Wednesday 6 February 2008

Goldman Says Sell Yuan Against Rupee as China's Economy Slows

Goldman Sachs Group Inc. recommended selling the Chinese yuan against the Indian rupee as the worst snowstorms in more than 50 years and the threat of a recession in the U.S. damp growth in Asia's second-biggest economy.

Investors should buy the rupee as the central bank may allow gains to stem inflation, Goldman's London-based strategists Themos Fiotakis and Thomas Stolper, and New York- based Jens Nordvig wrote in a research note today. Rupee buyers may also benefit from India's higher interest rates while China may halt the yuan's appreciation as blizzards hurt production, they said.

``The pace of the yuan's appreciation could slow if authorities wanted to counter risks of slowing external demand,'' Fiotakis and Stolper said. ``The snow-related slowing in Chinese activity suggests authorities could opt for a temporary pause'' in the currency's advance.

Goldman, the world's largest securities firm, advised investors to agree to exchange the yuan for rupees 12 months from now at the rate of 6.01 rupees per yuan. The trade is recommended for the non-deliverable forward market.

The yuan bought 5.5 rupees in the spot market after rebounding 5.1 percent from a two-year low reached in October, according to data compiled by Bloomberg.

The yield on a one-year government note in India is currently 7.4 percent, compared with 3.5 percent on a Chinese security with a similar maturity, Bloomberg data show.

Lower Forecast

China's economy may expand at the slowest pace in six years in 2008 as a global slowdown curbs export growth, the World Bank said in a report Feb. 4. The Washington-based lender lowered its growth forecast to 9.6 percent from an earlier 10.8 percent.

Indian central bank Governor Yaga Venugopal Reddy, who refrained from cutting the benchmark rate last month from a six- year high, said the risk of inflation, stoked by rising food and fuel prices, influenced his decision. The inflation rate rose to a five-month high of 3.93 percent in the week ended Jan. 18, a government report showed Feb. 1.

``The rupee has traded very resiliently in recent weeks, despite the sell-off in local equities,'' Goldman's analysts said. ``The RBI may be more anxious to avoid rupee depreciation to contain inflationary pressures.''

The rupee's 12.3 percent rally last year against the dollar, the fastest since at least 1974, has stalled after global funds sold a record amount of equities last month as the benchmark stock index slumped 13 percent.

The yuan has extended gains by 1.7 percent this year versus the U.S. currency after strengthening 7 percent in 2007, Bloomberg data show.