Downward pressures gaining on rupee

Financial markets continued to price in and speculate about another round of quantitative easing by the US Federal Reserve. In the currency markets, the US dollar came under heavy selling pressure, hitting its lowest level so far this year on a trade-weighted basis last week amidst growing prospects of further monetary policy easing by the Fed.

The dollar index, which measures its performance against a basket of six major currencies, fell to a 10-month low of 76.14 over the week.

Asian currencies rallied against the greenback after the Monetary Authority of Singapore widened the trading band for its currency, allowing the Singapore dollar to appreciate to a record high against the US dollar.

China also allowed the Renminbi to rise to a record of Rmb 6.6397 against the US dollar on Friday.

Meanwhile, Japanese authorities said they did not plan to engage in large-scale intervention, but “smoothing operations”. Indeed the Bank of Japan was not present in the foreign exchange market in spite of the Yen hitting a 15-year high.

Over the week, the US dollar dropped 0.3% to a nine-month low against the euro and lost 0.6% to the yen. It breached parity against the Australian dollar, falling to a record low and  touched a new record low against the Swiss franc, falling 0.5% on the week.
Asian currencies appreciated as well.

Over the week, the Singapore dollar rose 0.8%, the Malaysian dollar was up 1% to a 12-year high and the South Korean won gained 0.9%. The Renminbi advanced 0.4% last week and touched its strongest level since the Chinese central bank unified official and market exchange rates at the end of 1993.

In the local inter-bank market, rupee also gained by 0.7% against the US dollar. FII inflows remained buoyant ahead of IPO of Coal India Ltd. Acute rupee liquidity shortage also kept the Indian unit supported. Demand from oil companies and speculation about RBI intervention kept the rupee gains under check. Media reports suggested the central bank intervened in the inter-bank market at the rupee-dollar level of 44.10 on Thursday.

However, market participants were not convinced. Meanwhile, the RBI governor reiterated that the RBI will intervene to smoothen out any appreciation pressure on the rupee due to lumpy portfolio inflows. Weaker-than-expected industrial production data also impinged on the stocks and rupee. The rupee-dollar pair traded in a wide range of 43.97 - 44.765 last week.

The most key dynamic behind the US dollar’s performance this past month has been the constant speculation surrounding the Fed’s response to a sputtering economic recovery. A second round of monetary stimulus seems to be considered a near certainty.

That said, if the market is in agreement that another expansion of the monetary levers is in order, that likely means that scenario has already been priced in. If we have not yet reached this level of oversaturation of US dollar selling on account of quantitative easing, we are very near it.

From here, the only ambiguous aspect of this situation that could still lead to dollar-selling and risk-buying momentum is the size and pace of a new quantitative easing programme coming on November 3, when the US Fed meets to decide the future course of the monetary policy. For that reason, market participants would follow the many Fed member speeches due this week. A lack of clarity could work in the greenback’s favour.

The US data release calendar is very light this week. Consequently, Chinese third quarter GDP will likely have a bigger impact on the US dollar and the equities market than any scheduled indicator from the US data. 

In the local inter-bank market, market participants would be looking towards the RBI for any signs of intervention in the market. Moreover, with the Coal India IPO related FII inflows now out of the way, portfolio flows may now return to more normal levels. High oil and gold prices could also put some pressure on the rupee. The impact of the Coal India IPO on the stock market will also be crucial, as will be the second quarter corporate earnings reports. Any downside correction in the stock market would weigh on the rupee.

While the market momentum remains in favour of a stronger rupee, the weight of counter forces is growing. We could see some correction in the rupee, if any of these downward pressures gain traction this week.

Over the week, the rupee-dollar pair is likely to trade in the range of 43.80- 44.50.

The writer is senior economist, Royal Bank of Scotland NV and can be reached at gaurav.kapur@rbs.com. Views are personal.