Investor pessimism and dollar strength continued to put pressure on emerging market currencies. Record low interest rates in developed countries have acted as a positive but will the imminent rate hike by the Federal Reserve spell more bad news for emerging markets?
The Indian rupee is off its lowest level in more than two months and opened at the lowest level since January 8. Benoit Anne, managing director and head of emerging market strategy, Societe Generale is negative on the rupee in the short-term, but is bullish otherwise. However, he says the rupee move will not be dramatic as Reserve Bank is on the watch.
He says the rupee may be at 58/ USD by year-end. According to him, the growth picture is much better for Asia. As far as Europe goes, he is on a 'wait and watch' mode.
Anne will be surprised if rupee revisits 65 per dollar.
Below is the verbatim transcript of Benoit Anne's interview with CNBC-TV18's Menaka Doshi and Senthil Chengalvarayan.
Menaka: The dollar index is at an 11.5 year high. It is at about between 98-99 and looking at the 10-year yield in the US and the two are telling me a very different story.
A: It is a currency story. It is very much a dollar story and that is the main cause of pain for global emerging markets. The yields havn’t caught up yet but it is going one way in my view. I suppose global investors are a bit more cautious on the US rate side or the yield side than they would be on the FX side simply because what we learnt from last year is the US treasury market is a complicated one whereas the dollar one is much cleaner in a way and dollar is going one way and that way is up.
Menaka: Are you saying that the currency market or the dollar market is factoring in a rate hike lets say in the next 3-6 months whereas the bond market is not because the bond market is somewhere near 2.19 percent which is clearly nowhere close to the kind of sort of yield rise that we have seen in the past whenever a tightening conversation has begun?
A: The US treasury market is driven by many other factors than monetary policy expectations whereas the dollar right now is on a strong rise simply because global investors fear the message from the Fed and that Fed is going to meet again on March 18 and that is the key event for global markets this month.
Menaka: Are you expecting a rate hike in the US earlier than let us say the end of this year or the last quarter of this calendar year?
A: Yes, definitely. We are going for a rate hike in June this year which is quite early compared to expectations.
Menaka: Even though the inflation number or inflation data in the US is not encouraging at all for a rate hike.
A: Yes, that is right. The inflation picture would militate against that but growth dynamics and even improvement on the job front including wage growth is pushing us to make that aggressive call.
Menaka: If you are expecting a rate hike in June, I am guessing you are expecting a very measured rate hike and subsequent hikes to be also be very measured. Could you explain to us what you expect the fallout will be in equity and fixed income markets across the world and of course currency markets as well?
A: The interesting thought I am going to propose to you is, in fact I can't wait for that hike to happen simply because when that happens we are going to hear from the Fed that indeed the tightening will be very gradual. I believe ultimately this is going to be very good for risky assets including emerging currencies and equity markets. It is going to be a relief to hear from the Fed that the tightening is going to be gradual. It is going to be a relief that the uncertainty over timing of the Fed hike will be by definition resolved but until then it is a challenging bet.
Senthil: But do you expect some signals on March 18 which could lead to some easing in the situation?
Menaka: Like doing away with the word patience in its text.
A: Yes, that is the clear risk here. In other words if the Fed wants to start hiking in June they have to start preparing the market maybe with a tweak of the language already in March. So that is why markets are panicking.
Menaka: So your case is that once we have the rate hike out of the way because there will be only measure the gradual rate hikes subsequent to that, that is good news for risk assets, that is therefore good news for emerging market currencies. India has of course done better than most of the emerging market currencies like the Lira or the Rupiah but you expect that even the Lira and the Rupiah will benefit over this next three to six months?
A: Yes, once you have got rid of that Fed risk in a way the valuation will look spectacular and with that relief rally even those currencies that are currently quite vulnerable will probably bounce in a negative manner but it takes a leap of faith maybe to protect yourself into the future. Right now the big talk in the market is of course the stress we are observing in global EM.
Menaka: What is your 3, 6 and 9 month outlook on the Indian rupee then?
A: I am going to be fairly bullish on the rupee simply because as I said the environment is going to improve considerably in the latter part of this year. Right now I would say short-term I might be negative on the rupee simply because the environment is quite challenging. However, be assured the rupee is one of my top picks in Asia FX this year.
Senthil: That is because you expect emerging market flows especially in India to pick up. How much of a danger could European markets be and I am talking about a rise in European markets, money going back to the European markets. The European shares haven’t looked this cheap compared to either corporate bonds or government bonds in almost 50 years. At what point do you see money going back into European equities and will that be money that could have otherwise come to countries like India?
A: For Europe the key factor to me is signs that growth is turning around. We are still basically in wait and see mode on that front. When we have more tangible signs that growth is picking up I can see flow dynamics turning quite positive but until then I guess investors are really in watch mode.
The picture is better for Asia because if you look at global growth picture, Asia is the shining star in global emerging markets. So, I am less concerned about macro economic performance including in India.
Menaka: We are at 62.7 right now to the dollar – the Indian rupee that is. You said you would expect some short term weakness, where do you think the rupee could head in the next 3 months or so and what kind of recovery do you see take place in the second half of 2015?
A: The good news about the rupee is the moves are not going to be dramatic. It is a currency that doesn’t move much compared to its peers simply because the central bank is always on the watch, actually on both sides. So, I don’t anticipate major drama there. I would be surprised if we revisited 65 again. I think we will never make it there. On the lower side I would say slightly below the 60 big level is the target.
What I like about the Indian rupee is the carry is really high. It does provide high carry with very low volatility. So, in a way it is a safe currency.
Senthil: So, 60 is the target in what timeframe?
A: I would say we could go to 58 by the end of the year.
Menaka: I am going to factor two things in that one. A; declining interest rates in India. So if we were to see more than another half percent cut would your targets change and B; crude prices, if they moved up, let’s say, to USD 70-80 a barrel would again your expectation of how the rupee will respond change?
A: It would, but in terms of you price it is not my baseline scenario. We are calling for a gradual recovery in oil prices but nothing as dramatic as you suggested. So, India will not be overly penalised on that front.
Rate cuts, not necessarily a bad thing for India to the extent that it sends a very positive message in terms of the policy response being proactive on the part of the authorities. Investors tend to like that. So, no risk goes by monetary policy on the rupee.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
