See yen support at 93.6/$; volatile rupee: BNP

After three days of consecutive record lows, the rupee today saw a 30 paise recovery against the dollar. This recovery, however, might not be long-lived.

In an interview to CNBC-TV18, Chin Loo, senior currency strategist, BNP Paribas says the rupee will see volatility as foreign investors continue to exit their long positions from the Asian currencies. Also read: Investors nervous about Fed QE tapering: Societe Generale
The rupee is not the only currency that is being battered. The yen today saw two-month high of 93.90 against the dollar. This too, according to Loo, is due to unwinding of positions and expects yen to fall further. She sees 93.60/ USD as the next support level for the Japanese currency.
Loo says the weakness is likely to continue for the next six-12 months. "The reason for that is that Bank of Japan is still quite ready to do more, to try to reach 2 percent inflation target. More means that they continue to find liquidity in the market place to drive inflation and that eventually should weaken the yen," adds Loo in an interview to CNBC-TV18. Below is the edited transcript of Loo's interview to CNBC-TV18. Q: Firstly the yen appreciation. Where do you see this finding some kind of stability and what maybe the competent impact on other currencies in the Association of Southeast Asian Nations (ASEAN)?
A: We have had a very sharp pull back in the yen today against the US dollar. There really wasn't a key trigger for that move but I think it is more of a continuation of unwinding of positions. The crack of the 95 level triggered a lot of stop losses on the downside. So, given that market are all positioned in one way which is now dollar-yen and they are exiting at the same time, there is certainly a risk that the dollar yen could fall further. The next support area is at 93.60 so that’s the next line of support that we would watch. Q: For a slightly medium term, say for the next six months, given the fact that the yen has depreciated so much versus the dollar since the start of the year, about 10-11 percent, do you think the headroom on the upside could be far higher because of the volatility that we are seeing?
A: We think that the yen should remain weak for next 6-12 months. The reason for that is that Bank of Japan is still quite ready to do more, to try to reach 2 percent inflation target. More means that they continue to find liquidity in the market place to drive inflation and that eventually should weaken the yen. So, on that basis, we are still looking for dollar to head higher in the long term. Q: What about other Asian or maybe even emerging market currencies. They have been impacted by this across the board selling of emerging market bonds by FIIs we understand. Are you looking at this trend abating anytime soon or even immediately is the sale not over? In particular for rupee, what kind of lows can the currency touch in the short term?
A: It will be extremely volatile. The scene going here is really just to get out any position that you have or scale back. So, given that foreigners were long, Asian credits and quite happy to be long because of EU, we are seeing an exit out of those positions.
Where the rupee is concerned, yes there is certain amount of volatility. On one hand dollar rupee was trading much higher because of the risk-off but with Fitch upgrade of India’s outlook slightly stable has caused dollar-rupee to fall off again. So, there is extreme volatility in the marketplace and I think this sort of volatility will probably see quite a lot of market players stay out for the moment. However, in the longer-term, the drivers for the rupee’s strength will be addressing current account deficit (CAD) as well as its fiscal deficit. Q: I don’t know if you track the correlation but let me try that because a lot of these companies, exporters in Japanese markets, the likes of Panasonic, Toyota, etc had quite conservative estimates of the yen when they reported their earnings last, somewhere to the tune of 90, etc. Can you quantify for us what the impact will be because of such a big appreciation in the yen on some of these companies that export?
A: I think it’s premature to quantify based on a day’s move. Dollar-yen did collapse today below 95 but who is to say that it could stay below this level for more than a week. So, I think it’s a little bit premature to base revisions of earnings forecasts on a day’s move. But clearly if yen gets strong on a sustained basis then the impact on exports could be measured.