ECB, Fed looming over currency markets: Divya Devesh, Asia FX Strategist, Standard Chartered Bank

The moves in the currency markets are almost entirely being dictated by the two big boys at the moment – the ECB and the Fed, says Divya Devesh, Asia FX Strategist, Standard Chartered Bank. In a conversation with ET Now, he says that the market participants are latching on to every single word and move from both the banks. Excerpts:-

ET Now: The rupee is trading at 66.92. Is that because of the dollar strength?

Divya Devesh: Well, the moves in the currency markets are almost entirely being dictated by the two big boys at the moment – the ECB (European Central Bank) and the Fed (US Federal Reserve) – and the market participants are latching on to every single word and move from them. One key point worth highlighting about the ECB is that, we have got more easing from it. This was maybe below the market expectations but we did get a 10 bps rate cut.
We also got an extension of the asset purchase programme by six months but despite that, the market reaction across the asset classes has been very exaggerated. It clearly shows how crowded positioning is on some of these popular FX rates like short euro-dollar, especially amongst the hedge funds community which will remain a key consideration by year-end.

I think, the impact of the ECB announcement on the emerging markets’ currencies is not going to be uniform. We will have some low-yielding currencies which are probably more correlated with the broader dollar. For example, the Singapore dollar has been under a lot of pressure but for the INR, the positioning argument is going to be more important. Recently, the short euro and the long Indian rupee had been in an extremely popular carry trade and this is now being unwound post the ECB announcement. As a result, we are seeing more INR selling which means that there will be further upward pressure on dollar-rupee in the near term.

ET Now: Just to understand the broader implications of the weakness in the dollar index, do you think that will not have a constructive impact on emerging market currencies? The strengthing of the dollar index is causing weakness in emerging market currencies and rupee was just tagging along.

Divya Devesh: Yes, there is going to be some degree of differentiation between emerging market currencies because of the ECB announcement and what we are seeing over the past 24 hours, is really the unwound of carry trade and all risk trades. As a result, we will have high yielding currencies. For example, the Indian rupee and the Indonesian rupiah will remain under pressure. So the dollar-INR is going to go higher. On the other hand, we will have emerging market currencies more linked towards the broader dollar move.

We are seeing a weak dollar against the euro. It will be translated into dollar becoming weak against the Singapore dollar and the Taiwan dollar. Hence, there is going to be a differentiation between the two but as soon as we move out of this initial adjustment post the ECB, the market will again start focusing on the non-farm payrolls and the Fed. We might then probably see a uniform higher move in dollar against emerging market currencies.