Dollar/rupee likely to broadly range between 44.70 & 45.10

Our theme of ‘Consolidation , not reversal’ , discussed last month, holds well for the rupee. Cyclical recovery in the US will likely continue to get highlighted in the data releases due next week. Both ISM manufacturing and non-farm payrolls are expected to be higher in December vs. November. The labour report for December will be important, especially after a disappointing number for November.

This is expected to be positive for risk appetite, and hence, EM currencies. The compelling story for Asian forex revaluation remains threatened by Chinese tightening and geopolitical risks on the North Korean peninsula. Neither should have a lasting impact on core trends of stronger Asian forex, which investors should again embrace in early 2011. And the relatively benign global risk environment should maintain the dollar as the preferred funding currency in 2011. Locally, an improved inflow from foreign institutional investors into debt is likely as the deadline for allocated limits under the last auction approaches.

Global liquidity will once again chase the massive public issues from the government lined up for the first quarter in 2011, when another round of strong rupee appreciation may be seen. Some front-running next week may be rupee-positive . Expect USD/INR to broadly range between 44.70 and 45.10 next week. Any significant jump in oil prices remains a risk. Driven by global uncertainty and dollar recovery, we expect the local currency to consolidate in the 45.00-45.50 range in the medium term.

By Deepali Bhargava, Chief Economist, ING Vysya Bank