by Jon Beddell
Foreign Currency Market Update – GBP / INR Update
Asian currencies have been strengthening lately as recovery hopes continue to emanate from the region, most recently underlined by strong growth data from Singapore that prompted an upwards revaluation of their currency. Talk of China also revaluing has been doing the rounds. Investor risk appetite has been buoyant in recent weeks, increasing the appeal of high yielding currencies. The Rupee’s benchmark interest rate was raised from 4.75% to 5% on March 19th, and the central bank is widely expected to raise rates again at tomorrow’s policy meeting with most analysts expecting a 0.25% move.
The Rupee is largely driven by foreign investors who buy or sell the currency depending on their investment views. In the last three months foreigners have bought over $5bn of Indian shares, adding to the large inflows seen in the second half of 2009. The price chart below shows the Rupee’s appreciation over this period.
Looking closer to home, sterling remains mired in the throes of election fever, with last week’s TV debate throwing the result into even more uncertain territory. The pound had been well bid earlier in the week as the Tories moved ahead in the polls, but Nick Clegg’s apparent boost has made it hard to see a clear winner. Markets hate uncertainty, and sterling is being punished as a result. Analysts believe that a majority in parliament would help force through the public spending cuts that will be required to reduce the UK’s deficit. Without that, sterling lacks credibility, and with sovereign debt stories like Greece and Portugal still in the news the market would like to see a decisive outcome.
The big driver this week will be risk sentiment. On Friday is was revealed that Goldman Sachs is under investigation for fraud in relation to transactions in so called CDOs. “Credit derivative obligations” were at the centre of the credit crisis as banks invented new debt products to trade with each other in the hope of making money. The problem was, even the banks did not understand what these structured derivatives contained, and when it emerged that many of the underlying debt assets were comprised of subprime mortgage slime, markets were sent into a tailspin. The US Securities and Exchange Commission has brought charges against Goldmans, and it now looks like other regulators including the UK’s FSA will follow suit. This news unsettled stock markets, which fell over 1% in Europe and the US Friday. The US dollar rallied strongly as a result of safe haven buying, and this tended to depress the higher yielding (riskier!) currencies like the Rupee; but sterling was worse hit, which means the Sterling/Rupee exchange rate is actually down again today.
The technical outlook is negative for sterling. We are now approaching the 2009 lows around 66.25. The last time we traded below there was in 2000 / 2001 when the world was gripped by rampant risk seeking speculation of the dotcom boom. Given the currency uncertainty and negative market trend, buyers of the Indian Rupee should strongly consider covering any exposure now.
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