USD likely to strengthen by year-end on Fed taper: Barclays

Rohit Arora of Barclays believes the rupee will stabilise at its current levels of 61.90 against the dollar. According to him, the Reserve Bank of India’s support to the oil marketing companies has eased the pressure on the rupee but the recent rally in the rupee was due to weakness in dollar.

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The dollar, he says, will strengthen going ahead on the back of strong US manufacturing data and an impending QE tapering by December. Below is the verbatim transcript of Rohit Arora’s interview on CNBC-TV18 Q: What is the trajectory on the rupee? Today, unlike several emerging market compatriots the currency has actually gained, dollar now cheaper than even 62?
A: We expect dollar-INR to stabilise in the current range itself and the recent rally has been coming from the broad dollar weakness rather than INR strengthening. Going forward, the balance of risk has become more balanced than what we saw couple of weeks back and that is broadly because the oil marketing companies have been supported by the Reserve Bank of India (RBI). This has removed big pressure from the dollar-INR.
In the coming months, if risk aversion rises again and there is further attack on the emerging market (EM) assets towards the end of the year, then we could see a risk off weakening. Apart from that, it will be in a very stable range in the coming weeks. Q: What could the range look like for the dollar index going ahead, do you see it trade well below 80 for the next couple of months?
A: No, towards the end of the year we still expect the dollar strengthening. Infact over the medium-term, we think the theme is still intact. The manufacturing data coming out of the US has been pretty strong. The quantitative easing (QE) tapering has been delayed but it is still inevitable. Towards the end of the year, probably at the December meeting we will expect the Federal Open Market Committee (FOMC) to taper their asset purchases and that could lead to some dollar strengthening going forward.
What we have been seeing in the last couple of days is more or less opposition liquidation that is coming out of one, no tapering at the September FOMC meeting and second, a shutdown in the US earlier this week. Q: With this FCNR account incentives being offered to banks, do you think in the short run the dollar can get even cheaper than Rs 60 along with all the global cues you mentioned?
A: Not necessarily, because what FCNR is doing is more of a sentimental impact rather than the flow impact because this is something which is done with the RBI rather than the market seeing this kind of flow. So, it is acting on the stronger side of the sentimental impact.
n the negative side, we have global factors as well as risk of OMCs coming back to the market. So, it is a more balanced risk rather than a sharp strengthening view even if FCNR flows are greater than USD 10 billion which we are estimating.