Currency markets likely to be choppy

We have seen a sharp correction in the rupee and global currency markets last week. While the immediate trigger for this fall was negative unemployment data from the US, this correction was long overdue and reflects changing macro trends. Quantitative Easing-2 is coming to an end next month. Without this dose of easy liquidity, a sustained rally will be that much more difficult.

Secondly, central banks across economies have taken a hawkish stance that implies a preparedness to sacrifice short-term growth to combat soaring inflation. Thirdly, another crisis seems to be brewing in the eurozone – the lack of political will in Germany and team to continue providing nostrings-attached assistance to the faltering governments, like that of Greece.

After a prolonged period of appreciation, fuelled by easy money of QE-2, markets are realising that 2011 may be a year of subdued growth, high inflation pressures and sovereign default risks.

For the rupee, this means that the exuberance about positive events like lower trade deficit and higher IIP growth will be tempered by pressure on corporate earnings, higher fiscal deficit and hawkish stance of the Reserve Bank of India. While the medium term rupee outlook remains positive, the risks have increased. This week, expect a choppy rupee market as both local and global players adjust to the new mood of the market.

(Rugved Dhumale, AVP-RISK MANAGEMENT SOLUTIONS, Mecklai Financial)