by Jon Beddell
Foreign Currency Market Update – Iindian Rupee Update
A dip in inflation helped to confirm the Bank of England’s view that price inflation will continue to moderate, but it doesn’t do anything for interest rate expectations, which still price in very little tightening in 2010. The Consumer Price Index fell to 3% in February from 3.5%, a big drop but still well above the BoE’s 2% target. The budget (or should we say the pre election budget, for there is certainly more to come once the election is out of the way!) delivered no market moving surprises, but did remove at least some of the short term uncertainly hanging over the pound. Nevertheless, sterling fell to a two week low against the US dollar and other currencies, while the real focus was on the euro, which posted sharp losses across the board.
A credit downgrade for Portugal helped the US dollar this week, but the flight into US dollars was limited mainly to selling of the euro and yen, and did not spread to selling of high yielding currencies as is often the case when a major structural event hits the markets. Stock markets have hardly blinked, with the Dow Jones easing back slightly from 18 month highs yesterday. It was Portugal in the firing line this time, but Spain is also a talking point in the markets, and long suffering Greece still has no clear rescue plan. As long as the negative sentiment surrounding these sovereign debt stories doesn’t spread to equity markets the high yielders (which includes the rupee) can continue to strengthen. The fact that Spanish national debt is yielding 3.82% versus 3.97% for sterling 10 year gilts means that even after this week’s heightened fears over the state of the euro zone economies, investors still demand a higher return on UK debt because they view it as a higher risk. Hardly a ringing endorsement of the UK’s position despite the fact that Gordon Brown recently rebuffed suggestions that the UK’s AAA rating is also in danger of a downgrade.
The technical outlook for sterling is very poor. The sterling/rupee rate is now approaching the January 2009 lows at 66.20. That level produced a sharp bounce last year (far left of today’s chart), so investors will be watching closely for the reaction this time round. A daily close below 66.20 would be a major technical blow, and could cause a further wave of selling and an even lower pound. Buyers of the rupee should consider hedging any exposure now to avoid the risk of further downside.
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