INR update: Fears of a pandemic loom even as markets hope for the best

The novel corona virus situation can be compared to turbulence in an aircraft which makes one fear an immediate crash but statistically crashes are rare while turbulence is frequent. Markets seem to have realized the same and assumed that the virus will cause no harm which can be termed significant from a global perspective. Looking at the history of the past 100 years of pandemics across the world it seems a valid assumption as none of the episodes have been able to affect growth substantially at a global level. This said, the turbulence has become much more pronounced (with virus spreading and death toll rising) and it would be difficult to not fear a crash till the time it completely stops.

The corona virus is the only dominant theme currently driving markets. The markets seem to surprisingly calm about the budget and expects no surprises there. The inflow pipeline post budget continues to be strong which should limit the upside in case of fresh risk off sentiments. Due to the corona virus news flow short USDINR positions could stop out easily and therefore not recommended. CMP 71.20, Range 71.10-71.50 for the day.

INR update: Yuan gains and inflows continue to support INR ahead of Budget

INR update: Yuan gains and inflows continue to support INR ahead of Budget

The lower than expected US Industrial production was more than partly mitigated by the strong housing starts print on Friday. This week EU and US flash PMIs will give sense about economic activity in the developed world while ECB on Thursday will be keenly watched for the course the central bank takes under Lagarde’s new leadership.

CNH continues to gain (CMP 6.852) post the deal signing and better than expected China macro data release last week. Technically a break of 6.8450 on a weekly basis can suggest another 2% appreciation in Yuan and therefore it is a critical level to watch. USDINR has gradually moved higher from 70.95 levels to 71.08 on the back of short unwinding. Inflows continue to dot the way forward with uncertain timelines. While there doesn’t seem to be any reason for USDINR to move higher another 15p move up could be on account of short unwinding and regular outwards. Broad range for the pair is 71.25-70.80 while for the day 71.15-70.95 could hold, CMP 71.08

INR update: China’s currency manipulator tag removed

US removed China from the list of currency manipulator list and said that China has committed to not enforce competitive devaluation of the Yuan. This would mean that for at least the next fortnight Yuan should maintain its stead appreciation trajectory with a target of 6.82 (CMP 6.87). This steady Yuan appreciation should result in limited RBI intervention in USDINR. CNHINR has moved higher from 9.87 in October beginning to 10.3 now which could reason enough for RBI to allow INR appreciation towards 70.35 in case inflows continue to get sold. Also, USDKRW had traded above 1154 for the last 9 months and now the pair has broken that support and is trading at 1153.
Markets seem to have ignored the breakout CPI print yesterday at 7.35% considering that core inflation was still at 3.7%. The interpretation being that food prices are driving the headline inflation and since core is still under control, the higher than 6% number is transitory in nature.
USDINR 1m NDF is trading flat. In the next 10 days there could be two large chunky inflows supporting some INR gains from here. While last 10 days of January could drive USDINR towards 71.50 as markets focus on budget on the 1^st of February. A break of 70.67 on USDINR can indicate 70.35 while a break of 70.95 would indicate the end of the downtrend in the pair. CMP 70.85, Range 70.95-70.67.

INR update: Iran retaliates; markets maintain calm as Trump’s address is awaited

Iran fired missiles at American bases in Iraq today. The same was confirmed by US while Iran said that its revenge action is complete and it seeks no war. The US President is to address the nation on Thursday morning. In case the missile attacks would have led to loss of American lives then the retaliation from the US would be severe. Otherwise the market seems to be pricing in little possibility of further escalation in the tension between the two countries.

USDJPY initially moved lower from 108.50 to 107.65 levels but is now trading higher at 108.30 levels indicating that risk sentiments are not hit as much as one would have expected. Yuan continues to appreciate (CMP 6.9450), a weekly closing below 6.92 would indicate that 6.85 is on the cards.

