The environment of higher interest rates , as per economic theory is beneficial to home currency
as foreigners get higher yield as compared to their governments.
But will this hold true for rupee in current scenario ?
May WPI is screeching higher 10.16 % (year ago 1.38%) . May month CPI is at a cool +13.91%........... screeching higher . The fuel prices are (part) liberalised leading to perhaps
an icing on cake situation for inflation. Where is the power of spending in common man ?-- Its gone.
the 2008 recession answered by appropriate pumping liquidity into the system worked . It worked because the power of spending was still dominant in the pockets of consumer.
Now the talk of the globe is double dip recession. There have to be enough saved resources to
survive during the double dip. That is what is now difficult with hike in price of all flammable items.
The consumption power would thus be hampered incase of a double dip and that would translate into
everything from reduced topline growth of corporate sector and end with transmitted effect on to markets both equity as well as currency .
So to say the Rupee would defy economic theory and may have an uphill task when it comes to appreciating.
against the dollar
30 June, 2010
19 February, 2010
It is coming....................
Last night U.S Fed hiked the discount rate for the first time since 2008. It is the rate charged to banks under the emergency window. The signal is clear all entities now have to align with money market rates and Uncle sam`s monetary is slowly going back to the barracks now that order is seemingly restored.
other Linkages .....................
1) There is a high possibility of hike in repo and reverse repo rate before next monetary policy meeting
2) The short-term deposit rates of Banks are expected to increase by 50 bps or so upto one year maturities.
Which means lending rates may also go up !!-- The cost of short-term borrowing by corporates will get increased by atleast 1 to 1.5 %
3) USD libor which is lower at present would start inching up over next 6m - thus pushing up interest costs for PCFC, suppliers credit,buyers credit frequently availed by exporters and importers
4) In India Higher food inflation is worrisome to add to it government borrowing for FY 10-11 is expected to be higher than that of 09-10.
5) There are strong talks of China revaluaing its yuan once again . The argument for revaluation is typically based on either curbing rising inflation or capital inflows. The two are legitimate reasons for concern.
Rupee Impact to be expected
Rupee can display very wild swings (a) towards appreciation if China does something suddenly or Indian inflation is not controlled despite rate hikes till mid of the year. (b) towards depreciation since Economic factors are poised for a reduction in corporate margins thus probably affecting stock markets and putting decent depreciation pressure in Rupee towards mid of the year .
One needs to hedge the risks as the sequence of events cannot be timed precisely and it can impact your margins from timing difference even if you have a natural hedge within a month or a quarter.
other Linkages .....................
1) There is a high possibility of hike in repo and reverse repo rate before next monetary policy meeting
2) The short-term deposit rates of Banks are expected to increase by 50 bps or so upto one year maturities.
Which means lending rates may also go up !!-- The cost of short-term borrowing by corporates will get increased by atleast 1 to 1.5 %
3) USD libor which is lower at present would start inching up over next 6m - thus pushing up interest costs for PCFC, suppliers credit,buyers credit frequently availed by exporters and importers
4) In India Higher food inflation is worrisome to add to it government borrowing for FY 10-11 is expected to be higher than that of 09-10.
5) There are strong talks of China revaluaing its yuan once again . The argument for revaluation is typically based on either curbing rising inflation or capital inflows. The two are legitimate reasons for concern.
Rupee Impact to be expected
Rupee can display very wild swings (a) towards appreciation if China does something suddenly or Indian inflation is not controlled despite rate hikes till mid of the year. (b) towards depreciation since Economic factors are poised for a reduction in corporate margins thus probably affecting stock markets and putting decent depreciation pressure in Rupee towards mid of the year .
One needs to hedge the risks as the sequence of events cannot be timed precisely and it can impact your margins from timing difference even if you have a natural hedge within a month or a quarter.
18 February, 2010
is this what you do ??
- Set no benchmarks for exposures
- Have a moving target for realisations (maximising) or cost (reduction)
- Only see the hedged position and FORGET the unhedged exposure
- Clap when the market moves in favour of that only 10% hedge (what about unhedged?)
