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Currency & Money
Compared with Japan and much of Europe, U.S. growth prospects look sunny.
What has gotten into the dollar? For the past three years the greenback has been in a funk against just about every major currency on the planet. Mounting gloom over America’s trade deficit, economic growth, and even the war on terrorism pre-occupied currency traders. But in the past few months, the dollar has been confounding forecasters — and whipsawing short-sellers — by rebounding sharply.
Some of the US currency’s newfound strength is a reaction to the faltering euro, which has been hit not just by doubts about the health of the euro zone but about the viability of the single currency itself. Europe’s doldrums — euro zone growth is projected to top out at 1.6% this year — have rekindled a long-smoldering debate about whether the European Central Bank needs to cut interest rates. The ECB has resisted those calls, but if it reconsiders, an interest-rate drop would have a negative impact on the euro. And while French and Dutch voters’ recent rejection of the European Union constitution was widely expected, it drew attention to the policy discord at the core of the EU. A few politicians, particularly in Italy, have even dared to suggest that the one-size-fits-all nature of the euro is the problem. Although no one expects the euro to collapse, the debate is contributing to an uncertain atmosphere in foreign-exchange trading pits.
Plus, foreign money washing onto American shores continues to underwrite the US current account deficit, which last year was $668 billion, or 5.7% of GDP. Many see a looming dollar crash in that number, but in fact the balance-of-payments crisis could be getting less critical. March and April trade data were better than expected, with the deficit well below the high levels of January and February. That has led to talk of a leveling out — another boon to the dollar.
EUR-USD: During the month of June Euro was trading in the range of 1.1941 to 1.2356. Weak economic indicators of the Euro Zone, rising pressure for a rate cut by ECB and a divided opinion on EU constitution were the main reasons for Euro weakness. With no immediate signs of any miraculous rescue, Euro will continue to suffer its course of weakness in the days ahead.
Support and Resistant Levels Resistance at 1.2145 / 1.2276 / 1.2347 support at 1.1933 / 1.1891 / 1.1863 levels.
GBP-USD : GBP widely fluctuated in the range of 1.8405 to 1.7672, 4.15 % depreciation in a month. With the Risksbank decision to cut rates by 50 bps and ECB under pressure for the same, two out of seven members of Bank of England’s MPC have now voted for a rate cut. This clearly indicates a rising pressure for BoE to cut its rate. If not, BoE at least will be forced to keep the rates constant. With the rising Fed rate, yield GAP with USD is narrowing. Further weakness in GBP is clear.
Support and Resistant Levels Resistance at 1.7989 / 1.8167 / 1.8245 support at 1.7667 / 1.7612 / 1.7589 levels.
AUD-USD : AUD traded in the range of 0.7496 to 0.7811, 4.03 % depreciation in a month. Decreasing yield GAP against USD and continued USD strength over other major global currencies mounted a heavy pressure on AUD.
AUD/USD will be weak initially around 0.7516 level due to less USD demand, and towards mid- month will become moderate to the level of 0.7689 and by month end will become firm to the level 0.7767. Wide-range trade expected with high intra-day volatility is good time to take short during rise and cover during correction.
Support and Resistant Levels Resistance at 0.7689 / 0.7767 / 0.7812 support at 0.7501 / 0.7487 / 0.7457 levels.
JPY-USD : The pair was trading in the range of 109.03 to 111.80. USD touched an eleven month high against the JPY. Japan’s economy has been continually underperforming, an ever increasing yield differential with the US Currency and good US Economic prospect along with a record high oil price of USD 60 per barrel have pushed the Yen to the bottom.
Days ahead, we see Yen to weaken further unless Chinese Yuan appreciation takes place.
INR-USD : The pair was trading in the range of 43.4775 to 43.6913 during the month of June. Despite growing USD rates, USD strength against other global majors, a record high oil price at $ 60 a barrel, could not force INR above 43.70 level. Continued inflow by FII’s (hot money flow) and record high BSE Sensex level (above 7100) have helped INR to buoy at this level.
In next few weeks, based on the movement of major global currencies, we foresee INR to trade in the range of 43.45 to 43.60.
Local Market:
The 91 Days T-Bill rate continuously rose over the month from 3.8521 % pa to 4.0355 % pa., simultaneously forcing the SLF to rise from 5.3521 % pa to 5.5355% pa. Inter-bank lending rates moved in the range of 4.50 % pa to 5.25 % pa except few weekend exceptions. Much water flowed down the rivers during the past month, not because of heavy monsoon but because of huge issues /roll- over of T-Bills and Bonds by NRB. Investment thirsty market participants have continued to pay premium on 5 year development bonds with a semi annual coupon of 5.50 % pa. The maximum yield at which the market bid for these Development Bonds till the second last issue was at 5.25 % pa as against the face value yield of 5.50 % pa.
More issues of T-Bills/ Development bonds are in the offing and we expect to push the Inter-bank rupee rates above 5.50 % by the end of this FY.
USD-NPR rates are expected to move in tandem with INR-USD rates due to the fixed pegging of INR-NPR. With narrower band volatility in INR-USD trading, we foresee a bandwidth of maximum 50 paisa plus/minus in the next few weeks trading sessions.
By Nabil Bank
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GB Banjara |
Costly cooking
BY G B Banjara
The government says it was a must to raise LPG prices. Fidgety about the unavoidable losses of NOC, it is thinking of allowing private companies to import LPG directly. If this be done, what will be the implications? Read on.