Technically USDINR has broken 71.85 convincingly now (CMP 72.03), and the next major resistance is at 72.25 and 72.44 levels. Although a lot of chunky inflows are in the pipeline in the next 2 weeks, the geo political tension muddies the waters making it difficult to form a clear view. CMP 72.03, Range 71.85-72.25.

INR update: Moderate improvement in Risk sentiments

A deterrent remains effective only till the time it is not used; it is unlikely that Iran will take the US head on by blocking the strait of Hormuz (which is Iran’s nuclear weapon). Like North Korea, Iran’s soul objective is to protect its regime and the regime stays only till the time it gives US an excuse to invade. The most likely response from Iran would be increased proxy war against US troops in Iraq and across middle east. While this will keep markets worried but by the end of this week without any further escalation markets could have totally forgotten the new year incident.

Risk sentiments improved as Israel distanced itself from the killing of Sulaimani. USDCNH trades below 6.96 as KRW also registered modest gains. Equity markets in Asia is in the green. A daily close in USDINR below 71.68 would against open the door for 71.35 (favoured direction). A couple of chunky inflows over the next fortnight should also keep USDINR well offered. CMP 71.72, Range 71.80-71.60. 

INR update: Markets remain tensed as it awaits an Iranian response

Considering the fact that it seems certain that the Senate will keep Trump in office when the impeachment trial begins in the second week of January; it is difficult to link the impeachment trial to the US decision of escalating tensions with Iran. But what is unnerving is a President facing impeachment and having to decide on possible military actions in case Iran decides to retaliate. This week global markets would stay anxious while a few days without escalation would make markets look ahead.

US ISM (manufacturing PMI) had continuously slipped in 2019 and Friday’s reading below all estimates at 47.2 was the 5^th reading below 50 indicating a shrinking growth differential between the US and other DM economies. The US ISM prints also indicate that the next rate move from the FED would be a rate cut.

USDINR stays on the edge and reacted on the Iran geo political tension as oil prices have spiked to 70.44. The next resistance for USDINR is in the zone of 72.25-72.44. While escalation of geo political risks can happen instantly, de-escalation would only take effect gradually; Therefore, this week needs to pass before one sets a direction for USDINR. For the day CMP 72.01, Range 71.95-72.25.  

INR update: Geo political tensions flare up roiling market sentiments

Sentiments turned sour globally today morning as US and Iran came face to face in fresh geo political tensions in Iraq. It is in Iran's interest to ensure that the tension does not flare up. On the other hand the US is unlikely to back down if Iran or its forces show any aggression. Therefore like the North Korea geo political tensions in 2018 it is unlikely that these tensions flare up.

In a similar bout of geopolitical skirmish, recently on 14th September 2019 Saudi oil facilities in Abqaiq were attacked using drones by Iran backed rebel groups from Yemen. USDINR jumped from 71.13 to 71.98 and by the end of third day it was back at 71.17 levels. Oil took longer to normalize to pre attack levels given the concerns around restoration of supply which lasted till 30th Sep 2019.

Sustained trading in USDINR above 71.70 would technically indicate a target of 72.40. Therefore it would be prudent to wait until Monday before making a view on USDINR direction. CMP 71.65, Range 71.70-71.50.

INR update: January a crucial month for Yuan, dollar index nears crucial levels

Since 2016, every January CNY fix has moved by an average of 1.86%. This can be contrasted against average absolute monthly movement of 0.9% in the same period. Last 3 years since 2017 every January CNY has appreciated by 1% to 3%. This could indicate that China implements its desired currency direction from January every year. Looking at the CNY fix at the close of 2019 it seems the desire this time is to make Yuan stronger in the backdrop of a Phase 1 deal signing and ahead of a Phase 2 confrontation. Although CNY fix has given a break of 6.98 I would wait for another week till 8th of Jan so that higher market volumes affirm the lower breakout in USDCNY. Technically the target for USDCNY would then be 6.92 and lower, (CMP 6.9762).

