In an interview to CNBC-TV18, Dominic Bunning, Associate Director - FX Strategy, HSBC says that there is a 50 percent likelihood of the Fed QE tapering coming through today's FOMC meet. If that happens, he says, there will be an immediate bounce in the dollar index.
Going forward, he expects South Asian currencies to be under pressure. The RBI would like to keep rupee well supported," he says.
Below is a verbatim transcript of the interview on CNBC-TV18
Q: What about the whole global scenario? We have seen euro rally quite a bit, to around 1.37-1.38. Are you surprised by that? What is your expectation from Fed and how would that lead to any kind of moves on the euro?
A: Euro certainly has been more resilient than we were expecting. I think a few factors have come into play there. When we look at some of the flow dynamics, they have supported the euro, but also this tightening in the euro zone liquidity going into the year end has probably provided some support as well.
From the Fed's side of things we do think there is about a 50:50 chance that we see some tapering coming through at today's meeting. That may well be joined along with changes to the forward guidance to try and ensure that rates hold low for a long period of time.
Really, the key dynamic from the euro is that whereas the Fed is already starting to look towards the exit of quantitative easing (QE), in the European Central Bank (ECB) we are looking at more measures will come through to boost liquidity. So the ECB is still in that process of continuing to ease, continue to loosen policy that talking about potential negative, deposit rates and whereas the Fed is moving away from that QE story. From our perspective, the monetary policy difference should start to tail in 2014.
We are still looking for the euro to depreciate versus the dollar through the course of next year.
Q: What about the dollar index? It is currently at around 80 or so. What would the trajectory look like over there?
A: When we talk about the Fed as well we have got to look at the expectations. To some degree this tapering idea is starting to be priced in more by the markets. If today the tapering is announced, but eventually the market senses the forward guidance is coming to play and we will see rates lower we would expect to see a bounce in the dollar initially.
We certainly expect to see that knee-jerk reaction higher in the dollar, but a lot of that is starting to get priced in so that knee-jerk reaction may not lost for that long a period of time.
As we go into Q1 what we traditionally see is a relative pick up in the data story and that often helps to support some of the risk-on currencies and works a little bit against the dollar. What we are thinking about from an Asia perspective at least is that we see the dollar rallying on a taper announcement, starting to come off as the data looks a bit better through Q1 but then the dollar starting to strengthen through the course of 2014 as some of the structural issues come back into light for Asia.
Q: In 2014 what is the risk that some of the emerging market currencies will revisit their 2013 lows? Is there a risk that Indian rupee will go back to 68-69 and similarly for some of the other emerging market currencies?
A: We do not there is as big a risk that we get such sharp news in terms of moving to those levels. Our core view is that we would head towards the mid-60s by the end of the year after an improvement for a currency like the Indian rupee in Q1.
Across all of Asia, we do still sense there are some structural difficulties that need to be addressed. So for some currencies that is widening external balances or narrowing surpluses, also strong credit growth in some currencies which has become less productive in terms of its impact on growth and also some of the policymaker constraints have slightly increased from the past.
We still think there will be some difficulties for Asia as a whole. We would probably differentiate that and say that the South Asian and Association of Southeast Asian Nations (ASEAN) currencies will face more difficulties whereas the Northern Asian currencies will do a little it better through the course of 2014, but as I said, as we move further into the year there will be more of a focus on those domestic issues and a lot will depend on the reform programs that do end up coming through.
