Rupee may see further weakness, says HSBC

The rupee opened weaker today, snapping three sessions of gains. Paul Mackel, managing director-head of Asian currency research, HSBC says, one cannot rule out further weaknesses for the rupee. 

According to him, there are some deep routed issues externally, which can work against the rupee. "Also, some of the domestic conditions will keep the currency on the back foot going into the GDP number later this week,” he adds. Below is the edited transcript of his interview with CNBC-TV18's Mitali Mukherjee and Reema Tendulkar. Also watch the accompanying video. Q: What are your expectations on the euro? A: I think the sentiment for the euro is still quite poor. That was very evident in the price action of the currency yesterday. For example, as soon as the European sessions started to kick off, the currency started to roll over. I still fear that this issue surrounding developments in Spain will continue to be a drag on the currency. So, we cannot rule out a break of the 1.2490 level, which seems to be offering some potential support. Q: What’s your view on the Indian currency? Barring today’s move, in the past few days, the rupee has pulled back a bit. Do you expect the rupee to breach its earlier lows, which it hit of above 56.4 and actually head even lower in the near-term? A: I think you cannot rule out further weaknesses for the rupee either. It’s held up okay through the end of last week and even at the beginning of this week. But I still think that there are some deep routed issues externally, which can work against the rupee. Also, some of the domestic conditions will keep the currency on the back foot going into the GDP number later this week. Q: How does the Indian rupee stack up versus the other emerging market currencies? Will it continue to underperform as it has? A: In some ways, it’s a little puzzling. For example, the Indian rupee has been underperforming the Turkish lira for sometime. Everyone says the rupee is weak because of the current account deficit. That’s not really true because Turkey has a much bigger current account deficit and its currency is stronger. So, there is somewhat of an inconsistency there. I do think that this currency is going to remain one of the weaker ones within Asia, perhaps in the EM space altogether. What we need to see for it to turn for the better will obviously be a better external environment, but also the domestic situation on the fiscal side of things turning more promising. Q: We have had some relief over the last couple of days though in terms of the currency. Today’s weakness is in part because of expiry as well. Would you say that in the near-term the Indian rupee has seen the lows around that 56 mark? A: I can’t rule out that it could go even lower. I just can’t in this environment. There are so many uncertainties out there. Externally, you could have a very nasty situation within the Euro zone unfolding in the next couple of weeks. It wouldn’t just be that the rupee would be weakening, it would be a lot of Asian currencies altogether. The market would be gravitating increasingly towards the dollar because they want liquidity. So, I don’t like to rule out further weaknesses at all. Q: How should the money market approach events on June 17, when there is more clarity on elections and the outcome in Greece? What would read as a rally for the euro or conversely for it to crack? A: Everyone got very excited yesterday, when the opinion polls supposedly out of Greece were turning a bit more optimistic and pointing to signs of greater political stability. But then today, where is this optimism? It’s suddenly faded away. I don’t think it’s just about the Greece election. I think we have to take into account the ECB meeting on June 6. It is very critical for markets because if the ECB is willing to show its hand and greater support now, that would be good. That would be very comforting for markets altogether. If they are still showing quite tough love towards the peripheral part of Europe, I think that would send a very bad message. In that case, currencies like the rupee and other Asian currencies will continue to be under downward pressure. Q: What’s the range that you are working with for the euro-dollar? What would be your near-term medium-term target for the euro now? A: In the near-term, we are probably within reach of cracking this 1.25 level, possibly posting new lows. On the topside, if we can get a bit of optimism coming through again and we can take out some of the resistance above 1.26, we might get a clear out up to the 1.27 level. But after that, I think it’s going to be pretty tough going, especially before the ECB into next week and the Greek election.