What’s behind the strength in the Indian rupee? Is it more to do with the weakness in the US dollar?
I see it as more of a dollar weakness story, rather than an Indian rupee strength story. The non-farm payrolls numbers in the US on Friday missed expectations by a mile and that pumped the collapse in the US dollar. It benefitted Asian currencies greatly, including the Indian rupee, as any expectations that the market had about the Fed potentially tapering has now been pushed off. So we are now in a period where rates and policy in the US will stay very accommodative for a long time. That has undermined the US dollar. Hence, it has helped the rupee to appreciate despite the challenging circumstances that India faces with its pandemic.
Do you think it was largely expected by market participants that the US dollar will remain weak because of the money printing done by global agencies led by Fed?
Yes, the outlook for dollar was very mixed. Some people were bearish on the dollar. I am also from that camp. When the rally moved towards 94, it caught the market by surprise. But since then the dollar has retreated again. From a fundamental point of view, you cannot escape the fact that the US is running record twin deficits and eventually that size of their deficit will weigh on the dollar.
The dollar strengthened because the US was performing very strongly in the first quarter and the vaccine rollout was surpassing that of Europe’s. We are now going to be in for a period where the dollar will probably stay awake and potentially weaken even further because Europe is now starting to catch up on its vaccination drive. The Euro will gain strength and keep the dollar weaker.
When the dollar is going down, metal prices are hitting new highs. What is the correlation there?
There is a negative correlation between the US dollar and commodity prices because commodities tend to be priced in dollars. When the dollar goes up, commodity prices tend to go down. But that is only one part of the story this time around. What is fuelling the commodity rally more broadly is the strong rebound in global growth. The demand for about all commodities has gone up and it is also partly related to low inventories. Last year in the midst of pandemic, the inventory levels were cut to very low and no one was really anticipating such a strong rebound in global growth. So here we have a combination of low inventories and a strong rebound in global growth fueling the demand for commodities and a weaker dollar all acting in the same direction. That is what is causing the huge surge in commodity prices that we are seeing right now.