USD index needs to break 96 to confirm dollar weakness as a trend for 2020. CMP 96.7, a break of 96 would need significant development and momentum which seems to be missing now. Perhaps a breakdown in USDCNY would be a catalyst for a broad based dollar weakness in January 2020.

A confirmed breakdown in USDCNY or dollar index should be INR positive in spite of sustained buying by nationalized bank. In this back drop the expected range till first half of January 2020 should be 71.45-70.80. For the day, CMP 71.26, Range 71.35-71.15. Expecting some INR gains in the second half  today given the quarter end.

INR update: USDCNY fix to be watched for sustained Yuan appreciation and dollar weakness

In otherwise muted markets CNY fix today printed at 6.9805 (from Friday's 6.9879) indicating that PBOC might be finally allowing the Yuan to appreciate in spite of the doubts markets had on the phase 1 deal. If this Friday's CNY fix is below 6.98, it would be significantly dollar negative for EURUSD and emerging market currencies alike.

While CNY fix must be seen to ascertain the direction for EM currencies in general, for USDINR appreciation would be controlled and limited because of continuous buying from nationalized banks in the futures and OTC market. Brent is trading higher at 68.30 because of increasing geopolitical tensions in middle east. Markets seem to be comfortable with Brent between 60-70 levels and we might not see any sustained impact on other asset classes till the time Brent moves higher than 70 levels.

With certain chunky inflows in pipeline for Jan 2020 and likelihood of fresh portfolio allocation along with a possibility of a lower USDCNY fix, first half of January 2020 might be positive for the rupee driving USDINR towards 70.70 levels from the current 71.3350. For the day CMP 71.34, Range 71.45-71.15.  

2019 snapshot and what's next for currencies?

2019 snapshot and what's next for currencies?

In 2019 dollar index gradually drifted higher as trade war escalated; trading above its 200 WMA (at 96) for the entire year and just below a 20 year downward sloping trend line (at 99), a break of either would determine the next move across currencies. CMP  97.65.

EURUSD similarly was not able to breach its 200 WMA during the year at 1.1357 and slowly drifted lower towards the 1.10 handle. In EURUSD a break of 1.10 and 1.1150 should determine but only the next 2 big figures. CMP 1.1080.

USDJPY trended lower from 112 to 106 in the first half and then back to 110 levels since August. The move up has got resisted at 200WMA at 109.75 which looks like a hard ceiling given the price action. CMP 109.40.

USDCNY fix started 2019 at 6.7 levels and headed to 7.1 as trade war escalated. The cool of to current 7 levels was on account of expectations of a phase 1 deal. A break of 6.98 on USDCNY fix would indicate a lower breakout in the pair and should result in EM currency appreciation across when it happens. CMP 7.01.

Price action in USDINR mostly stayed in the range of 69-72; but RBI intervention since October 2019 has shifted the base higher to 70.70 levels which looks like a hard floor now (except if USDCNY fix breaks below 6.98). On the other hand a weekly close past 72.40 in USDINR could pave the way for a move towards 74 levels. CMP 71.18.

INR update: Positives priced in, Rupee can now come under pressure given the macros

With the US-China phase 1 trade deal already digested in price, the one reason which could have led the dollar index to break 96 (200 WMA) has proved to be insufficient. We should continue to see USD index trade in a range of 96.65 and 99 for the foreseeable future (CMP 97.31). On the other hand, with US elections behind us, what lies ahead is again Brexit related uncertainty which should also weigh on the EURO making a weekly close above 1.1158 unlikely (CMP 1.1133).

USDINR has not been able to break lower in spite of the US-China deal plus large inflows. Therefore, now the focus shifts on the weaker macros helped by a possible move up to 99 levels on the dollar index. To add to this Brent has moved up by 7% in the last fortnight which will also help an up move in USDINR.  Last week’s close of 70.81 should act as a good stop for long USDINR positions. A close above 71.15 should pave the way for 71.70. CMP 71.09, Range 70.95-71.15.

