Decisive breach of 53/$ can help Re appreciate: Barclays

Olivier Desbarres of Barclays Capital feels the US economy is in a better position as compared to the European Union. "Our near term view is still that the dollar will be under modest weakening pressure because of the announcement of QE3, which is an open-ended QE3," he told CNBC-TV18 in an interview.

He expects the euro-dollar to move above 1.30 in the near-term. "We may still see the US dollar regaining some ground as we head into 2013, particularly latter part of 2013. But for the time being, we still think that the dollar has some inherent weakness," he said. He expects more easing from Bank of England (BoE) in November. As far the Indian currency is concerned, Desbarres says the rupee is well-positioned for further appreciation. The rupee had gained 11 paise to close at a fresh over 18-week high of 53.36 against the dollar in the previous session. Forex dealers said besides strengthening of dollar against euro overseas on eurozone debt worries, rupee fell on increased month-end demand for the American currency from importers. A weak opening in the domestic equity market also influenced the sentiment, they added. "I think the rupee can strengthen further if the 53 mark is breached decisively," Desbarres said. Below is the edited transcript of Desbarres' interview with CNBC-TV18. Q: Are we going to see more pressure? It looks like all the good news, all the bonhomie that central bankers try to pump in has played out. Are we going to see the euro under some more pressure? A: It does seem at this point in time at least that the rally that we saw post the European Central Bank (ECB) promise of buying bonds, post the QE3 announcement, is going to fizzle out. We have seen Asian currencies trading lower against the US dollar, we have seen equities flat lining, we have seen some currencies losing little bit of ground. The euro dollar is below 1.29. The INR has held up a bit better, but many of its high carry counterparts particularly in Middle East and Africa region have failed to hold on to these gains. We have to respect the recent price action; we have to acknowledge the possibility that we may see a little bit more pressure on these risky currencies particularly, if we do not get evidence of better economic data anytime soon. When we take a step back from all of this, we still think that some of the tail risks have been taken out. This liquidity will need to find a home and as a result we expect currencies, which are reasonably cheap on valuations and have carry, to do reasonably well. The picture in the Europe is going to look a little bit better because of this ECB backstop. We would ultimately expect euro dollar to push back above 1.30 in the near term. Q: What about dollar index. What kind of patterns are you seeing on the dollar index right now and the levels that you would watch for, for the next couple of months? A: The dollar index (DXY) is largely made up of euro, it is somewhere around 60 percent. So, when we are looking at DXY index we are looking at something that doesn’t look too dismal to euro dollar and having said that the next important level psychologically for DXY index is the 80 level. We are not very far away from that. If we breach through that the market will be looking perhaps further upward momentum, but this is reflecting the fall that we have seen in euro dollar. _PAGEBREAK_ Our near term view is still that the dollar will be under modest weakening pressure because of the announcement of QE3, which open ended QE3 - it could last for months quarters or years, there is no terminal point or at least not the one that’s been made explicit. If we look medium-term 6-12-18 months out, it still strikes that the US economy is in a better position than the European economy. We may still see the US dollar regaining some ground as we head into 2013 particularly latter part of 2013. For the time being, the dollar has some inherent weakness. It hasn’t played out in recent days, but ultimately it will play out in the next few weeks. Q: How will it play out versus the various Asian currencies or the risky emerging market currencies, notably would the rupee be a big gainer? A: It is very interesting if you look at the price action since the middle of September, we have seen dollar Asia in effectively trading mode and not going anywhere, very much range bound. The only Asian currency, one of the few emerging markets or major currencies to show better traction and momentum has been the Indian rupee. Although, I would note that in the past 48 hours it has struggled to breach through the 53/USD level. Overall, we are in good environment for carry currencies which have underperformed in recent years. I would argue that the rupee fits that’s category. On top of that we have had some good reform announcements from the government, which has created some momentum with investors. When I look at the emerging market (EM) universe, the INR is reasonably well positioned to provide some decent total returns to investors. At this stage, it does look that 53/USD level is an important barrier for us to breach before we can start looking at further downside. Q: What is the further downside you are looking for the dollar; does it get to 52 by the year end? A: I certainly think it’s within reach 52, one big figure, it’s certainly within the realms of the feasible. First, we need to get through 53. Then the next big question is going to be the tension between the slowdown in global growth on one hand and promise of further liquidity injections, monetary easing by the Fed, by the ECB but also remember that BoJ – we think the Bank of England will provide more QE when it meets in November. It is how this tension plays out, which will be key. We tend to think that it will over the next month or so favour this monetary loosening and that will suggest that we do move towards 52. But the lesson in the past few weeks is that some of the momentum has been lost and it’s not going to be a straightforward process. We are going to see one step forward, one step back. The market at the moment is taking positions, squaring off positions, taking a bit of a breather, looking for the next stimulus, looking for the next set of data announcements and looking what happens to euro zone and particularly Spain.