FOREX: Torn between Dragon and the PIGS

Joydeep Sengupta, Managing Director Global Markets, Bank of America

The dollar-rupee seems to have found a pivot around 44.40 with the Dragon (China) threatening to lure the currency below a 44 handle and PIGS (Portugal, Ireland, Greece & Spain) in Europe threatening to regain the 45 milestone. The risk of a knee-jerk reaction (1-1 .5% appreciation) to a possible CNY ‘adjustment’ will always remain.

While believers hope that the market would be able to put behind its worries about Europe, a fragile EU can withstand only that much and not much more if events deteriorate from current levels. That eventuality could see asset prices correcting and the rupee too weakening as the dollar generally strengthens.

While the longer-term bias is for the local unit to appreciate towards a 43.00, in the immediate weeks ahead the risk of a break higher (weaker rupee) outweighs. For the week, should see dollar buying interest at 44.25 levels with much of these positions being pared around 44.65/70.