Dollar to strengthen; rupee may struggle to hit 53: Mecklai

Jamal Mecklai of Mecklai Financial Services expects the US dollar to dramatically strengthen in the next six-eight months.

Fundamentally, the dollar is bullish which means the rupee is bearish. In the short-term, if dollar hardens then the rupee is likely to hover in 55-57 range, he said in an interview to CNBC-TV18. However, rupee appreciating to 53 levels is far-fetched and it will take some time for the Indian currency to stabilise from its current volatile behaviour. The Indian rupee, which saw its lowest level in 10 months on Wednesday, opened flat at 56.14 per dollar versus 56.16 Wednesday. Also read: Downward pressure on rupee to continue: AV Rajwade Below is the edited transcript of his interview to CNBC-TV18. Q: It has been a difficult month for the rupee and it has passed that level most traders who were talking about at the 56 mark. What do you expect to see through the course of the next few weeks, more downside or some support here? A: We need to understand that the rupee is really falling because the dollar is strengthening; we are very clear on that. I feel that net-net, it depends really on what the dollar does. The dollar is actually going to strengthen and dramatically but over six-eight months. In the immediate term the dollar is already correcting a little bit. People are digesting the news, the market already knows that quantitative easing (QE) is over which is why the dollar was going up. US interest rates are rising but most of the variables are close to where it has resistance levels. So it may stop for a while. I am not sure whether the dollar index goes up from 83-84 to 85-88. The rupee will reflect all of that. Let us say it goes up by 3-4 percent; will the rupee weaken by 3-4 percent? I am not sure because our markets are thinner, there is not that much ability to really take positions. Fundamentally, the dollar is bullish which means the rupee is bearish. Q: Even if there is no one-to-one correlation between the dollar index move and the rupee, if your view is that eventually the dollar is going to harden from here, does it mean that the rupee will get trapped in a 55-57 kind of range and expectations that it would appreciate significantly when it went to 53, those should be kept at bay? A: In the short-term i.e. in a few months, it is likely to be true. If the dollar is strong the rupee is going to be weak. There are two benefits of the dollar for India; one is that commodity prices are obviously low and I think we are moving into a bearish commodity trend. So oil, gold, all these things are going to go down. Now when that starts to harden into the markets mind then people will see that India’s current account is perhaps not much easier than we had thought. This is going into the next year and half. So that should attract inflows. What I am trying to say is that it is a double edge sword which is that certainly if the dollar is stronger, the rupee will be weaker. But the dollar is weaker, India’s position gets a lot better, inflation control becomes easier, etc. So one thing that we can be sure of is volatility but looking at 53 today seems a tall order. _PAGEBREAK_ Q: Some of what you say should have played out already, should it not have the current account deficit (CAD) trend, the commodity prices, flows have been exceptionally strong. Even this month we have got USD 3.5 billion from Foreign Institutional Investor (FII) but that is not moving the needle on the rupee at all. To be fair the dollar index has not gone on a huge rally or anything. It has been in this 83-84 range for a while now so why is the rupee so weak? A: 84 is relatively in a week or 10 days because I have been tracking it very closely. It is only recently that it started to breakout and there is much more to come and there have been inflows. So, fundamentally, people are still not convinced that we have got a political capability to really run the economy efficiently. There are lots of things being thrown out. One of the good things I saw recently was Reserve Bank of India (RBI) loosening some of the tightening it had done sometime ago so that is a good sign. What you have to understand is you need to make the market as free as possible so people get accustomed to the higher volatility and are able to manage risk better. So your point on why are people not already jumping on the fact that gold is down, oil is down, etc, basically people still don't really believe. They believe that may be gold is going to go back-up, I think it is going to go to USD 1000 over the next several years. However, once it starts going down again, perhaps people will then appreciate our current account deficit. Again let us understand that there is still a huge deficit and we still need USD 70-80 billion a year to plug it. So it is not just that it is going to get better that is suddenly going to improve the rupee. It is going to take some time because there are lots of other obstructions in the way, the whole political story, the election coming up, etc. So we have to live with the fact that we are wobbling around with the rupee. One more point, just because the currency is weakening doesn’t necessarily mean that it is difficult times. Markets move, sometimes currencies weaken, sometimes they strengthen. You got to run your business whichever way it happens. Weaker rupee is not necessarily a bad thing; it is good for exports for example. Q: We have been through periods of weakness before such as late last year after which the rupee actually bounced back quite sharply. What would you expect to see as a trend for the second half of the year? Is it a given that the rupee is probably headed lower or do you think there are chances that we spurt back? A: 57 is a pretty good range but the job of markets is to prove it wrong. So something can happen to bounce it back that is always a possibility except that I don't know what it is that is why if it happens it would be such a surprise. So we need to recognise that is what markets are. You very seldom can jump on horse or asset or whatever and just ride it all the way. We all know that. So while it looks weak, it could turn it into anything, I don't have any specific answer, I am not looking for them right now because that is not my job to forecast the rupee, nobody can do that.