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Capital To Flow Back From Emerging Markets To The U.S.

Monday, March 24, 2014
By Pramit Brahmbhatt

Pramit Brahmbhatt is CEO of Alpari Financial Services (India)

Last week the Rupee traded range bound as in the first half of the week domestic stock markets traded strong and reached new highs which helped the Rupee to appreciate below 61.00 levels and on the other hand in the second half dollar index traded strong after falling for three consecutive weeks on the outcome of the FOMC meet. Janet Yellen stated its key rate, currently near zero, would be 1 percent by the end of 2015 and 2.25 percent a year later. If this happens, then we could see capital outflows from emerging markets back into the U.S., especially when a concern about China’s economy slowing is rising. The Rupee ended the week near its previous week’s close. The trading range for the Spot USD/INR pair is expected to be within 60.50 to 62.00.

It is recommended to be cautious and Buy USDINR on dips with the appropriate stop loss as overall Rupee is expected to depreciate more. Pivot Point for the Pair is at 61.04 and below is the Support & Resistance levels.

Last week the FOMC meeting looked decidedly more hawkish, the first was the upward shift in interest rate expectations. In December their assessment of appropriate monetary policy saw the majority believe interest rates would be around 0.75% (or less) by the end of 2015 and rates near 1.75% by the end of 2016. As of March, the committee thinks 2015 rates could be closer to 1%. This was then followed by in her inaugural press conference as Fed Chairman, Janet Yellen stated a 'considerable period' of time after asset purchases end could be 'something on the order of around 6 months'. This was a surprise because historical FOMC precedent suggested the general period of time between their last ease and first hike was roughly 12 months. Just prior to the Fed decision, the market was priced to see the first rate hike (to 0.50%) around October 2015, however as of today (post-FOMC meeting) the market now believes the timing of the first Fed rate hike could be August 2015. Thus, the USD rallied across the board over the next 24-hours.

Industrial and Commercial Bank of China Ltd. and its three largest competitors recorded the slowest profit growth pace since financial crisis in 2008 along with the current rolling bad loans and weak deposits. Moreover, ICBC, China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd. will probably report combined net income next week of 791 billion yuan ($127 billion) for 2013, compared with 11% in previous year, where the growth may slow to 7% this year, compared with a 17% increase forecast for the four largest U.S. and European banks. Agricultural Bank, China's third largest, is expected to record 14% gain in annual profit on March 25. Bank of China's earnings, due March 26, may have risen 8.5%, while Construction Bank, the nation's second biggest, may post growth of 11% on March 30.

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