EM currencies' recovery brief; INR undervalued: Julius Baer

Mark Matthews of Bank Julius Baer & Co is surprised by recovery seen in battered emerging market (EM) currencies. However, he cautions that this recovery is not sustainable.

Speculation about US tapering its QE programme has whacked most emerging markets currencies out of shape. The Indian rupee breached the 68-mark on August 28, hitting a record low of 68.70 against the dollar. He feels that the Indian currency is undervalued at current levels. The next key event for global markets is the FOMC maeeting scheduled on September 20. Matthews feels tapering will be on the lighter side. He says, the Federal Reserve tapering program will not be more than USD 10 billion this month. Meanwhile, he is upbeat on Europe, US & Japan markets. Also Read: Still comfortable with long-term India holding, says StanChart Below is the edited transcript of Mark Matthews’ interview with CNBC-TV18 Q: The expectations now are that the Fed taper will not be as severe and maybe on the lighter side. What is your expectation of the event and how much has been priced into the global markets? A: The cut by 10 billion from 85 billion to 75 billion of purchases of government securities per month is in the price. We will have to see what the reaction is. The reaction could go either way; it could be good or bad. We just have to wait and see. Q: What have you made of this fairly decent emerging market equity and currency recovery that we have seen? Good to go for more? A: I am surprised by it. I didn’t expect emerging markets to come back as quickly as they have. For now, I do not think it is sustainable. I feel like it is technical. I do not see why they should bounce and that being said, some emerging markets’ currencies are very cheap and the rupee stands out as being the cheapest. From a valuation perspective, it makes sense to bottom here. I would have expected a few months of licking our wounds before we bounced. Q: The rupee recovered from 68.8/USD to 63.4/USD. You think it is good to go for more? A: From fundamental point of view its undervalued, but I thought that the market would have wanted to see stabilisation before confidence build to buyer and the fact that the market would have wanted to see trade deficit continue to narrow and I suppose it did. Because the number reported yesterday was USD 10 billion, which was a good and the market would have wanted to see more from the new Reserve Bank of India (RBI) Governor, Rajan. So, I am surprised at the strength and the bounce. I do not think it is sustainable, but I could be wrong.