INR update: US-China trade deal done, Brexit ambiguity over, markets celebrate

It has been an eventful morning. US announced that a Phase 1 trade deal has been agreed to with China. Consequently USDCNH is trading at 6.96 as compared to 7.025 yesterday. China is still to announce the same and USDCNY fix at 7.0156 still prices in some amount of caution. A USDCNY fix next week below 6.98 would be a Chinese confirmation on the in principle agreement with US. Technically USDCNY fix moving below 6.98 calls for at least another 1% appreciation towards 6.92.

With the conservatives likely to win a clear majority in UK elections the uncertainty around Brexit seems to be reducing leading to a relief rally in GBPUSD. GBPUSD seems poised for 1.37 today (CMP 1.3460). driven by positional short covering.

A weekly close in USD index (CMP 96.77)  below 96.00 (200 WMA) would likely bring in 94.5 levels and therefore seems unlikely (prices stay in range more often!). On the other hand if EURUSD closes above 1.1150 today, then it would be significantly bullish for the pair with a target of 1.1357.

Price action yesterday suggested that the inflow is done with. Price action yesterday afternoon also suggested some large buying driving the pair higher from 71.60 to 71.85 perhaps driven by nationalized banks. There doesn’t seem to be any likely bullet inflows in the pipeline for the next 1 month in USDINR.

USDINR will be driven by USDCNH for the next few session post which local macros should start dominating. 70.30 is 200 WMA for USDINR and a weekly close below the same would be significantly bullish for the Rupee and therefore unlikely. For import 70.30-70.50 is a buy zone from a 1-2 month hedge perspective. For the day CMP 70.61, Range 70.35-70.70.    

INR update: FOMC dovish on rates but unchanged on growth/inflation indicates a structural change

Before the FOMC yesterday the message was that 2% CPI in the US is enough for the FED to consider hiking rates but Powell’s comments that persistent high inflation is required to hike, changes that expectation. Yesterday US CPI printed at 2.1% but now the FED doesn’t see it as reason enough to even consider hiking in 2020.

For 2020 the FOMC has kept GDP and inflation forecasts at September levels but lowered the rate forecast from 1.9% to 1.6% which is a change of approach for the FOMC. The reason for this change of approach could be trade war concerns with an objective to reach even lower levels of unemployment. If this change indicates a structural shift then it perhaps paves the way for a substantially weaker dollar in 2020. Dollar index CMP 97.03 with immediate objective at 96.01 (200WMA).

USDCNY fix came in lower at 7.0253 against 7.0383 indicating moderate optimism ahead of the trade deadline. Although for Trump the choices are increasingly difficult, delaying additional tariffs would suggest Chinese victory and implementing incremental duties could result in a stock market fall. Price action suggests that the large inflow in USDINR is over although the trend is still lower with next support zone at 70.30 (200 DMA) to 70.55 levels. With other EM currencies also supporting INR strength one can expect USDINR to head lower towards 70.50 today. CMP 70.66, Range 70.50-70.75.

INR update: FOMC likely to sound more optimistic; Inflows dominate USDINR price action

The FOMC’s communication strategy has aimed to ensure that markets remain confident of the economic outlook when times are good. In the current situation FOMC will look to boost market sentiments further. Currently the market prices in the next move as a rate cut somewhere in mid 2020, which the FOMC will look to delay or change into a rate hike. Therefore the dot plots from the FED can be expected to be somewhat hawkish even though there is no immediate rate action likely.

The FOMC today plus the nearing trade tariff deadline of 15^th Dec can result in the dollar index heading towards 97.8 levels from the current 97.50. UK election results will be available on Friday morning only. Markets have priced in a Conservative majority in spite of the market’s poor track record in predicting election outcomes and its impact on asset prices.

