‘Too early to become bullish on US dollar’

What can one expect to happen in the currency market, after the Brexit verdict of the UK referendum? Heng Koon How, Senior Investment Strategist, Asia Pacific, FX, from Credit Suisse Private Banking in Singapore, shares his views through an e-mail interview.

Now that Brexit has happened, how are major currencies and the dollar looking?

While we still expect the US Federal Reserve to raise interest rates this year (in December at the earliest), the rate hike path is likely to be very gradual. Therefore, it is too early to become bullish on the US dollar, in our view.

Surplus currencies, such as the Swiss franc (CHF) and the Japanese yen (JPY), should remain quite resilient, although both the Swiss National Bank and the Bank of Japan will likely resist further strengthening of their respective currencies. Judging from the marked rise in sight deposits, the SNB has clearly been active in the FX market to limit further CHF strength from safe haven inflows.

How about the Asian and other currencies?

In Asia, we think Japan’s large external surplus, supportive valuation and historically narrow rate spreads between the US and Japan should limit the Japanese yen’s weakness, even if the Bank of Japan eases in July.

We would thus still avoid shorting the JPY. We see the Australian dollar (AUD) and the Canadian dollar (CAD) remaining range-bound, as upside for commodity prices is limited in the near term and China’s growth is slowing.

Most importantly, upon Brexit, the Chinese yuan (CNY) has embarked on a new leg of weakness as it has weakened noticeably past 6.60 to 6.66 against the dollar. The transmission mechanism for a weaker CNY is clear, because the European Union is China’s largest trade partner. Brexit may result in further collateral risk for the European Union, as such the euro (EUR) has weakened and the CNY is expected to follow. We maintain our negative view on the CNY and reiterate our 12-month forecast of 6.90 for USD/CNY.

How far can the expected outflow in September for repaying the FCNR (B) deposits impact the rupee? How far has it been factored in the market?

Negative impact on the Indian rupee from the potential outflows related to FCNR maturity is likely to be limited. The RBI is likely to hedge and will be able to effectively manage this risk.

What is your outlook on Indian rupee?

Our view on the Indian rupee view stays neutral against the dollar.

Raghuram Rajan has announced that he would not seek a second term as RBI governor. This, no doubt, has injected some form of short-term uncertainty into the market. However, we see the reform measures on monetary policy put in place by Rajan as sustainable and should have limited impact over the medium term.

Overall, we stay neutral on the INR as its superior risk adjusted carry offsets the increasingly uncertain external environment. Our three-month and 12-month forecasts for USD/INR are 68.00.