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Monday, Apr 15, 2002

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48.95 crucial level for the rupee

V. Ravi Kumar

As we move into the second half of the month and the FII figures are beginning to show a slackening trend, there is every chance that 48.95 is tested and broken soon and the dollar moves into fresh territory.

THE dollar ended the week in the nervous nineties, having been rebuffed yet again at 48.95, and a new barrier for it for further gains. The dollar found plenty of buyers whenever it dipped below the 48.90 level and this is a sure sign that the dollar is indeed very well bid and it is only a matter of time before it moves higher.

Once the 48.95 level is breached again there seems to be enough momentum for the dollar to get to 49.10 which should be the new pivot. This time round, at 48.95 levels of spot, forward premia were higher, due to the effects of RBI's aggressive open market operations in the G-sec markets to neutralise liquidity in the money markets. Thus, at that level, exporters found good levels to encash some of their future receivables.

As we move into the second half of the month and the FII figures are beginning to show a slackening trend, there is every chance that 48.95 is tested and broken soon and the dollar moves into fresh territory probably 49 plus.

Watchers of the dollar against the rupee have plenty of factors to track this week; the ongoing crisis in Palestine and its impact on the value of the dollar, oil prices and expectations of interest rates in the US as a consequence.

The Japanese yen and some of the Asian currencies rose appreciably against the dollar earlier in the week. But this trend was reversed on Friday when the yen weakened against the dollar amidst tentative signs that Japanese investors may be accelerating their investments into overseas markets. After the start of the new fiscal year in April, foreign exchange markets have been surprised by the reluctance of Japanese investors to venture back into overseas investments.

But some analysis shows that there are signs of pick-up of outflows from Japan. During the week, the dollar rallied from 130.40 levels to about 132.20 on Friday. These are early days for signs of economic recovery in the US, but consumer spending is showing signs of fatigue!

Retail sales rose only by 0.2 per cent in the month of March against expectations of about 0.5 per cent. Except for gasoline, there was no increase at all in March. The University of Michigan's consumer index also fell to 94.4 from 95.7 in the earlier report.

Though it would be too premature to jump to conclusions on the state of the US economy based on one month's report, it does seem that the recovery suggested by some recent figures last week may have been caused by a slowdown in the pace of liquidation of inventory levels.

As a result of the new numbers about the US economy, the market has begun to re-look at the issue of levels of interest rates in the US dollar. The financial market has scaled down its expectations of a rise in the US interest rates, to about a 10 per cent rise in interest rates in the Fed's meeting in May from about a 90 per cent chance earlier.

Indeed the market is in the right direction, as always. As the proverb goes, the market is always right. The US data shows that a recovery is in progress, but it is very tentative and there is practically no inflation. This dearth of inflation has given rise to the view that the Fed is in no hurry to raise interest rates and adds weight to the argument that rate rises, will be later in the year, perhaps in September or November 2002.

Thus, from the talk of a "soft-landing" for the US economy, the interest - rate market is positioning for a " soft-take off "!

However, given the above view in US interest rates, it seems unlikely that monetary authorities in the UK, Australia and Canada are likely to wait for the Fed, before they bring about rate increases in their currencies. This perception led to the dollar weakening generally against other dollar bloc currencies.

Against the euro, reservations about the strength of the economic recovery in the US have yet to bring the dollar lower against its European counterpart. This was largely due to expectations of future growth and inflation differentials between the US and Euro-zone.

Earlier in the week, the OECD revised upwards its growth forecast for the US economy from 0.7 per cent to 2.2 per cent.

Its forecast for Euro-zone growth, meanwhile was revised downward from 1.4 per cent to 1.3 per cent, with inflation there pegged at 2.1 per cent.

The energy markets kept rupee traders on their toes all week, which began with a suspension of oil imports by Iraq and ended with a coup in Venezuela. All this happened against the backdrop of the continuing Israeli - Palestinian conflict.

Early in the week, the suspension of oil exports by Iraq in protest against Israel's incursion into West Bank towns caused a surge in prices. A statement by OPEC officials that there was enough oil to meet world demand dampened this price rise.

On Friday, the President of Venezuela, Mr Chavez was forced to step down and was detained by the military. Venezuela is the fourth-largest producer of oil in the world and is the biggest supplier to the US markets.

Also Mr Chavez had established his country as one of the staunch members of OPEC with a good record of compliance with cartel production quotas.

His removal has added some uncertainty to the energy markets. The new establishment in Venezuela may not follow Mr Chavez's habit of quota busting in order to maintain prices in the oil markets and may force a rise in prices as a consequence.

The forward premia market has also been beset by uncertainty. The aggressive pace of OMOs by the RBI has sowed some confusion about the central bank's stance on interest rates and liquidity levels.

What appears is that the RBI is keen to maintain "stability" in the G-sec markets and not create conditions for another rally in bond prices to avoid players falling into a "bull-trap". Much would also depend on the direction of the spot rupee.

However, given our view that the dollar is poised to test higher against the rupee, it would be prudent to pay at levels of 5.90 per cent in the six-month annualised rates.

At these levels also, many players will be keen to raise rupee resources, given the uncertainties connected with the forthcoming credit policy.

(The author is Head, Treasury, at Vysya Bank, Bangalore. The views expressed are his own and not necessarily those of his employer.)

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