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A newfound sense of optimism pervaded over financial markets last week.
Global equity markets made good gains over the week, buoyed by a recovery in financial stocks after upbeat comments from three US banks.

On Tuesday, Citigroup said it had been profitable in the first two months of the year. Similar comments were later made by JP Morgan and Bank of America. Better-than-expected US retail sales data also cheered the markets on hopes that the US consumer could prove more resilient than feared. The impact of this improvement in risk appetite was felt by the safe-haven currency, the US dollar, which fell over the week.

In the currency markets, the news of Swiss National Bank’s (SNB) intervention in the market to prevent appreciation of the Swiss franc grabbed the attention. Swiss officials were active in the foreign exchange market on Thursday, selling francs against the euro and the greenback at progressively lower levels, forcing the currency down 3.3% versus the euro and 2.8% against the dollar on the day. The SNB’s actions left the Swiss franc lower over the week, but raised some concerns over the central bank’s economic
tactics. The franc was down 4.3% on the week against the euro and 2.1% lower against the dollar.

Although the SNB’s motives were to halt deflation, some market participants were concerned the tactic would be considered a move to bolster exports, which might trigger devaluations from other central banks. While speculation over market intervention to weaken currencies made headlines, the dollar quietly tracked lower against the euro. Its move was a part of the unwinding of risk aversion after months of turmoil in the equity markets. The greenback was further undermined on Friday after Wen Jiabao, China’s premier, voiced concerns about the value of the country’s dollar denominated foreign exchange reserves, held mainly in US treasuries. The euro climbed 2.2% over the week against the dollar.

The yen, which was sold off during the last two sessions on speculation that the Bank of Japan might follow the SNB’s lead on intervention, closed fractionally lower against the dollar over the week.

The pound saw a dramatic fall against the greenback on Monday after the UK government announced that it was to increase its holding in Lloyds Banking Group. Sterling also faced headwinds from the commencement of the Bank of England’s quantitative easing programme. It recovered well over the last three sessions. The pound climbed nearly 2% from Wednesday, but remained 0.5% down on the week after its falls on the first two days.

Among other major global currencies, the New Zealand dollar climbed during the week, helped by an improvement in risk appetite and the Reserve Bank of New Zealand’s decision to cut rates by 0.5%, rather than the 0.75% which a large segment of the market was expecting. The accompanying statement said that, at 3%, rates were “very stimulatory” and together with fiscal measures, should support the economy. The kiwi rose 4.5% over the week against its US counterpart and by 4.4% against the yen.
In the local inter-bank market, the rupee closed the week almost unchanged against
the dollar. The positive impact of the gains in the equity market and greenback’s weakness were countered by a rise in oil prices and the subsequent demand for dollars.

FIIs also remained net sellers of local stocks and bonds. The rupee-dollar pair traded in range of 51.48-52.01. In the rupee-dollar forwards market, premia rose across the board last week, as concerns over rupee liquidity surfaced on account of advance tax payment related outflow and the government’s bond issuances. That led to some upward pressure on interest rates and thus, the increased forward premia.

This week, the outcome of the weekend meeting of finance ministers and central bank governors of the G-20 group of leading and emerging economies could set the stage for price action in the financial markets.

The meeting ended without any specific new commitments, but with a re-iteration that further action on monetary policy, fiscal stimulus and regulatory reforms would be introduced in the coming months. Market participants might take this as a favourable outcome considering that there were some tensions in the run-up to the meeting over the US call for other countries to match its 2% of national income fiscal stimulus.

During the course of this week there are a plenty of important economic data releases from the US and also the meeting of the Federal Reserve’s rate setting committee. The rate decision from the Fed has no room to surprise, with rates effectively at zero already. The statement accompanying the rate announcement is also less important than usual, considering that the Fed is already doing everything possible on the monetary policy front to keep borrowing costs low. The data is also unlikely to add anything new to the established landscape and is unlikely to stir significant volatility across the currency markets.

In the local market, lot depends on the global risk sentiment. If the risk appetite improves further, then the equities market would get some boost. That, along with the possibility of a weaker dollar, would prove helpful for the rupee. Rising oil prices could create some pressure even though oil companies now have access to the RBI’s SMO window to buy dollars. Overall, the rupee-dollar pair can trade in the range of 51.25-52.00 with deprecation bias for the Indian unit.

The author is senior economist, ABN Amro Bank. Views expressedare personal.