If U.S. 10-Year Yield Goes To 2.70%, Expect Rupee To Hit 69/$: Bank Of America
The trajectory of the rupee will be dictated by the U.S. 10-year yield, says Jayesh Mehta.
The rupee on Monday broke below the 68-mark yet again by depreciating 24 paise to trade at 68.20 against the dollar in early trade at the Interbank Foreign Exchange, due to increased demand for the American currency from importers and banks.
Sustained capital outflows and dollar's strength against a basket of currencies also weighed on the local unit whereas a higher opening in the domestic equity market limited the rupee's fall, forex dealers said.
Bank of America expects the rupee to remain volatile over the next 3-4 weeks. A rise in the U.S. 10-year yield to 2.70-2.75 percent, may prompt the rupee to hit the 69 mark against the dollar, said Jayesh Mehta, managing director and treasurer at Bank of America.
Here are edited excerpts from the interview.
What reasons are you attributing to the current weakness in the rupee?
It’s just outflows right now. It’s related to the rise in U.S. bond yields.
What impact can we expect on fund flows, if we see more weakness in the rupee?
As of right now, the rise in U.S. yields is based on expectations. If you look at the U.S. 10-year yield, it rose to a high of 2.65 percent and then retraced its steps back. Till we get to know the real picture, markets are going to be volatile on both sides. The impact of yields correcting from 2.65 percent to 2.42 percent is not going to be that large but when it goes back again to 2.60 percent, and that is where the general sentiment and expectation is. With the new government the U.S. increasing its spending, U.S. yields will be on the higher side and if that is so, then all emerging markets will be impacted. But that is the general feeling. The actual outcome will be known only by February-end or so. On January 20, Donald Trump will get sworn in along with the new cabinet. So till now to mid-February we have this kind of situation. After that, if U.S. yields rise as per expectations, the dollar will definitely strengthen and emerging markets will weaken. If it works out the other way round and yields move below 2.40 percent then emerging market currencies could appreciate.
How are you advising your clients to trade the rupee over the next 3-4 weeks?
The next 3-4 weeks are going to be volatile. If one has short-term positions, one needs to hedge them. Otherwise live with the volatility. In the immediate short term, we don’t really see any dramatic changes, unless the U.S. 10-year moves to 2.70-2.75 percent, then the rupee could go to 69.