Powered By Blogger

Search This Blog

Saturday, April 10, 2010

Rupee to stay on firm footing as risk appetite improves

The focus in financial markets shifted back to the ongoing global economic recovery last week. In the recent past, sovereign risk concerns have dominated the market sentiment and weakened risk appetite. A slew of important economic figures, including the US employment report for March, hit the markets last week.
The data points were reassuring for the market as they indicated that the global economic activity was gaining traction led by the manufacturing sector. This was evident from the better readings of purchasing managers’ indices (PMI) for the manufacturing sector from across major economies. The US Institute for Supply Management’s manufacturing index rose to 59.6 in March from 56.5 in February—its highest level since July 2004.
Other such PMIs from across the globe also echoed the message of improving activity, with the market taking particular notice of China’s official PMI which rose to a higher-than-anticipated 55.1 in March.
In the currency markets, the US dollar was under pressure for much of the week. Heightened investor confidence regarding the prospects for global economic recovery dented the safe haven demand for the US currency. The greenback recovered some of its losses on Friday after the US jobs data prompted speculation that the US Federal Reserve may increase interest rates sooner than expected. Monthly non-farm payrolls data showed that 162,000 jobs were created in March, while upward revisions to
January and February data kept the unemployment rate at 9.7%.
The greenback made some healthy gains on Friday, but over the week it remained lower and fell 0.7% against the euro and dipped 0.4% against the Swiss franc.
The pound was the outperformer among major currencies after improving economic data dispelled some of the pessimism over the UK economy. Fourth-quarter 2009 GDP growth was revised higher on Tuesday, while the UK’s current account deficit also narrowed sharply. Meanwhile, the UK purchasing managers’ survey on Thursday indicated that activity in the manufacturing sector rose at its fastest for more than 15 years in March.
The sterling’s rise was given added impetus as opinion polls showed the UK opposition Conservative party had extended its lead ahead of the general election, expected to be held in May. This lessened fears of a hung Parliament, which many fear could leave an incoming UK government without the authority to tackle Britain’s record fiscal deficit.
Market positioning also favoured the pound, with figures from the Chicago Mercantile Exchange showing speculators had placed record bets against the pound in the week to March 23. Last week’s sterling rally was given a further lift as market participants unwound some of those short positions. Over the week, the pound rose 2.1% against the US dollar. Sterling also climbed 1.4% to a one-month high against the euro and gained 4.4% against the yen.
The Japanese unit was the underperformer, dropping 2.3% to a three-month low against the greenback and falling 3% to a two-month trough against the euro. The prospect of interest rates remaining at ultra-low levels in Japan while yields rose elsewhere was increasing the attractiveness of the yen as a funding unit in carry trades.Commodity-linked currencies were buoyed by an increasing risk appetite with the Australian dollar given an additional boost by hawkish rhetoric from the Reserve Bank of Australia (RBA).
Speculation that the RBA will raise rates heightened after governor Glenn Stevens warned it would not be wise to leave rates at “rock-bottom” for longer than necessary. The Australian dollar rose 1.6% against the US dollar over the week.
In the local market, the rupee remained strong against the US dollar and hovered around an 18-month high.
The Indian unit was helped by the weakness in the greenback overseas and continuing capital inflows, especially from the FIIs. Portfolio investors bought local stocks and bonds worth $1.2 billion last week. The rupee finished the week stronger by 0.8% and the rupee-dollar pair traded in the range of 44.88-45.53 over the week. The rupee also finished the last financial year stronger by over 11% against the US dollar.
The top event risk of last week (the non-farm payrolls report) has yet to fully play itself out with most markets shut on Friday. That being the case, the 162,000 increase in payrolls (only the second positive number in 27 months and the biggest in three years) would be interpreted as a boost to the relative growth and interest outlook for the US and thereby assist the dollar. This data is also likely to trigger a surge in risk appetite on Monday and push up riskier assets like equities and commodities and that would undermine the greenback, given its safe-haven status.
If indeed risk appetite regains its footing this week, it would extend the progress of last week’s risk appetite. With a general recovery in investor optimism, carry trades have started to revive.The US non-farm employment report and the round of manufacturing data have bolstered expectations of a solid recovery.There are still credible threats to the advance of risk appetite including Greece’s sovereign debt payments, the UK’s upcoming election, sovereign credit ratings and stimulus withdrawal.Should a swell in risk appetite be averted, the US dollar could actually make considerable headway on Monday.
In the local market, rupee is likely to remain on a firm footing. The market momentum is on the Indian unit’s side this week too. Over the week the rupee-dollar pair can trade in the range of 44.80 – 45.25. But a sharp rise in crude oil prices last week is likely to mute any gains for the rupee. Rupee’s prospects in this new fiscal depend on the capital inflows.
Rising commodity prices, especially crude oil and recovering non-oil imports are likely to lead to a higher merchandise trade deficit. That along with slowing services and other invisibles-related inflows, as was seen from the third quarter balance of payments data, is likely to increase the size of the current account deficit.
To fund that deficit, capital inflows are required. The strength of the rupee therefore critically depends on the size of net capital inflows. Sizeable inflows like those seen in 2007 and early 2008 can trigger sharp appreciation. Among the capital inflows, portfolio investments are the main source of inflows. Any slowdown in these flows creates pressure on the rupee.
Relatively even as strong growth fundamentals support the rupee’s appreciation, the pace and extent of appreciation may still be muted, as capital inflows may not be strong enough.
Souce :- DNA


No comments:

Post a Comment