In the morning of 22nd June, the common man was greeted with yet another bad news. The government raised the LPG price by Rs.100 per cylinder (14.2 kg) to Rs. 900 per cylinder. That is an increase of 12.5 percent over the previous price of Rs. 800. This means that a housewife will buy gas at the rate of Rs 63 per kg. to cook rice that costs less than Rs 30 per kg! This also means that a gazetted government officer, who earns Rs. 8,000 per month is going to spend more than 11 percent of his monthly income on cooking gas, assuming his wife manages her kitchen at the rate of one cylinder a month.
Surprisingly, this time there was no big hue and cry over the issue of price rise except a few student groups staging token demonstrations in front of Nepal Oil Corporation (NOC), the monopolist importer of petroleum fuels in Nepal. Even our issue-hungry mainstream media and the political parties seem to have ignored it.
However, NOC has been still complaining that even at Rs. 900 per cylinder, it is bearing a loss of Rs. 130 per cylinder. That means that the price will soon cross the Rs. 1,000 per cylinder level if NOC were to cut its subsidy on LPG.
LPG is being imported under the bilateral agreement between NOC and Indian Oil Corporation (IOC). However, the import arrangement for LPG is different from other petroleum products. Unlike in other petroleum products, NOC does not import LPG directly. It only issues the purchase license to 20 or so private gas companies, which procure, bottle and distribute the commodity to households at a mutually agreed price between them and the government.
There has been long standing argument that the reason why gas is so costly is because its price is not determined in the markets but inside the closed doors of the Ministry of Industries, Supplies and Commerce. Why does not the government give a free hand to the private companies to import LPG directly? This question has been around for a long time along with the issue of privatisation of the NOC.
This time, the government has expressed its intent to do just that. Due to its compulsion to reduce the increasing losses of NOC and also to demonstrate that it has indeed taken the first step towards privatising NOC, LPG import will be freed to private companies soon. This means that the private gas companies can directly purchase LPG from any company in the world they want and can sell at the competitive market prices.
The important question to ask is: What will be the implication of this move? Will this help or harm the consumers? Will the gas companies benefit from this?
For any free market economist, it may be a straightforward policy recommendation without a second thought. But, a deeper look at this industry will indicate otherwise. The idea of mindless freeing of LPG import is further going to worsen the situation. In order to understand this, let us look at a few facts of LPG industry and try to relate them.
l A decade ago, LPG was not even a significant commodity in terms of consumption. It was considered a luxury used by only a handful of the rich. From a meagre 4,000 MT in 1991, LPG consumption has reached a level of 66,000 MT in 2004. A whopping rise of 16.5 times in 14 years! Nearly 400,000 families (over 10 percent of the country) are using LPG for cooking purpose. Thus, any price rise is going to hurt a very significant portion of population - mostly the urban middle class.
l While the prices of petrol and diesel are lower in Nepal as compared to India, the price of LPG is approximately 75 percent higher in Nepal. This is partly due to the fact that our import prices are increasing due to the rising petroleum prices internationally. But, it is also due to the high government tax on LPG. There is nearly a 22 percent tax levied by the government including a custom tariff of 6.75 percent, VAT 13 percent, local development tax 1.5 percent and a special fee of 0.5 percent.
l Our gas companies are too small in size. The largest gas company has less than 200 MT as storage capacity. The entire industry’s storage capacity cannot meet more than 10 days’ aggregate demand.
l India being a net importer of LPG, there are restrictions on its export. Only one company, Indian Oil Corporation (IOC), has been allowed to export LPG from India.
Freeing LPG import without proper groundwork is undoubtedly a bad idea, because this will hurt the consumers, the gas companies as well as the government. Twenty private gas companies chasing one supplier in India means monopoly power will shift from NOC (a controllable monopolist) to IOC (uncontrollable monopolist). IOC will want to take price premium for its monopoly right, thus raising the gas prices further. Any improvement in efficiency brought about by competition among the private gas companies will be offset by this price premium. A few gas companies could try to bring LPG from third countries directly, but prices will not be lower because of higher transportation and management costs. Also, such import from third countries will require huge storage capacity for the importing company, which does not exist now.
Consumers will lose because gas price will shoot up beyond Rs.1,000 per cylinder immediately. There will be price fluctuations with every purchase. This will give local gas dealers an incentive to hoard and jack up the prices artificially.
The government will lose too. Because, gas being an essential commodity, it will have to pay a very high political costs for supply shocks and huge price rises, which are likely to be the case in the new scenario.
The government cannot shrug off its responsibilities by mindlessly freeing the gas import. Then, what is the solution? It should work on freeing the import license gradually, but it has to do it with a proper homework. It should ensure that LPG remains within the reach of a common man’s budget by maintaining an affordable price band. It should intervene by lowering the tax rate if prices tend to go beyond this price band. Remember, while India is gradually removing subsidy from other petroleum products, a high level of subsidy on LPG is still there keeping the consumers’ welfare in mind.
Private sector gas companies should be encouraged to consolidate and expand their storage capacity. They should be given some time for this. Alternative sources of LPG import and their cost-benefits should be analysed carefully.
Over the long run, we need to work on reducing the dependence on LPG by introducing alternative fuels for household cooking. We should urgently explore the possibility of commercialising the natural gas available in the Kathmandu valley, which also happens to be the largest market for LPG in Nepal. The government should encourage the use of electricity for household cooking purposes by reducing the electricity tariff in the mornings and evenings. Though there are other problems associated with it, as the demand for electricity is already the highest during the mornings and evenings, solutions have to be seriously sought. Cost effective solar cooking technologies for the households could be another option to look at.
(Banjara is a management expert)
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