Email
Print
ShareMumbai: Risk trends continue to dominate the price action in the currency markets. Last week, appetite for risk among investors and market participants improved due to hopes of a speedy passage of US President Barack Obama's economic stimulus package.
Economic data also triggered hopes that the global economic slide might be bottoming out. Surveys showed that pace of deterioration in the services sector of the Eurozone, the US and the UK was falling while manufacturing and bank lending data in China showed some strength.
Due to the improved appetite for risk, currencies that benefited from their safe-haven status in the face of heightened risk, suffered losses last week. So the US dollar, the Japanese yen and Swiss franc lost value to the euro, pound and commodity currencies like the Australian dollar.
It was the euro that saw particularly high activity and volatility last week. It fell to two-month lows against the US dollar and the pound as concerns over the region's exposure to problems in central and eastern Europe grew. The euro suffered on concerns over Eurozone banks' exposure to the region. According to Bank for International Settlements data, European banks, excluding UK and Switzerland, had foreign claims of $13,200 billion September 2008-end. This was far in excess of the $6,600 billion owed to US banks. UK bank claims were $4,200 billion and Japan's banks were owed $900 billion.
Those worries increased as Russia's credit rating was downgraded due to rapidly deteriorating external fundamentals. Under severe pressure due to falling oil prices and large capital outflows, Russia has spent more than $200 billion of its foreign currency reserves in defending the rouble. Last week, the rouble fell to a low of 41 against its euro/US dollar basket. The move took the currency to the bottom of the Russian central bank's new trading band for the first time.
The euro was also undermined, as the European Central Bank (ECB) president warned of a sharp slowdown in the Eurozone even as the ECB left interest rates unchanged at 2% on Thursday. The currency, however, recovered to finish the week 1.2% stronger week-on-week as rising risk appetite tempered safe-haven demand for the greenback.
The other European major, the pound rose as the Bank of England's cut interest rates by 0.5% to a record low of 1%. Over the week, the pound rose 0.9% against the euro and climbed 2.1% against the US dollar.
The greenback rose to a one-month high against the yen, up 2.1% over the week, as rallying stock markets boosted risk appetite and stemmed haven demand for the Japanese currency. The yen fell 3.4% against the euro over the week, shed 4.4% against the pound and plunged 8.8% against the Australian dollar. Rising risk appetite also hurt the Swiss franc. The US dollar, however, suffered against the currencies of commodity producers. It fell 6.4% to the Australian dollar on the week, 3.6% to the New Zealand dollar and 1.7% to the Norwegian krone.
In the local inter-bank market, the rupee appreciated by 0.4% against the US dollar. The rupee-dollar pair continued to trade within a narrow range. Last week range was 48.55-49.15 as market sentiment, external fundamentals and flows (demand for and supply of dollars) continued to dictate stable price action. Sentiment remained cautious in the backdrop of weakness in the local equities market. External fundamentals remained unfavourable for the rupee, as the latest trade data showed the third consecutive month of negative exports growth in December with declining but positive imports growth, thereby widening the trade deficit. And, flows remained well-matched, thereby confining the pair to a narrow range. The greenback's weakness overseas, however, worked in the rupee's favour.
This week a very important event will significantly influence the risk perception of market participants. On Tuesday, US Federal Reserve chairman Ben Bernanke is scheduled to testify in front of the House Financial Services Committee on the Fed's lending programmes. This could prove to be one of the biggest market-movers of the week.
If Bernanke's comments are bearish on prospects for the financial markets and global economy, they could have negative repercussions for the stock markets, and we could see flight-to-quality spark demand for the US dollar and yen. But if he inspires confidence that conditions won't get worse, risky assets could rally.On Thursday, the US retail sales data is forecasted to show a drop for the seventh straight month in January. Retail sales are anticipated to have contracted 0.8% during the month. The impact of a disappointing data may be limited, as the Fed has already cut the Fed Funds target to a record low range of 0.0-0.25% and has no room to cut further.
Price action in the local market will be influenced in favour of the rupee, if the risk appetite improves. Broadly, the rupee-dollar pair will seek direction from the greenback's movements in the overseas markets. Also some of policy announcements and developments of the last week, especially the issuance of oil bonds to the oil companies, may prove helpful for the rupee. Market participants will also speculate about the nature of the third economic stimulus package to be announced in the interim budget on February 16. Any indication that the government is looking to cut tax rates could prove favourable for the rupee in the short term, though in the medium term, such a move could lead to some negative ratings action on external front.Overall, the rupee-dollar pair could remain stuck in its recent trading range of 48.50-49.20.
The author is senior economist, ABN Amro Bank. Views expressed herein are personal. Email: gaurav.kapur@in.abnamro.com
