Greek woes forced bankers in London and Singapore to stay back in their offices on Friday, as they scrambled for dollars and tried to sort out their positions, while in Mumbai, the Euro zone mess scotched all hopes of banks, which till mid-last week were certain they would make a killing in the currency market.
Most foreign banks in India had built large short positions on the dollar, as they counted on the rupee to rise amid foreign inflows and good growth numbers. But their bets backfired, almost overnight, as the US currency surged.
“Strange that few saw it coming. The first shock came on Wednesday, when the rupee slipped 32 paise, and stop losses were triggered. Still, some traders felt it would bounce back. By Friday, they knew it was over. Many foreign banks have taken hits,” said the treasurer of a European bank.
Bankers and corporate treasurers are keeping a close watch on the twists and turns in the local money and currency market. Indeed, a few corporates have taken the bet that the dollar’s rise may not be sustainable. A large oil company is learnt to have entered into a derivatives deal to convert a slice of its rupee borrowing into dollar. “There is also a report that a cement firm has also done a similar deal. These players are of the belief that it will pay off in the long run,” said a trader with a large private bank.
The EU’s efforts to ring-fence Greece’s debt problems may soften the credit-default swaps and stabilise the currency market a little and dispel fears of a possible dollar shortage in international markets, but it’s unlikely to alter the course of the currency market or the views. “How markets open after Sunday’s EU meeting is important,” said a trader.
Banks in India were taking positions in the rupee-dollar market through their usual method, where they buy dollar today in the spot market and sell the dollar at value tomorrow to another bank, and the next day they repeat the transaction to roll over the short position.
“It’s nothing unusual for banks getting caught on the wrong foot. What’s important is the view they take from here,” said a banker. Banks were almost taking a structural view on the rupee to gain, something that was strengthened by a flurry of reports on China revaluing its currency. This lead to anticipation that the rupee, along with other Asian currencies, would rise, and foreign portfolio managers were banking on this to pump in more money into emerging markets with appreciating currencies.
In the local market, bond yields are down, with traders betting that interest rate may not rise as quickly as was earlier expected. Overnight swap rates, used to hedge interest rate risk, have come off, and so the Mifor swap rate that banks use to hedge cross-currency risks has fallen unusually.
The Mifor, or the Mumbai Inter-bank Forward Offer Rate, is down as much as one percentage point since April 27, and this is partly explained by the shallow market and the fall in dollar-forward premium.
A lower Mifor would mean a lower hedging cost. “Some corporates may try to borrow in dollar and hedge in rupee. But getting dollar funding may not be easy, unless things stabilise. European banks and institutions have dollar commitments and there is demand from them,” said a derivatives trader.
The currency market may stay choppy for the next two weeks. “Attempts to stabilise the market and resolve the Greece crisis could give a false relief, and a rally could later turn into broad-based selling,” said the head of forex trading at a foreign bank. What he meant was that any signs of dollar easing could be misleading and make some believe that the crisis is over.
Source :- The Economic Times
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