An eventful, data-heavy week ahead for currency markets

Currency markets will have a very eventful week. Key events and data are due both in local and overseas markets this week. Locally, the RBI will announce its rate decision on January 31. The market at large is expecting a 0.25% hike by the RBI in its short-term policy rates — reverse repo and repo rates. In case the central bank surprises with a bank rate hike, which is construed as a medium-term rate signal, the rupee is likely to see a more sustained bounce. Otherwise likely hawkish posturing in the monetary policy statement, pointing towards further monetary tightening in future, will also help the rupee.

Local market participants will also be keenly watching the events and key data releases from the US. The US Federal Reserve (Fed) will deliver its rate decision on Wednesday. With the Fed is likely to keep the Fed rate unchanged at 5.25%, the tone of the monetary policy will be keenly analysed. If the Fed upgrades its assessment of the economy and highlights the persistence of inflationary pressures, the US dollar will find eager buyers.

Market participants will also get a comprehensive view on the performance of the US economy, in the recent past and going forward. With the fourth-quarter GDP estimate due on Wednesday, any improvement over the 2% growth in the third quarter will support the view that the US economy is witnessing a soft landing.

Also due this week are forward looking data releases like the January ISM manufacturing index and the non-farm payrolls will help to formulate the outlook on the economy. Labour market indicators recently have been strong, reinforcing the view that the weak housing sector induced slack on the US economy, is being made up for by the improvement consumer income and spending.

The greenback is likely to remain well bid. This will temper the strength of the Indian currency to some extent, as market participants will be wary of holding short dollar positions. The rupee-dollar rate is thus likely to trade in a range of 44.20 - 44.50.

Price action among the major global currencies last week saw the greenback outperforming the other three majors. The US dollar ended stronger in week where speculation about the future course of interest rates in the UK and Japan, guided market action. Market participants scaled down their expectations of another rate hike by the Bank of England (BOE) in February, after a surprise hike in January. That followed after a statement by the BOE Governor Mervyn King that UK CPI inflation in the second half could be much lower than earlier expected.

The Pound Sterling, which was undermined by King’s statements, fell sharply as the minutes of the BoE’s January meeting revealed that four of the nine-member monetary policy committee voted against the decision to raise rates. The market was expecting seven members to favour a hike.

The pound also fell against the yen, as liquidation of carry trades mid-week saw high-yielding currencies like the Australian dollar and the Sterling being sold. The yen also staged a broad based recovery against the Euro and the greenback. The trigger for the cutting of carry trades was the CPI inflation in Australia. The yen got support from the speculation that the G-7 meeting on February 9 - 10 could yield some statements on the Yen weakness.

However, the yen gave up some gains, mainly against the greenback on Friday, after the January CPI inflation in Japan printed lower- than-expected. This cast doubt on whether the Bank of Japan will raise rates next month.

The greenback advanced broadly on Friday, as generally robust data from the US housing and manufacturing sectors provided further evidence the economy is more resilient than many initially thought. The greenback rose after data showed that while new-home sales posted their biggest drop in 16 years in 2006, sales picked up in December. That followed a report on new orders for durable goods, which increased by a larger-than-expected 3.1% in December.

In the local inter-bank market last week, the Indian rupee ended slightly weaker against the greenback and traded in a relatively narrow range of 44.15 - 44.305. After starting the week on a stronger note on the back of dollar sales by exporters’, the rupee’s gains were arrested by the RBI intervention. Month-end dollar buying by the oil companies also pulled the rupee down. A sharp recovery in crude oil prices, also weighed on the market sentiment.

The author is Senior Economist, ABN AMRO Bank. Views expressed herein are personal. gaurav.kapur@in.abnamro.com