Go long on rupee; targets 56/$ by year-end: Barclays

Nick Verdi, Barclays Capital recommends investors to go long on the rupee at this stage. The indication of US Fed tapering off quantitative easing has hit many emerging market currencies including the rupee. He, however believes that once the markets realise that tapering off will not be rapid risk premium will reduce and longs will be rewarded.

"On a three month basis, we are looking at a target of 56.5/USD and by year-end 56/USD for the rupee," he says in an interview to CNBC-TV18

Also Read: Rupee in danger of touching 61/$ soon: Macquarie

Meanwhile, Verdi believes if the US payroll numbers are better-than-expected, it would lead to a selloff in the US treasuries and perhaps a negative reaction in the emerging markets.

Below is the verbatim transcript of Nick Verdi's interview on CNBC-TV18

Q: What is your call on the currency? We have seen some retreat on the dollar. What is your trend both for the dollar and the rupee?

A: The dollar is ultimately on an upward trend. The G10 central banks will be the most hawkish, going forward, first out of the blocks with respect to tightening monetary policy and so, it will strengthen. As for the Indian rupee (INR), we have to think about it in the context of other EM currencies, particularly those that have high current account deficits (CAD).

The Fed's move towards tapering has increased risk premium across markets and for now currency markets see this as a bad thing and that has hit the INR badly. Going forward, this risk premium will decline. Markets will get use to the fact that this is not going to be a rapid Fed tightening and tapering does not mean tightening in the near-term. It should mean that investors will look to value and look to those currencies that have been hit hard and INR is one of them. It is sold off purely on international factors and for a lot of investors it has opened up some value. So we are recommending that investors enter longs in the rupee at this stage.

Q: What is your near-term range for the rupee? If you are entering at 60, what kind of an upside do you expect?

A: On a three month basis, we are looking at 56.5 and by year-end we are looking at 56, so tapering off there. A lot of this risk premium gets taken out and longs will be rewarded.

Q: Automatic Data Processing (ADP) data coming in stronger than expected has not unleashed any risk-off today in the Asian markets or in the EM currencies. Even if the nonfarm payroll numbers were to come stronger than expected 165,000 on Monday, are we not going to see EMs being abandoned like they were after the Federal Open Market Committee (FOMC)?

A: A strong number would lead to a selloff in the US treasuries and perhaps a negative reaction in the EMs. The reason why the dollar has rallied on the back of the good labour market data in the US that we had this week, it is just relatively light positioning in the run up to the US holiday. The US is out today, but I do not think we are quite at the stage where markets can react positively to strong US labour market data.

Q: Will the reaction not be way too negative?

A: I do not think it will be around, but if the US rates do back up then EM rates will do the same and that will be negative for their currencies. Once markets are able to fully grasp what the Fed is trying to do, that taper is not necessarily tightening, then markets will realise that if the US labour market is doing well, that is good for the world.

Q: The yield is back to 2.50 percent already from 2.42-2.43 percent. In case of a selloff, can it approach to 2.67 or 2.70 percent kind of levels?

A: It could do that very easily if we get a payroll number that consensus around 165,000. If we are 10,000-15,000 above that then markets could get a little ahead of themselves and sell treasuries in earnest.