(USD/INR) Rupee To Rebound Against The US Dollar, (USD/TRY) Lira Under Pressure

Published: 11 Jul at 5 PM Tags: Dollar, America, USA, India, Turkey,

Although the Rupee hit a fresh record low against the US Dollar earlier this week, the Indian currency strengthened as emerging market assets were boosted by the decreasing odds of the US Federal Reserve tapering stimulus.

India’s currency strengthened to 59.32 against the US Dollar, breaking through the psychological 60 Rupee per Dollar level, after minutes from the latest Federal Open Market Committee meeting were published and Fed Chairman Ben Bernanke made his highly anticipated announcement.

Bernanke’s inference that ‘highly accommodative monetary policy for the foreseeable future is what’s needed in the US economy’ triggered intensive market volatility, and overnight the US Dollar broadly softened.

Now, according to trading patterns, it seems that the Indian Rupee could be heading for a rebound.

The shift in sentiment towards emerging-market assets inspired by the US easing talk in recent weeks may have been excessive, as the Rupee’s 14-day relative strength index against the US Dollar pushed above the 70 barrier – indicating that the Rupee’s decline has been overdone.

According to strategist Dhiren Sarin: ‘Although the Rupee touched a record low, the momentum in the drop slowed, suggesting investors may not be as bullish on the Dollar as they were earlier. So it does look like the Rupee can strengthen in the short term.’

However, as another industry expert points out: ‘Tapering risks are going to continue in the third quarter and probably into the fourth quarter as well. There will be a lot of volatility [the Rupee will] stay under pressure.

The Rupee is currently trading against the US Dollar in the region of 59.8210

Elsewhere, the Lira’s 9 per cent drop against the US Dollar over the last two and a half months has piled pressure on Turkey’s central bank.

Although yesterday’s US developments have allowed the Lira to gain during local trade, the central bank has to juggle calls to raise interest rates (in an attempt to stabilise the Lira) with the Turkish Prime Minister’s demands to keep rates low.

Even if US quantitative easing isn’t tapered as early as expected Turkey is still exposed to the risk of foreign capital outflows, particularly in light of its hefty current account gap.

Economist Yarkin Cebeci points out: ‘The central bank cannot let the currency go as this could potentially lead to an inflation/depreciation spiral, hurt the bank’s credibility dearly and have a detrimental impact on corporate balance sheets. Instead, if the Lira remains under pressure, hiking rates would be a safer strategy for the central bank [...] We expect the bank to hike the policy rate at most by 100 basis points as a sharper increase could lead to increased political pressure and its benefit would be doubtful.’

But the bank’s options are restricted by Prime Minister Tayyip Erdogan who believes that last month’s extensive protests were triggered by a ‘high interest rate lobby’.

A rate hike is rendered even more unlikely given the upcoming elections.

As Barclays’ economist Christian Keller observes: ‘The central bank’s willingness to undertake such a rate adjustment is unclear, in particular given the strong government rhetoric against ‘high interest rate lobbies’. Ultimately, only a combination of continued pressure on the Lira and further forex reserve losses might force the central bank to act.’

The Lira strengthened to 1.9414 against the US Dollar overnight but has since weakened to 1.9500
As of Thursday, 11th July 2013, the Pound Sterling currency rates mentioned within this news item were as follows:

GBP USD exchange rate was 1.5177, and GBP INR exchange rate was 90.7504.

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