- Slap when market moves against that only 50% hedge
- Trust bankers more than your in-house costing-marketing-finance specialists
- At end of the year decide nothing to do next year w.r.t forex exposures
The good news is that , its not all that bad considering that majority of us are either walking in the dark without even a small pocket torch to guard very next footsteps OR quite a few of us are using a high beam at night and feel they can see a planet far into the next galaxy before any other astronomer has seen.
Foreign currency exposure management assumes importance in these volatile times and there has to be a scientific , objective and holistic approach to guard the bottomlines .
05 January, 2010
time to remember history once again
We wish all our networked community a happy and prosperous new year
Our absence of uploading a post was noticeable to quite a few of our
networked people. The markets really go crazy in last month / few weeks of the
calendar year and its hazardous to take a view or embark upon any serious thought
about next year and the only happy people are the day traders who with some stop
losses can get good results. We were one of the community.
One question trickled in which asked us to explain the movement between metals and USD.
We have been observing it especially with gold and there have been occassions in the recent past
wherein a few industrial metals also go down with dollar strength (though at present they are
doing strong). -- One reason could be earlier risk aversion of dollar lead to a build-up of positions
in the yellow metal. As hedge funds re-worked their thinking about global demand supply, a few of
the other commodities too found their way on to the truck along with Gold. Thus all of them appreciated
as dollar fell and the other way round.
The year has begun. many of our networked friends are still complacent about interest rates especially the USD. Before giving out any predictions and fundamental logics , we would rather draw on our past. The past wherein we have seen how the animal called inflation woke up and within no time changed the whole perception of the world.
It was 2004 and the month was March. The best of forecasts called for a rate hike of 25bp a return of liquidity tightening from 0.99% libor only in March 2005-- not before. The best of traders had sold FRAs and aligned accordingly. Two inflation datas and two good employment reports i.e just two months of April and May changed the story. August 2004 Greenspan hiked 25 bp and kept on hiking rates for another seven consequent times taking the 6m libor to 5.5% ( 2007 sept). One remembers the events so clearly especially if you have been stuck against the market. We still remember waking up mid night to see the 10 yr US treasury ticker .....which came once in some 5 minutes -- a penalty for ignoring inflation.
In currency markets it was another landmark episode. 2005 one investment bank predicted Rupee at 45 in 12 months when it was at 40 and whole community was calling for 37-38. It was a call from economist`s desk and a concern about fiscal deficit and overvaluation of rupee was raised. not so much of the latter as for earlier. Fiscal deficit--- we still live in it and we had lived with it even before the forecast. What changed so suddenly --- focus -- it shifted from all other things to fiscal deficit. No other element seemed as important to otherwise cosy community of exporters who had merrily sold dollars forward even 2 to 3 years instead of one. And the importers listened in disbelief . The first 2 rupee movement was due to market trigger and the rest 3 Rs. was from position reversals and stop loss triggers.
Year 2010 . Hope people recollect those episodes before they happen -- And take corrective steps by implementing hedges. A myopic view about hedge is of a export side core hedge-- Rather, many people feel that core hedge only relates to a hedge whcih protects our Rupee realisation value from dollar exports. --This is true for entity with one sided exposure. More often due to change in economic parameters the ratio of domestic to export sales undergoes a change and the entity ends up twice imports as that of exports.In such a case just because rupee is expected to appreciate -core hedge cannot be on export side. Perhaps more risk lies on the import side.
Entities have borrowed at 5.5% 6m libor rate and kept riding the downwave on each subsequent revision.
till 0.42% .They have acted very well all this while. But we see a hesitation from entities to spell out how much savings they desire are enough and and what level they need to lock-in. There seems to be a belief that USD libor will not go up so fast so soon. -- for a moment we agree to this but also ask-- are 3% gains not enough to think of initiating a 20-30% hedge ?
This 2010 seems to be a very interesting year. Because all the stories are over. last two years the story of dollar depreciation prevailed. -- the movie was made just that way --with dollar index falling to all time lows.
