Re flip-flops, looming Fed rate hike tells on gilts

RECAP

The rupee appreciated in the initial part of the last week on central bank interventions to cushion the rupee from the impact of rising global oil prices.

It, however, declined during the last few days of the week as the greenback firmed against other currencies globally.

Also, foreign banks shunned the local currency for the dollar sending it down. Dealers said the foreign banks have been built up huge interbank sell-buy swap positions anticipating the demand for greenbacks from oil companies with payments due early next week on June 15.

Although markets will remain volatile with two-way movements, the bias remains towards a depreciation as dollar has been gaining continuously to other currencies such as euro and pound sterling.

The bearish outlook on rupee has been stirred by the fear of a selloff spree by foreign institutional investors (FIIs) as forex inflows are not adequate as they used to be few months back.

Premiums on forward dollars inched up with the rise in sell-buy swap rates. This assumes significance as importers have been in cautious mode: with the month-end demand over, they have been opting for hedging.

The rupee started the week at 44.97 per dollar and ended with a loss of 20 paise at 45.16/17. There has been heavy demand from the interbank players who bought dollars from the spot market to stay liquid in the forward segment.

The bearish sentiment on the spot rupee will continue till the Budget as foreign and domestic investors are waiting for cues on the policy front from the government. Foreign exchange inflows have started going down gradually.

Apprehensions of another rate hike by the Bank of England and an expected 50-basis-point raise by the US Federal Reserve and bearish sentiment on domestic inflation and interest rates drove bond prices down throughout the week.

The bond market also reeled under several bouts selling pressure throughout the week. During the week, long-term bond prices fell by almost 70-80 paise.

The yield on the ten-year benchmark bond, 7.37 per cent 2014, closing at 5.33 per cent compared with the close of 5.26/27 per cent at the beginning of the week. Dealers said some of the government securities, such as 5.59 per cent 2016, have been even dealt below par.

Interest rates in some countries, such as Australia and UK, are on the rise. The Bank of England raised its repo rate on May 10 by 25 basis points from 4.25 per cent to 4.5 per cent. This is its third rate hike this year.

The US Federal Reserve has also signalled a rise in its funds rate from the 46-year low of one per cent at its next meeting to be held on June 29.

The US dollar in the last two trading sessions has gained by almost 3 cents against all other major currencies.

This raised the fears of 50-bps raise in the US funds rate by the Federal Reserve at its next meeting this month-end. Relatively-weak jobs data, announced earlier last week, had, however, calmed down the fears and dealers are factoring in a 25-bps hike in US funds rate.

Yields on government bonds are rising globally indicating a bearish sentiment. The sentiment in the domestic government bond markets was bearish with the possibility of a further rise in oil prices spiking higher inflation.

Dealers said the markets are not finding major support from any institutions or public sector banks which are usually large buyers. "Everyone is in a wait-and-watch mode till the Budget," they added.