Difficult to be positive on rupee in near term: HSBC

It will be difficult for us to be more positive on the rupee in the near term, says Dominic Bunning of HSBC after rupee falls above the psychological 60 mark today. He believes the Indian currency is still in the clutch of the global environment and the move today is very much in line with what has been seen in the rest of Asia. (Read More)

"It is still a dollar story but underlying that for the rupee, there are still a lot of structural challenges and a lot of outflow pressures that still remain," he says in an interview to CNBC-TV18.
He believes if markets are a bit positive on general risk assets then rupee can look a little more attractive given its high yield. However, he does not think such sentiments can last very long. He says there is still a lot of volatility to been seen in the US treasury market and that will keep the emerging market (EM) currencies under a bit of pressure.
Meanwhile, Bunning says the market is still very uncertain about how exactly the Federal Reserves (Fed) tapering process may continue and that is why people are still concerned about holding certain EM assets given the volatility around treasuries. Below is the verbatim transcript of Dominic Bunning's interview on CNBC-TV18 Q: What do you attribute to the weakness in rupee? Is it just global in nature or are you hearing of any kind of outflows from the Indian debt market?
A: The rupee is still in the clutch of the global environment and the move we had today is very much in line with what we have seen in the rest of Asia. So it is still a dollar story but underlying that for the rupee, there are still a lot of structural challenges and a lot of the outflow pressures that were in place earlier in the year and still remain. Therefore, it will be very difficult for us to be more positive on the rupee in the near term. Q: There has been bit of pressure on all emerging market (EM) currencies, is this a preparation for receiving the nonfarm payroll numbers?
A: Yes, certainly an element of risk around that number. The market is still very uncertain about how exactly the Federal Reserves (Fed) tapering process may continue. Therefore, people are still concerned about holding certain EM assets given the volatility around treasuries. Q: Will this risk aversion continue up until Friday? Do you expect markets to remain subdued till then? If it indeed were a little stronger than 155,000 that is doing the rounds by way of estimates now, do you think we could see a risk aversion as savage as the one we saw post Federal Open Market Committee (FOMC) statement?
A: Firstly, it will depend on how today's ADP numbers come out and that will give us a hint about the payroll numbers as well. With liquidity likely to be a bit dry tomorrow with the big US holiday, we may be little subdued depending on where we come from ADP.
On Thursday, the reaction post payroll numbers into next week will be less of an aggression move given the tapering aspect is more priced into the market than it was before. So if we get a stronger number then the market is at least a bit positioned for the idea that Fed can start to slow some of its buying of bonds. Therefore, it is not a huge move but certainly there is still room for dollar to appreciate against EMs from here. Q: Do you see too much of a downside for the rupee, will it underperform Asian peers?
A: It is going to depend on our overall environment. If markets are a bit positive on general risk assets and that is possible given we are at more attractive valuation levels across board then the rupee can actually look a little more attractive given its high yield. But I don't think those kind of sentiments are going to last for a very long time.
We are going to get small retracements, lower in dollar-INR for example. There is still a bit of an adjustment in terms of overall positioning away from EM, may be back towards developed markets and there is still lot of volatility to been seen in the US treasury market and will keep EM currencies under a bit of pressure. Q: Currently what is the forex market pricing in with respect to the jobs data? If it comes out largely in line with expectation than what could be the immediate reaction that we could expect in the dollar and in other currencies?
A: In terms of the payroll numbers, the market is looking for something in the range of 160-175. If we do get a number in line with that it is not going to change sentiment, people will still look to buy dollars on dips against the rest of EMs. We need to see more surprising data release for us to come out of that framework for the time being. Q: Are you seeing the exit of foreign investors from emerging market bonds or equities or is this just currency positioning? With regards to India, is there any kind of specific foreign investor exit that you know?
A: It is hard to pin down on a day to day basis the exact flows looking at some of the data that we get. There has been a bit of outflow out of equity markets given that we are generally down across most of Asia. From the bond markets, a little bit of trimming positions as well from short-term investors, but a lot of it may be just positioning and speculation going into the end of the week.