can move lower. We did see some of the Central and Eastern European currencies rally very strongly in response to Draghi's comments yesterday and it’s in that space where we could see some of the more interesting action in the coming weeks. Q: Wouldn't all this be countered if the Fed were to hint something on Tuesday-Wednesday? What exactly are you expecting in terms of the GDP number later today and any possible reaction from the FOMC?
A: We are expecting a 1.5% q-o-q annualized numbers. So boarding line with Merkel expectations and lower than the pace in the first quarter. What could be interesting in tonight's numbers is that it will be accompanied by the annual benchmark revisions to the GDP data.
So if the economy was shown to have a larger output gap than the Fed previously felt that could be moved to act via monetary loosening earlier than we are expecting.
You can ask what the Fed will achieve by committing to further quantitative easing here. Treasury yields are already very, very low. We really expect the Fed to hold fire. As a result we are fairly comfortable with our call of being long dollars. Q: The rupee has stabilized in a range of 54-56 in the past couple of weeks. What is your target on the rupee in the near-term and do you expect it to move?
A: Some of the range bound movement we have seen of late will continue. Our near-term target for Dollar-INR is up to 56. If we look at it from a flows perspective, FDI remains pretty good and equity flows as well, but foreign bond flows remain fairly weak, so well within the quotas set by the authorities.
If you add in our view of being long dollars and risk aversion continuing to increase as we move through the summer then we are not looking for a significant rally in the rupee anytime soon. Q: You mentioned about the ECB using the S&P as well. In last LTRO, when they did that there was a strong risk rally across all risk assets. You don’t see anything of that kind?
A: The LTRO was used to address liquidity concerns in European banking system and some of those funds were then used to invest in risky assets.
I think the SMP would be much more targeted towards getting yields down in Spain and Italy and in fact if you look at the impact of previous SMPs it was fairly short-lived and if you look at how markets have been reacting to policy action since 2009 we do see a tendency of fall in riskier assets which force these policymakers to act.
I think riskier assets tend to rally, but though the timeframe of this stress intervention rally cycle has been shortening. So any positive reaction from the SMP being reactivated will be short-lived I think. Q: Since your central case is that of dollar strength you are not looking at too much of an emerging markets or Asian equity rally fund flows into this part of the world in the remaining part of 2012?
A: Bond flows have held well this year into EM as a whole, but I would say really investors have more proclivity to increase their exposure to Latam then EM given where yields are and I think there is more scope for Latin American policymakers to caught nominal rates here then in Asia. Q: Yesterday, was quite a sentimental reaction only on the back of positive statements, but no action. We have the ECB meet which comes up soon in the next couple of days. Till then how do you expect the euro to move and post that what would your expectations be in terms of a possible upside or downside for the euro?
A: I think in and around to the ECB if we don't get any comments that pour cold water over Draghi's comments yesterday namely commentary from German policymakers and the euro can nudge a little bit higher into the ECB.
But if we do get positive action out of the ECB I think that only means a weaker euro, because it will in effect be a monetary policy loosening. But what is difficult to envisage is a long lasting euro rally after the policy meeting next week.