US Dollar:

A primary concern for all during the year is stability. A relatively strong recovery in the United States would be sufficient to attract foreign capital to support the US dollars. The Federal Open Market Committee voted unanimously to raise the federal funds rate by 25 basis points to 1.25 percent, its first hike in four years. The hike did little to stir the market enthusiasm as the Fed reiterated that with inflation likely to stay "relatively low", pace of hikes "is likely to be measured". Accordingly, market believes that gradual hikes will not lure enough foreign money to fund U.S. current account deficit, the dollar fell across the board against major currencies as the 25 bps hike was long factored into the exchange levels.

Japanese Yen:

Large capital outflows from Japan, since the beginning of the fiscal year, had contributed to Japanese Yen weakness. In the wake of US dollar weakness in the recent sessions, the Yen has been the prime beneficiary. With the Japanese economy recovering, the Yen is expected to rise and we would have seen it testing 107 level. Probably we will be seeing Japanese Yen testing 105.50-106 levels in near term taking cues from major happenings in the Japanese economy.

Euro:

The recent weakness of the Euro versus the US dollar is related to US dollar strength and outlook for the euro zone. However, rebound in export orders and gradual pickup in consumer outlays encourages a recovery. The chances of a rate cut by the ECB have vanished with favorable outlook for a rate hike by end of 2004. We do expect a momentum in this currency by end of this month. Market expects Euro to touch 1.25 levels in the near term.

Sterling:

Sterling rose from 1.7890 from May to 1.8340 early this month and touching levels at 1.84. Bank of England aims to stabilize housing price through raising interest rates and a 25 basis point hike came this month. With interest rates standing at 4.50%pa, second only to Australia, sterling is equipped to sustain its recent gains versus the dollar. The Monetary policy committee acknowledged the labour market conditions, growing consumer demand and improved business conditions in the region and this firms our basis for further BOE rate hike. The market expects the rates to climb up towards 5.0%pa and GBP/USD to trade between 1.8400 to 1.8600 in near term.

Indian Rupee:

The overall trend in the rupee is seen down in the wake of budget uncertainties. The rupee might weaken below 46.00 rupee per $1 as corporate dollar demand continues. Foreign exchange inflows from FII continue to remain less as investors have postponed their investments until the Union Budget which will be taking place on 8th of July. Currently trading level is between 45.75 to 45.95 per USD.

Nepali Rupee:

Nepali Rupee trading is more influenced by the USD/INR movement due to the fixed parity between the two currencies (Indian Rupee 1 is equivalent to Nepali Rupee 1.6). Inter-bank demand and supply does not play major roll in determining the direction of USD/NPR rates. Accordingly Nepali Rupee devalued against the USD dollar by 75 paisa from the start of June, 2004.

Local Market

91/364 days T-Bill Rate movement / Money Market

In the month of June yields in 91 days T/Bills and 364 days T/Bills ended slightly higher at 1.4975%pa and 2.6733%pa respectively against the starting levels for the month at 0.8426%pa and 2.5323% pa. With an increased foreign debt and improved revenue collection HMG is cash surplus. As a result, we are observing lower yields on T/Bills. Until we observe fresh borrowings to absorb excess liquidity from the market, the yields in T/Bills are expected to remain low.

With the REPO rate trading between 1.20%pa to 1.70 %pa during the month, the inter bank call money rate hovered between 1.00%pa to 1.50 %pa. In the absence of fresh T-Bill issues of significant volume, both the above rates are anticipated to range bound at above levels.

This material is contributed by Nabil Bank Ltd.          

Disclaimer:

This publication is for information only and is not to be construed as an offer to buy or sell investments. Nabil Bank Limited, whilst considering the contents to be reliable, takes no responsibility for any individual investment decisions based thereon.

Trade as a Means to Fight Poverty  

How will the increased foreign trade help in poverty alleviation? A result of a simulation exercise.

Policy changes liberalizing Nepal’s international trade affect poverty in two ways: (i) Trade increase manufacturing output and employment on a one to one proportion (i.e. an elasticity of one). Employment in manufacturing sectors increases the wages of the newly employed relative to their old wages in the informal sector where they are coming from: also, the newly employed come to manufacturing because of certain demographic characteristics; thus, gains in urban incomes are more than in rural areas because they have these special characteristics; (ii) Transport improvements associated with the growth of trade lead to an increase in the use of high yielding inputs and increases the relative prices and production of non-traditional non-cereal crops (e.g. fruits, vegetables, spices, and tea), which in turn lead to higher incomes.

Formal Sector Growth and Employment Creation

Substantial pro-poor employment gains can be achieved if the trend growth rate of manufacturing and textiles (around 6% annual growth) of the last five years of the 1990s is maintained over the next five years. This can lead to an increase in the average incomes over consumption of all by 5% and up to 48% for poor urban households over the next five years. This average assumes that the current urban-rural ratio does not change and that the overall effect of gains from rural-urban migration to these manufacturing jobs is not included. While households from urban areas and the Terai benefit more, rural households in other areas also benefit (table 1).

The effect of achieving higher growth rates and employment levels by 2 percentage points (i.e. from a trend of 6% growth to 8% growth) over the next five years is an income increase of over 50% of consumption for poor urban households. While household incomes in the poorest three deciles in rural areas increase by about 3% under the low growth regime of 2%, this increase jumps to 4.5%, on average, under the higher growth regime. The effect on poor urban and poor, female-headed households is even higher (table 1). The benefits of expanded employment in manufacturing and textiles are unequally distributed.