See dollar-rupee move higher in near term: Barclays Capital

In an interview to CNBC-TV18, Nick Verdi, Currency Strategist, Asia, Barclays Capital says the sell-off this week hasn’t been rupee specific. The Indian currency seems to be sinking in the same boat as some of its Asian peers but the rupee’s movement was largely scented around events in India.

Verdi says that from here if events in Europe do worsen there are other currencies in the emerging markets (EM) which need to catch up. “I wouldn’t necessarily think that the rupee would bare all of the brunt of a euro led sell-off.” Below is an edited transcript of his interview. Watch the accompanying video for more. Q: What are your targets on the euro-dollar because that seems to be the underlying premise for most currencies and the way they are moving?
A: We are looking at the euro falling to 1.20 in a year’s time. It’s worth bearing in mind that the euro does have some structural support in that while we are seeing peripheral bond spreads widen so investors pulling money if you like out of Spain and Italy. It has been recycled into other euro area assets. So the euro has remained fairly steadfast. Also Read: See another 50 bps repo cut by FY13 end: Morgan Stanley
If we do get contagion from Greece to other asset markets, other currencies may be impacted more than the euro itself and that central and eastern European currencies are the key avenues for the currencies that would be hit in that type of environment and that is what we have seen already this week. Q2: From a trading perspective how would you approach these currencies now? Do you think just in the near-term the dollar could be overbought and the euro a bit oversold?
A: It is possible. If we think about why the euro and other risky currencies weakened over the past week it has been because of political uncertainty in Greece. There have been concerns over the Chinese economic outlook but it has been purely about Greece now. The Greek president has announced that we will get elections by the middle of June.
So at least in the very near term we may get some relief. But as we approach that election, some of the concerns will resurface again and those currencies which tend to selloff very sharply when risk aversion increases will be affected in a similar fashion. Q: We have all been stressing about the kind of pressure that the rupee has seen in recent times but put it in context with what its done relative to other emerging market or Asian market currencies?
A: If you look at the sell-off this week it hasn’t been rupee specific. Ahead of this week the sell-off in the rupee was largely scented on events in India. That hasn’t been the case this week. One could argue that from here if events in Europe do worsen there are other currencies in the EMs which need to catch up. I wouldn’t necessarily think that the rupee would bare all of the brunt of a euro led sell-off. Q: What kind of targets are you working with on the rupee both in terms of downside risk and whether or not there could be any retracement?
A: Risk in the near-term in our view is that the dollar-rupee does move a little bit higher but ultimately some of the measures that the government has announced recently while they haven’t stemmed any of the weakness that we have had thus far, when the risk environment improves and I think it will do once we get beyond the next quarter then the rupee could retrace some of these losses. So we think it can probably get into the high 40’s by year-end. Q: What is it that you hear about the outflow situation in the near-term because many people watching these markets have pointed out that for currencies such as ours, it’s a lack of inflow situation not so much an accelerated outflow situation? Do you expect that to happen in the next few weeks?
A: Outflows have been an issue particularly on the equities side but if we look at the balance of payments (BoP) situation from the current accounts side, the trade deficit and the capital account side in terms of other flows such as equity flows it hasn’t painted a particularly positive picture for a long time. This isn’t new news.
Any further sell-off from here really has to reflect one of two thing – either a significant further deterioration in the trade outlook or something that is euro led. But I really think that acceleration in the near-term in the sell-off in the rupee will emanate from events in Europe rather than India specifically.