Market News

by Jon Beddell

Foreign Currency Market Update – GBP / INR Update

After a period of high volatility, but ultimately little net change over the election week, Sterling fell yesterday on the release of trade data for March which showed the trade deficit widened to £7.5bn for march, up from £6.3bn in February.

Bank of England governor Meryn King gave a nod of approval to the new government’s pledge to cut public spending by £6bn this year. Delivering the quarterly inflation report King warned that the UK economy was still in danger, but that the planned cuts would be useful in showing the markets that government was taking action, preventing a possible run on the pound and selling of UK gilts. We saw what happened with Greek, Spanish and Portuguese debt over the last few weeks and the new administration will be doubly keen to avoid a similar fate for gilts. When investors feel that a government may not be able to meet debt repayments as they fall due, they demand a far higher interest rate for investing in new government bond issues. Paying a high rate compounds the debt problems and can force a default. So taking steps to improve the market’s perception of how we are tackling our debt mountain is almost as important as reducing the deficit. The BoE believe inflation – which is currently well above the bank’s 2% target – will moderate back towards 2% over the next two years. That gives policy makers the flexibility to keep interest rates low for the short term.

The Rupee has made a new high, breaking below the 66.00 level which had been working as support earlier in the week. That level was also the January 2009 low, and represents a key long term support zone. That this has now been broken could send the Rupee sharply higher. Clients with Rupee requirements should consider covering now in order to avoid further possible downside.

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.

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.

by Jon Beddell

Foreign Currency Market Update – GBP / INR

The big fundamental news last week is that the Bank of England have opted not to extend the £200bn asset purchase facility that was designed to increase money supply in the banking system. The bank were faced with a decision between bolstering the somewhat anaemic economic recover, and stoking inflation after recent data showed inflation hitting 2.9%, well above the bank’s 2% target. Over all sterling has shown little reaction to the widely expected outcome, trading flat against the euro, and falling against an overtly strong US dollar.

The Rupee has remained steadfast in the face of weak stock markets, which have driven funds in search of “safe havens” such as the Yen and US dollar. Sterling has suffered as a result of this trend, as have the high yielding commodity currencies like AUD and NZD. The Rupee by contrast has shown itself to be relatively neutral in terms of investor risk sentiment, and did not plunge along with high yielders back in October 2008 when the credit crisis first emerged.

The trechnical outlook is in favour of a weaker pound. We are now testing the key support at 72.50, a level that has been challenged twice in the last few months and produced a positive reaction each time. However, the last reaction was decidedly weaker than the October 2009 bounce, leading us to conclude that the pound may slip through support this time. Buyers of the Rupee should therefore cover any requirement now to avoid the risk of further downside.

Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.

Market Update – GBP INR

No change from the Bank of England yesterday. That outcome was widely expected, so the market’s reaction was minimal. Sterling has recovered over 15% from the January lows, but the longer term trend for the Sterling/Rupee exchange rate is still negative. Since October’s sharp rally we have seen a few weeks of sideways/lower drift, which means sterling is losing any short term impetus. If we continue to drift below trend support at 74.00 we would be expecting a continued decline towards the January lows around 66.00.

Any opinions expressed in this document are those of TorFX
analysts. Any analysis and/or forecasts provided are aimed at
helping clients understand market conditions and developing trends.
Clients are wholly responsible for their own trading
decisions.