USDINR has seen large inflow getting sold over the last 2 days. USDINR 1m NDF is trading marginally right (1p) since yesterday even though RBI fix is trading around -0.75p. This seems to suggest short unwinding in NDF and actual inflow in onshore market. Likely that some large inflow is continuing even today. Nationalized banks are buying since morning but that has not been able to arrest the price fall. I would expect the downtrend to continue today, CMP 70.77, Range 70.85-70.60. The next major support for USDINR is in the zone of 70.30-70.55

INR update: Trade deal becomes less likely although market sentiments remain supported

Considering that less than a week remains for the trade deal deadline the chances of a phase 1 deal being struck before 15^th Dec 2019 appears to be less bright as compared to last week. The political compulsion for Trump to push for a deal also seems to have abated with his approval ratings not declining any more plus equity markets holding on to their gains. Until November 2020 elections Trump gains not as much by doing the trade deal but rather by keeping hopes alive of a deal and simultaneously keeping his constituents involved in the match between the two super powers. This makes me think that Trump will make the contest more difficult before he wins it sometime before the elections which are still 11 months away.

Dollar index failed to continue its downward trend and closed just higher than its 200 DMA (97.67). Asian currencies trade weaker against the dollar as mild risk off plus dollar strength weighs on the currencies. USDCNY fix has moved higher from Friday’s 7.0383 to 7.0405. This lack of global support makes me believe that the lower break in USDINR today morning is not sustainable and is flow driven. The pair should be bought here for a move back towards 71.40. Range for the week 70.95-71.45. CMP 71.12, Range for the day 71.04-71.30

How Real estate prices are the key to boosting demand in India?

Although I refrain from writing anything which can be construed a suggestion to policy makers but today I am making an exception. The reason for not doing so is simply because there is no end to it. And the reason for making the exception is the news about government exploring personal income tax cuts to boost demand.

It is the individual’s balance sheet which needs to be boosted to get the wealth effect back; and this can be done without putting the country at risk of a credit rating downgrade.

India’s adult population (above 18 years) is roughly 870 million; out of which 680 million have a total wealth of Rs. 0.7 million or less (www.statista.com), let's call them the Mass. Yes total wealth and not yearly earnings. 

Out of the remaining 190 million people, 170 million have a total wealth of Rs. 7 million or less. Let’s call them the Fortunates. The remaining 20 million are richer and let us call them the Wealthys.

If we were to list the financial assets of the 870 million adults in the country who drive economic demand then the Mass (680 million people  with wealth below Rs. 0.7 million) would have around 20% of their assets in banks or government saving schemes or gold. 80% of the Mass’s assets by value would be made up of agricultural land or the house that the family lives in. Considering the low wealth levels of the Mass, bulk of their assets would be functional (i..e., agricultural land or occupied house).

The Fortunates (170 million people who have Rs. 7 million or less in total wealth) will again have at least two thirds of their financial assets in real estate specially agricultural land, occupied house or workplace. The remaining one third would be in other financial products and gold. The split would not change substantially from the Mass as the Fortunates would use their higher but still low earnings to first get basic assets like a better house or an income generating land or shop.

Even if we were to assume that the 2.5% Wealthys have a median income which is double that of the richest Fortunate, the median would be Rs. 14 million. Thus at this level also real estate is likely to form a substantial part of total asstes, let us assume a fifty-fifty split.

Therefore basis the above assumptions we can say 97.5% percent of Indian adults have at least more than two thirds of their wealth in real estate in the form of agricultural land, occupied house or place of work. 

Now if the prices of these real assets go down the population becomes less prosperous and over a period of time starts feeling it too.

The house that one lives in is not marked to market at the end of every financial year. But the price of that asset forms the pivot of future security and savings estimates, simply because it forms bulk of the savings for bulk of country's population.

