Risk aversion could keep rupee strained
Market jittery on prospects of monetary tightening, upcoming US data releases.
Uncertainty over the outlook for global economic growth and central bank monetary policy unsettled financial markets last week. Stronger-than-expected US GDP report for the third quarter provided only temporary respite, as market participants questioned whether the pace of growth could be sustained. The 3.5% annualised rate of growth in the US economy outperformed expectations however, most market participants remained sceptical. Uncertainty about central bank exit strategies intensified, as Norway became the first European country to raise interest rates since the onset of the financial crisis and the RBI signalled monetary tightening going ahead.
The US dollar and the Japanese yen advanced strongly, as concerns over the sustainability of the recent rally in global asset markets stoked safe-haven demand for both currencies. The greenback started on a weaker note, hitting a fresh 14-month low against the euro on Monday, as a report in a newspaper published by the People’s Bank of China recommended that the country diversify its massive foreign exchange reserves away from the US dollar denominated assets.
Selling pressure on the greenback did not last long, as equity markets dropped sharply amid nervousness that the removal of monetary policy accommodation by the world’s central banks could halt the recent rally in risky assets. The US dollar and yen both rallied sharply as investors unwound carry trades on the back of heightened risk aversion ahead of US GDP data on Thursday. But the greenback’s advance abated, as asset markets stabilised when data showed that the US economy emerged from a recession in the third quarter of 2009. Over the week, the US dollar rose 1.9% against the euro and 1.7% against Swiss franc, though the yen gained 2.1% against the greenback and the pound rose 0.9%.
In the local inter-bank market, rupee fell 1% against the US dollar, hit by a bounceback in the greenback in the overseas market and a sharp slide in local stock market. Loss of risk appetite saw FIIs withdraw funds from Indian equities. Month-end corporate demand for dollars added to the pressure on the rupee. However, dollar supply from exporters emerged as the rupee-dollar pair went past the 47.25 - 47.50 level. Over the week, the rupee-dollar pair traded in the range of 46.66 - 47.625.
This week offers substantial economic event risk and financial markets are likely to see large price moves and heightened volatility. Highly-anticipated central bank decisions, especially from the US Federal Reserve and the European Central bank and the all critical US non-farm employment report are due this week. While none of these central banks is expected to raise rates, investors will be on alert for any hints about possible shifts in stance.
Price action in the rupee-dollar pair could also continue to see higher volatility. Any recovery in the stock market after last week’s sharp decline would provide some support to the rupee and vice versa. The greenback’s price action against other Asian currencies would also continue to have strong bearing on the rupee. Any further contraction in the risk appetite of global investors would hurt the rupee. Stronger than expected US data releases may be met with caution by global investors now. On the whole, prospects of a stronger US dollar and a weak stock market would continue to keep rupee under pressure. The rupee-dollar pair can trade in the range of 46.50-47.50 this week.
The writer is senior economist, ABN Amro Bank. Views are personal.
The US dollar and the Japanese yen advanced strongly, as concerns over the sustainability of the recent rally in global asset markets stoked safe-haven demand for both currencies. The greenback started on a weaker note, hitting a fresh 14-month low against the euro on Monday, as a report in a newspaper published by the People’s Bank of China recommended that the country diversify its massive foreign exchange reserves away from the US dollar denominated assets.
Selling pressure on the greenback did not last long, as equity markets dropped sharply amid nervousness that the removal of monetary policy accommodation by the world’s central banks could halt the recent rally in risky assets. The US dollar and yen both rallied sharply as investors unwound carry trades on the back of heightened risk aversion ahead of US GDP data on Thursday. But the greenback’s advance abated, as asset markets stabilised when data showed that the US economy emerged from a recession in the third quarter of 2009. Over the week, the US dollar rose 1.9% against the euro and 1.7% against Swiss franc, though the yen gained 2.1% against the greenback and the pound rose 0.9%.
In the local inter-bank market, rupee fell 1% against the US dollar, hit by a bounceback in the greenback in the overseas market and a sharp slide in local stock market. Loss of risk appetite saw FIIs withdraw funds from Indian equities. Month-end corporate demand for dollars added to the pressure on the rupee. However, dollar supply from exporters emerged as the rupee-dollar pair went past the 47.25 - 47.50 level. Over the week, the rupee-dollar pair traded in the range of 46.66 - 47.625.
This week offers substantial economic event risk and financial markets are likely to see large price moves and heightened volatility. Highly-anticipated central bank decisions, especially from the US Federal Reserve and the European Central bank and the all critical US non-farm employment report are due this week. While none of these central banks is expected to raise rates, investors will be on alert for any hints about possible shifts in stance.
Price action in the rupee-dollar pair could also continue to see higher volatility. Any recovery in the stock market after last week’s sharp decline would provide some support to the rupee and vice versa. The greenback’s price action against other Asian currencies would also continue to have strong bearing on the rupee. Any further contraction in the risk appetite of global investors would hurt the rupee. Stronger than expected US data releases may be met with caution by global investors now. On the whole, prospects of a stronger US dollar and a weak stock market would continue to keep rupee under pressure. The rupee-dollar pair can trade in the range of 46.50-47.50 this week.
The writer is senior economist, ABN Amro Bank. Views are personal.