So now the themes seem to be changing back to dollar strength -- is it because the dollar weakness story has lived its life and we ant some new spice ?? but then advocates of prolonged US weakness and Asia shining story give dollar weakness one more chance. -- The result is -- both dollar bulls and bears seem to have an agreement to share a single Tent. It is yet decided as to who would reside in at first half of the year and who during the next half. ---- We better stay protected objectively w.r.t our Benchmarks and margins per unit without getting emotional either about the dollar bulls or the dollar bears.
Our absence of uploading a post was noticeable to quite a few of our
networked people. The markets really go crazy in last month / few weeks of the
calendar year and its hazardous to take a view or embark upon any serious thought
about next year and the only happy people are the day traders who with some stop
losses can get good results. We were one of the community.
One question trickled in which asked us to explain the movement between metals and USD.
We have been observing it especially with gold and there have been occassions in the recent past
wherein a few industrial metals also go down with dollar strength (though at present they are
doing strong). -- One reason could be earlier risk aversion of dollar lead to a build-up of positions
in the yellow metal. As hedge funds re-worked their thinking about global demand supply, a few of
the other commodities too found their way on to the truck along with Gold. Thus all of them appreciated
as dollar fell and the other way round.
The year has begun. many of our networked friends are still complacent about interest rates especially the USD. Before giving out any predictions and fundamental logics , we would rather draw on our past. The past wherein we have seen how the animal called inflation woke up and within no time changed the whole perception of the world.
It was 2004 and the month was March. The best of forecasts called for a rate hike of 25bp a return of liquidity tightening from 0.99% libor only in March 2005-- not before. The best of traders had sold FRAs and aligned accordingly. Two inflation datas and two good employment reports i.e just two months of April and May changed the story. August 2004 Greenspan hiked 25 bp and kept on hiking rates for another seven consequent times taking the 6m libor to 5.5% ( 2007 sept). One remembers the events so clearly especially if you have been stuck against the market. We still remember waking up mid night to see the 10 yr US treasury ticker .....which came once in some 5 minutes -- a penalty for ignoring inflation.
In currency markets it was another landmark episode. 2005 one investment bank predicted Rupee at 45 in 12 months when it was at 40 and whole community was calling for 37-38. It was a call from economist`s desk and a concern about fiscal deficit and overvaluation of rupee was raised. not so much of the latter as for earlier. Fiscal deficit--- we still live in it and we had lived with it even before the forecast. What changed so suddenly --- focus -- it shifted from all other things to fiscal deficit. No other element seemed as important to otherwise cosy community of exporters who had merrily sold dollars forward even 2 to 3 years instead of one. And the importers listened in disbelief . The first 2 rupee movement was due to market trigger and the rest 3 Rs. was from position reversals and stop loss triggers.
Year 2010 . Hope people recollect those episodes before they happen -- And take corrective steps by implementing hedges. A myopic view about hedge is of a export side core hedge-- Rather, many people feel that core hedge only relates to a hedge whcih protects our Rupee realisation value from dollar exports. --This is true for entity with one sided exposure. More often due to change in economic parameters the ratio of domestic to export sales undergoes a change and the entity ends up twice imports as that of exports.In such a case just because rupee is expected to appreciate -core hedge cannot be on export side. Perhaps more risk lies on the import side.
Entities have borrowed at 5.5% 6m libor rate and kept riding the downwave on each subsequent revision.
till 0.42% .They have acted very well all this while. But we see a hesitation from entities to spell out how much savings they desire are enough and and what level they need to lock-in. There seems to be a belief that USD libor will not go up so fast so soon. -- for a moment we agree to this but also ask-- are 3% gains not enough to think of initiating a 20-30% hedge ?
This 2010 seems to be a very interesting year. Because all the stories are over. last two years the story of dollar depreciation prevailed. -- the movie was made just that way --with dollar index falling to all time lows.
So now the themes seem to be changing back to dollar strength -- is it because the dollar weakness story has lived its life and we ant some new spice ?? but then advocates of prolonged US weakness and Asia shining story give dollar weakness one more chance. -- The result is -- both dollar bulls and bears seem to have an agreement to share a single Tent. It is yet decided as to who would reside in at first half of the year and who during the next half. ---- We better stay protected objectively w.r.t our Benchmarks and margins per unit without getting emotional either about the dollar bulls or the dollar bears.
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