Rupee in danger of touching 61/$ soon: Macquarie

Nizam Idris, head-EM FX Strategy, Macquarie sees rupee breaching 61 against the dollar and overshoot to 61.5-62/USD in the near-term. He expects a strong data out of the US, maybe 180,000 new jobs in June, which will make dollar stronger.

"Current account and fiscal deficit adds up to around 10 percent of India’s gross domestic product. When considering the capital outflows in emerging markets (EM), economies like India would feel the pressure," he says in an interview to CNBC-TV18. Also Read: Rupee to hover in 59-61/$ for now: HDFC Bank
Meanwhile, with a medium-term perspective, Idris expects rupee to stabilise. He believes the US Federal Reserve will begin tapering off the quantitative easing 3 by December-end. Below is the verbatim transcript of Nizam Idris's interview on CNBC-TV18

Q: How would you brace for the non-farm payroll numbers, the ADP employment number that came out overnight looks better than what the street had discounted. Should we brace for a risk-off in emerging market currencies next week?
A: It’s a good number. It should be a risk-off event but in today’s market where the market is anticipating good number to equate the Fed starting to reduce quantitative easing (QE) 3, there could be pressure on economies that are seeing a current account deficit like India. So, all this is not necessarily a bad event. I am expecting a decent strong data out of the US maybe 180,000 new jobs in June and that is likely to mean stronger dollar. Q: How would you expect the rupee to move in the immediate aftermath, over the next few weeks? Do you think 61-62 gets tested?
A: The risk is for an overshoot on the upside. This is largely a dollar story and the dollar story is still structurally quite strong. If you switch that to focus on India, it has its own structural issues. Current account and fiscal deficit adds up to around about 10 percent of gross domestic product (GDP).
When you get a big picture where capital is flowing out of emerging markets (EM), economies like India would feel the pressure. For me the dollar-rupee 61 is very likely and overshoot to 61.5-62 is a possibility at least in the near-term. Beyond the near-term, the question is whether the US data could sustain to be strong. It has not been fantastic but strong, decent.
Whether a decent number is enough for the Fed to bring forward tapering of QE3 into September from the current perception of December is a big question going forward. So, in the near-term there is overshoot beyond 61. In the medium-term it should stabilise. My bias for the Fed is still for a December tapering.

Q: Don't you think rupee will be supported by dollar inflows that will come in from the Hindustan Unilever (HUL) open offer or from Diageo flows?
A: We could see some capital inflows and moves to liberalise the foreign institutional investor (FII) market further, but the structural issue is still quite negative for the rupee. I am talking about current account coming in and about 4.8 percent deficit to GDP, though somehow better than last year. But the market is pretty much familiar with that story. Market wants newer story, not one-off flow events.
We want reform and that needs to be a clear sign where export growth could be stronger, CAD could be narrower and that could be more structurally supportive for the rupee. Q: Does your base case include that FII outflows continue for the month of July and August as well?
A: Unfortunately, the risk is that outflows will continue simply because the market is adjusting or repricing what the Fed would do from here. Repricing would include being underweight on bonds market and emerging market (EM). Being underweight in bonds and EM market need not necessarily be a bad thing, because it could go into equity in a bigger way, but EM equities need to catch up.
The lack of reform over the last couple of years, EMs drive towards reform was lost somewhere in between the financial crisis in 2008 and Arab Spring and for that EM is been given a miss right now. We need stronger reforms for good news out of the US to be translated into inflows into EM. Q: How much higher do you think the dollar index could go from here?
A: I am looking for structural dollar upside, maybe another 5 percent. Dollar index is against the G10 currencies, so dollar will outperform the G10 currencies. Dollar is likely to outperform EM currencies where you get the structural issues of twin deficit, but dollar may not outperform places where you see strong reform meaning they could actually benefit from strong US demand. For example, Singapore Dollar may not weaken so much against the dollar even as we are talking about structural dollar strength going forward for example.