Friday, August 17, 2007

The brief Rupee gig

Equity markets needed an excuse to correct and they took to US subprime woes and unwinding of Yen carry like bees to honey. Result, Yen is appreciating against the USD and USD is appreciating against a basket of currencies including the Indian Rupee. It was almost a celebration when INR touched Rs.41.385 against the USD after hovering around Rs.40.50 levels since mid July with no signs of a recovery.

Traders might be under the impression that the U.S. has exported some of its subprime risk to Europe and, as a result, will be able weather most of the risk of a subprime fallout. But it's a mistake to think they exported all of it. Many U.S. banks have a lot of assets not only in mortgages but in real estate. If foreclosures spike, then banks could suffer an even worse fate. The deep gash in the US economy is for real. I don’t think the dollar rally is sustainable. If it gets better, the US currency and bond yields would rise and the dollar will slide. If it gets a whole lot worse, the dollar's still going to slide.

For example, if the stock market gets a lot worse, foreigners will start to panic about their investments in the U.S. But even if the panic subsides, the dollar's value still might decline if investors go back to their favorite trade: shorting the dollar against a basket of currencies.
Don't rush to buy those IT stocks now... The Rupee rally is still not done.

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