FOMC disappointment to be blamed for Re weakness: Macquarie

Markets had kept a close watch on the outcome of the Federal Open Market Committee (FOMC) meeting on Wednesday. However, the US Federal Reserve kept rates unchanged, extended Operation Twist and hinted that it is prepared to launch a third round of quantitative easing if required. In an interview with CNBC-TV18, David Forrester, Currency Strategist at Macquarie said that the FOMC is clear about a lot of uncertainty in the US market.

The rupee also hit its all time low of 56.57 per dollar on Thursday. Forrester believes the huge current account deficit and FOMC disappointment is to be blamed for the weakness in the Indian currency. According to him, the dollar rupee could see a topside of around 57. Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video. Q: How would you assess what the FOMC is trying to tell us? Is there a broad hint of more QE or is there a hint that one should embank on it?
A: I think the FOMC has made it clear that we have got a situation there. There is a lot of uncertainty about the US economic outlook and that is largely because of overseas events. So they stand ready to do more in terms of further easing, if it's required.
I think the market was a little disappointed, given QE3 wasn't initiated and also that it wasn't really into that strongly, neither in the policy statement nor in Bernanke's press conference. Overall, the FOMC is telling us that it is keeping the options open. Q: Would you therefore say that there is less fuel for a risk-on trade from here on?
A: I would say for today, there is less fuel. Certainly, the market has build up ahead of the FOMC. In terms of risk on trades going forward, we still think there are good news stories going forward. We have got to look out for Europe that could upset things a little. But, at the end of the day we think the markets are under pricing.
The chance of a China rebound in the second half of the year and for ever China is seamless. On top of that, it is noticeable that the Fed did not mention or did not emphasize the fiscal cliff that the US economy faces at the end of 2012. Hence, we think that has potential to come through and change the Fed rhetoric in the coming meetings. Today, there is little fuel for risk on rallies. But, going forward we are still quite positively risked at this stage. Q: What's your view on the dollar-rupee at this point? We are seeing fresh lows on it at the moment? What has led to this inexplicable fall even as crude has fallen, we have some macro positive here at least. It's not a big risk off in the global markets. So why do you think rupee is falling beyond reason?
A: Well at the end of the day, you have twin deficits for the rupee. You have the large current account deficits, the only significant one in Asia. So yes, it is a risk on, risk off currency because it is completely captive to capital inflows. That is the reason for some of the weakness on the back of the FOMC disappointment. You could see rupee continue to drift higher.
One point of note is that oil importers in India are probably overly hedged. Even if dollar India continues to drift higher, they are not going to be forced into buying it. A little more topside and, if you do get a big risk on rally then it could come off quite sharply. You do get those capital inflows back into India, but on top of that you may see some unwinding of the hedging by oil importers. Q: At the moment what is the range you are working with for the rupee? What kind of depreciation are we likely to see if it does extend on the downside?
A: Well we think topside dollar rupee can get to around 57. It has been trading at around 55.5-57 range for quite sometime. But again a caution and if you get a big risk on rally that can come off pretty quickly, that dollar rupee can come off pretty quickly. Q: Given the recent data in India - inflation, growth, central bank's reactions, would you say that there are chances of capital flows?
A: Well central bank is clearly caught between a rock and a hard place. It is trying to fight inflation but remains sticky to the upside. The data in India, particularly the cyclical data has not been looking stellar, to say the least. It is difficult to pump up the economy and of course pump up the equities and generate those capital inflows.
I think RBI is not going to be the source of capital inflows in India in the near term. I think you have to rely on a broader global risk sentiment rally for that. Q: What about the euro-dollar? The turmoil in Europe is not getting any better. What would be the range and the broad direction for the euro-dollar for this quarter?
A: Well for Euro dollar, things got better in Europe. We have now got a Greek government that is pro-bailout and will negotiate on friendly terms with the troika. We still have concerns about Spain's banks. However, it may get resolved next week at the EU summits.
So we have got a wait on that but at the end of the day, putting all this aside, you still have a weak macro economic picture for the euro. We have got very weak growth as the fiscal austerity bites and the ECB will probably have to cut rates. That leaves Euro Dollar in the downtrend, particularly after that FOMC meeting last night.