Email
Print
ShareThe US earnings season was the primary driver of the price action in the global markets last week. A strong start to the third-quarter corporate earnings season, particularly in the banking sector, helped to underpin investor confidence. Market participants reacted positively for most of the week to forecast-beating earnings reports. Equities in most leading economies touched highs for the year as confidence about global growth boosted the price of oil and heightened risk appetite, causing the US dollar to dip below significant levels.
The US dollar fell through $1.50 against the euro for the first time in 14 months last week, as optimism over prospects for global growth stemmed safe haven demand for the beleaguered greenback.
The prospect of a prolonged period of ultra-low interest rates in the US continues to weigh on the greenback, encouraging investors to abandon it in favour of higher returns elsewhere, as investor optimism returned.
On Friday, the US dollar dropped to its weakest level since August 2008 against the euro. Over the week, the greenback fell 0.7% against the euro. The US dollar also fell 0.9% against the Swiss franc on the week, lost 0.6% against the Australian dollar and fell 1.5% versus the New Zealand dollar.
Among other major currencies, the pound suffered a sharp fall on Friday after data showed that UK's GDP unexpectedly contracted in the third quarter of 2009. The UK economy has now contracted for six successive quarters for the first time since records began in 1955. This data raised the likelihood that the Bank of England would expand its £175 billion quantitative easing programme after its monetary policy committee meeting on November 5. Over the week, the pound depreciated by 1% against the euro. The US dollar rose 0.3% against the pound over the week.
The low-yielding Japanese yen was also a victim of rising risk appetite, falling 1.3% to a one-month low against the US dollar on the week and dropping 1.9% to a two-month low against the euro.
Meanwhile, the Canadian dollar fell 1.4% on the week against its US counterpart after the Bank of Canada said the recovery in economic activity in Canada since July could be "more than fully offset" by the currency's recent strength. This quashed speculation of any early interest rate hike from the Canadian central bank.
Among key emerging market currencies, the Brazilian real lost ground against the US dollar, falling 0.4% on the week after Brazil's finance ministry said that it would impose a 2% tax on foreign purchases of Brazilian stocks and bonds in a bid to curb the real's recent rise.
In the local currency market, the rupee lost some ground against the greenback, despite the latter's overseas weakness. The Indian unit slipped against the greenback on the back of a slide in the stock markets and a sharp rise in crude oil prices. Rupee's movements were also in tandem with the weakness seen among Asian currencies last week. The positive feature for the Indian unit was the continuing inflow of portfolio capital. Last week, FIIs bought local stocks and bonds worth $621 million. Over the week, the rupee-dollar pair traded in the range of 45.93 - 46.82 and the rupee weakened by 0.5% against the greenback.
This week, the most crucial piece of data to watch out for is the third quarter US GDP data. Consensus market estimate is for the US economy to have grown at an annualised pace of 3.2% during the quarter, thus officially bringing an end to the recession in the world's largest economy. The details of the data would also be as critical as the headline number. The growth in private consumption would particularly be crucial, given that consumer spending accounts for almost two-thirds of the GDP and is the backbone of the US economy. The recovery in consumption in the US is equally crucial for the global economy, given that US consumers spent almost double than their Asian counterparts in 2008.
The impact of the US GDP data on the currency market price action would depend upon the prevalent market sentiment in the run up to the data release. If there is a consistent rise in investor optimism, then the greenback could actually suffer some losses. Alternatively, if risk appetite happens to commence a meaningful retracement beforehand, the resultant recovery in the greenback could get more support. From a fundamental point of view, a recovery in the US economy could lead policymakers to consider exiting the massive monetary stimulus provided since the onset of the financial crisis in 2008. As economic recovery strengthens, market participants would be forced to review the US dollar's recent carry trade funding status.
In the local market, the focus will be on the RBI monetary policy review meeting this week. The central bank is likely to sound hawkish, noting the persistent inflationary pressures and improving economic activity levels. The RBI may also choose to raise banks' cash reserve ratio in order to absorb some of the excess liquidity. That will bolster its ability to intervene in the currency market to some extent. Otherwise prospects of higher interest rates could prove to be another positive for the rupee, as an interest rate advantage would attract more capital inflows.
The other variables which market participants would closely monitor would be the rising oil and other commodity prices. And, with equity market looking to take a breather, rupee may see some pressure on account of these two factors. Moreover, any reversal in the US dollar would also exert downward pressure on the rupee. On balance, the rupee could continue to trade with some weakening bias and the rupee-dollar pair could trade in the range of 46.00 - 46.75 this week.
The writer is senior economist, ABN Amro Bank. Views expressed herein are personal.
