The Bank of America is “quite bullish” on the Indian rupee and sees “significant room” for appreciation, according to its foreign exchange and rates strategist Rohit Garg.

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“We’re targeting 74 levels (against the dollar) for the Indian rupee,” Garg told CNBC’s “Street Signs” on Tuesday.

Recent risk-on momentum in the markets has had a “prominent impact” on emerging market currencies, especially those that are commodity-driven, he said. Risk-on momentum refers to an environment where investors are willing to put their money into higher risk instruments. Emerging market currencies are usually more volatile, making them a higher risk investment.

The Indian rupee has weakened significantly against the greenback, with the country’s already slowing economy being hammered further by the coronavirus pandemic when the government imposed a nation-wide lockdown that was extended a few times.

Year to date, the rupee has weakened 5.15% against the dollar, according to data from Refinitiv Eikon. It was last at 75.028 per dollar, as of Wednesday morning Singapore time.

Chinese yuan outlook

Looking at China, Garg said the Chinese yuan will likely hold below the 7.2 level against the greenback.

“Our assumption right now is that the U.S.-China trade deal still holds up,” the strategist said.

The offshore yuan was trading at 7.1013 against the greenback Wednesday morning Singapore time, while the onshore yuan, which is tightly controlled by the Chinese government, was trading at 7.1079 per dollar.

Garg warned that in the event that the trade agreement between the two economic powerhouses comes under threat: “We can’t rule out a move towards 7.4.”

This will likely depend on actions taken between the two economic powerhouses as the rhetoric heats up, he said.

Tensions between Beijing and Washington have reignited in recent weeks over a myriad of issues such as the China’s approval of a controversial national security law for Hong Kong that has called into question the city’s autonomy.

Last year, the world’s two largest economies were embroiled in a trade war, which saw both sides impose tariffs on hundreds of billions of dollars on each other’s goods.

“For now, I think we still believe that ... (the Chinese yuan) should not be weakening beyond 7.2 (per dollar),” Garg said.

First Published:Jun 3, 2020 9:07 PM IST