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ShareRisk appetite strengthened last week as reassuring corporate earnings reports from the US -- most notably from the banking sector -- and signs that Chinese economy was rebounding bolstered market sentiment and investor confidence.
Forecast-beating second-quarter earnings figures from Goldman Sachs, JP Morgan and Intel prompted a sharp rally in global equities market.
Signs of a pick-up in the global economy, most notably in China, added to investor optimism. A string of Chinese economic data releases on Thursday reaffirmed the country's economic resilience and validated that its fiscal stimulus packages were working.
Chinese GDP growth accelerated from an annual rate of 6.1% in the first quarter of 2009 to 7.9% in the second quarter, surpassing forecasts. And, Chinese industrial production registered 10.7% growth in June, the largest increase for nine months.
Disappointing core US retail sales figures and a weak reading from the Philadelphia Federal Reserve's survey of factory activity highlighted the fragile state of the US economy -- although there were some pockets of strength in the week's releases.
Growing risk appetite fed through to the currency markets, weighing on safe-haven demand for the Japanese yen and the US dollar, and boosting higher-yielding currencies, especially those of commodity exporters.
Improving risk appetite hit the yen hardest. Over the week, it fell 1.8% against the US dollar, dropped 3% against the euro and lost 2.6% against the pound. The yen's losses were more acute against commodity-linked currencies, as raw commodity prices rose sharply.
Over the week, it fell 4.9% against the Australian dollar, lost 6.3% against the Canadian dollar and dropped 4.8% against the New Zealand dollar.
Falling safe-haven demand also hit the US dollar. The greenback faced additional pressure from news that China's foreign exchange reserves, the world's largest, had grown by a record $178.3 billion to $2,130 billion in the second quarter of 2009. The largest increase in reserves was in the month of May, when the greenback weakened sharply while US Treasury yields rose - a sign that Chinese central bank might have reduced its buying of US Treasuries.
The pace of reserve accumulation suggests that China is having difficulty in diversifying its foreign exchange stockpile in the short-term. It is estimated that the Chinese authorities hold 65-70% of their reserves in US dollars, with the rest in other currencies including the euro, pound and yen. Rapid accumulation of dollars, even as the Chinese authorities seek to maintain the balance in their reserves by diversification, puts downward pressure on the greenback.
Fear of a weaker dollar contributed to capital inflows to China this year.
Over the week, the US dollar dropped 1.2% against the euro, fell 0.9% against the Swiss franc and dropped 0.8% against the pound.
Among key emerging market currencies, the South African rand rose 1.3% against the US dollar over the week, the Brazilian real climbed 3.4% and the South Korean won gained 2.4%.
The rupee also appreciated against the US dollar last week. A rally in the equity market too helped the Indian unit. The BSE Sensex rose by over 9.2% during the week helped by FII inflows amounting to $351.8 million.
However, the extent of appreciation was muted by the dollar demand from importers. Crude oil prices rose by 6.1% which contributed to the pressure on the rupee.
The rupee-dollar pair traded in the range of 48.46-49.445 and rupee gained by 0.6% against the greenback.
This week is a relatively uneventful week in terms of economic data releases. But market participants would keep a close watch on several key corporate earnings reports and effects on the equity market and the US dollar.
It also remains critical to monitor the trajectory of key financial market health indicators and their effects on the US dollar. Any noteworthy deterioration in financial market risk sentiment will likely be a trigger for a major greenback rally.
An event which could lead to that, is the possibility of bankruptcy of CIT, the US lender to small businesses. Last week, CIT was downgraded to junk status by all three major ratings agencies on bankruptcy concerns.
Fitch Ratings and Standard & Poor's said there is a strong likelihood the corporate lender will declare bankruptcy in the near-term after failing to secure government support. Market however, ignored this news in the backdrop of strong economic data and corporate earnings. Events around CIT bankruptcy could attract greater attention this week and could lead to some risk aversion.
In the local market, rupee could start the week on a stronger footing as last week's stock market rally would continue to prove beneficial for the Indian unit. However, given that the rally was particularly sharp, market could see some consolidation.
Quarterly corporate earnings announcements would also be in focus and positive surprises would be helpful for the equities and the rupee too.
The rupee could however, come under pressure on account of higher oil prices and dollar demand from importers.
Any ebbing of the risk appetite would also affect the rupee negatively and so will a rally in the greenback.Overall the rupee-dollar pair can trade in the range of 48.25 - 49.00 this week.
Forward view
The rupee could start the week on a stronger footing on last week's stock market rally. Positive surprises from quarterly corporate earnings would be helpful for equities and the rupee too.
The Indian unit could, however, come under pressure on account of higher oil prices and dollar demand from importers The rupee-dollar pair can trade in the range of 48.25-49.00 this week.
The author is senior economist, ABN Amro Bank. Views expressed herein are personal.
