Brexit poll: The impact on Rupee could be compounded due to Rexit and the Indian currency may see Rupee aim for even 69.00/69.50 levels on spot.
A cocktail of event risk and local policy making risk is haunting the Rupee traders. On one hand fear of Brexit or Britain exit from EU is keeping the EM currencies like Rupee on the edge and on the other hand the change of guard at RBI has created a local policy risk. Markets can be paranoid, like they were going into the Union Budget, expecting a populist Budget, only reverse on a dime post event. An interesting development is happening in the Dollar/Rupee market.
Over the past two session we have seen the offshore market for USDINR derivatives become much more active and push the Rupee lower against the US Dollar. Right after the onshore Rupee markets closes, offshore traders push the Rupee further down against US Dollar. Rupee has started to underperform even in absolute terms against the currencies in the emerging market space. We can expect the fear trade to continue till a new Governor is appointed.
Over the very near term, how much Rexit will impact would depend on what happens with UK’s referendum. Going by the opinions the vote is on the knife-edge. With most opinion polls suggesting 10-15 per cent of representative sample of voters still undecided. The lead or trail for exit or remain very close for comfort. Though betting portals are giving nearly 75 per cent possibility of a “remain” verdict but we need to exercise caution. Over the past one week, most risky assets, equity, commodities and emerging market currencies and British Pound have staged a strong rebound. Therefore, the risk going into the event remains asymmetric. Add to this the fact that market conditions are going to treacherous with liquidity conditions being very thin. We can expect wild and sharp movements over the next two days. A vote for exit may lead to Pound falling 4-5 per cent in a couple of sessions, global stocks markets falling very sharply and Indian Rupee, along with emerging market currencies can see depreciation of 2-3 per cent. The impact on Rupee could be compounded due to Rexit. We may see Rupee aim for even 69.00/69.50 levels on spot. Nevertheless, a vote to “remain” can cause a broad base fall in US Dollar. In that case Rupee can appreciate towards 66.70/67.00 levels on spot.
Our tactical long position can wait till the Brexit vote passes. We are keeping base case as UK votes to remain, in which it may be the opportune time to build the long side bets on the pair on decline below 67.00 for importers. Nevertheless, an exit vote would not offer that opportunity of a lower entry, in which case importers may have to chase momentum and buy the pair at higher levels.
The author is currency analyst, Kotak Securities