See further weakness for Dollar index: Macquarie

David Forrester, senior vice president of G-10 forex strategy at Macquarie in an interview to CNBC-TV18 shared his views and outlook on the bond markets and currency markets.He sees a little more weakness for the Dollar index and a big position squeeze in euro-dollar.

He expects the US 0 year bond yield to settle around 2.5 percent later this year.

Below is the transcript of David Forrester’s interview with CNBC-TV18's Latha Venkatesh and Sonia ShenoyLatha: How should an emerging market investor look at the rise in bond yields? Is this anything like reminiscent of June 2013 and the taper times, at that time you also had strong dollar but should we worry at all that money will be pulled out from emerging markets?A: You have to be careful at looking at the current taper tension because it actually is, instead of an Federal Open Market Committee (FOMC) taper tension it is now an European Central Bank (ECB) induced taper tension. The ECB has come out and said that they are only going to taper their bond purchases, it is more of the case with the market beginning to process that in post some improvements in the European economic data.The important thing here is that we are seeing some position clearing and we are seeing people taking some profits off the table in the European government bond market. Now so far that is only spilling over really into G-10 markets, it hasn’t really hit the emerging markets (EM) and we expect that to continue.Latha: You expect that they might start taking profits in emerging markets?A: No, we are actually not looking for that. We think that this is positions growing in G10 markets. We continue to see that in the case of dollar Asia even today it is heading a bit higher. We have to look at what is going on here. When we had the US dollar strengthening in 2013, on the back of the FOMC induced taper tensions that was a clear structural shift in the market. This was the Fed saying, yes, we may have to taper. At the moment what we would characterise is a cyclical shift that is because, one, it is not being driven by change in plans by the ECB in their most recent minutes. They are very clear in saying that we will continue to taper and two, again I come back to the positions growing.Sonia: What are your own thoughts on how to approach the currency market now because the rupee as of this morning has opened at the lowest level of 2015 at about 63.70 - What is your own assessment of how one, the dollar index could move and two, how EM currencies like the rupee could pan out?A: There are two separate stories here. First of all when we come to the G-10 markets and the dollar index, we are seeing a big position squeeze particularly in euro dollar, the market was very short euro dollar heading into this government bond sell off. We are around 1.13 on the euro dollar now and 1.15 is a very important technical resistance level. So, we could see a little bit more weakness in the dollar index.Now when it comes to EMs you can see today even that dollar Asia is seeing the opposite price action to G-10. You are seeing a bit more US dollar weakness in those for G-10 versus dollar Asia we are seeing a bit more dollar strength. There may be some concerns, that we are going to see a spill over into EM markets and we favour long exchange rate such as dollar-Thai baht because we do expect return to US dollar strength across G-10 and EM but we also think locally, the Thai baht has some troubles.Latha: What about the rupee itself, it is at the lowest point in 2015. Will you factor in more weakness?A: Well we have a few factors when it comes to the rupee. First of all oil prices is stabilising, so that should be okay or supportive of the rupee. Economic reforms in India – it continues to struggle on that front but we do think we are getting there. We are not negative rupee we actually think it could be one of the better performing EM currencies in the coming months. Again this comes back to obviously there are a lot of foreign investments in the Sensex. So, if we do start to see further rallies in global equities then that is going to weigh on the rupee.Latha: I just want to know whether rupee 64 to USD is round the corner? It doesn’t get that weak on the rupee, does it?A: We don’t think so.Sonia: What is your own prognosis of how much higher the US 10-year bond yield could rise? A: We expect the 10 year bond yield to settle around 2.5 percent later this year.