One might argue that these real estate holdings are not liquid and therefore do not affect demand. But what cannot be argued is that these real estate assets are bulk of the individual's balance sheet. What cannot be argued is that if your balance sheet shrinks then you become less Fortunate. If one becomes poorer then sooner or later one behaves accordingly. The "how" of it is very important and lack of an elaborate behavioral explanation in no way suggests that it does not happen.

Therefore till the time prices of these real estate linked assets go up we are unlikely to see demand picking up sustainably across the population.

The nominal prices of Real Estate have corrected 20% since 2014 according to estimates. It is no coincidence that growth has seen a steady deceleration in the same time period.

Now what can the government do to revive real estate demand and therefore prices, without taking the fiscal route?

A simple method could be to allow first time home buyers full deduction of interest against their income, for personal income tax purposes. This would effectively reduce the funding cost of home buying by a third without any drag on tax collection as currently home offtake is at a record low.

It would lead to releveraging of the individual's balance sheet with a less risky and now reasonably priced real asset. Noteworthy is that there is no other transaction in which an individual commits herself to an asset which is worth multiple years of her income. Therefore such transactions inevitably result in higher growth with large amounts of money changing hands in such short period of time.

Real estate inventory reduction would help NPAs giving room to banks and NBFCs to lend to other areas of the economy. The resultant uptick in real estate prices will show on the balance sheet of the individual although only as a passing thought; But that passing thought is enough to choose between a Rin or a Surf and sometimes between starting a new business or not.

INR update: Dollar index heads towards a trend reversal

Today is a crucial day for the dollar index (CMP 97.37). As suggested dollar index was not able to surpass 98.9 levels last week / month. A weekly close for the dollar index below 97.35 would open the door for 97 figure and 96.01 (200 WMA). NFP today would be crucial as a weaker NFP would result in the overtly dollar long positions against EUR ($8.5b long according to IMM) and JPY ($4.5b long) to be unwound. This would reflect across EM currencies and notwithstanding the connotations of risk on-off sentiments.

RBI has clearly shown for records that its mandate is managing inflation at 4% and not core inflation or some other measure of price. This stance is worth applauding, at least currently as inflation is above 4% and likely headed towards 5%. Unlike in the recent past, RBI hopefully would show the same determination to keep inflation at 4% when inflation dips below median. If there is one macro factor which has been a problem for the country it has been inflation but in the same breath I must mention that for a growing country, inflation at 5% is perhaps much better than inflation at 3%.

The next level to watch for USDINR is that of the dollar index as mentioned above. A downward break of dollar index as mentioned earlier could take USDINR to 70.30 next week. For today we are seeing a correction in the short positioning built over the last 2 days. For the day CMP 71.35, Range 71.50-71.25.

INR update: US pushes China to close phase1; dollar weakens against G7 as US slows

The US seems to be putting more and more pressure on China to complete the Phase1 deal. In November 2019, Trump had asserted that the deal with China a day after his inauguration in Jan 2021 will be much worse than a deal before. What he said yesterday was just rephrasing the same sentiment.  US House of Representatives has approved a bill sanctioning human rights violations by China against Uighur Muslims, this too seems to be to put more pressure on the Chinese administration to close a Trade deal. As we approach the deadline more volatility can be expected as the US pushes China to close a deal while the Chinese seem to be playing the waiting game. There doesn’t seem to be a reasonable way to guess the outcome to this contest.

On the other hand, equity market’s being at record highs have given more teeth to the US administration as it opened the French front in the trade war, threatening to put tariffs on French imports worth $2.4 billion.

The fact that US manufacturing ISM has been under 50 for four times in a row makes me believe that the US data would start surprising lower as the economy slows down. For a change the currency markets, seem to focusing on US data and not the increased trade war rhetoric which has resulted in dollar weakness after the US manufacturing ISM data on Monday. Today’s US ISM services print becomes a very important piece of information for this argument.

USDCNY fix has moved higher from yesterdays 7.0224 to 7.0383 and this week we can see the fix headed towards 7.05 given the situation in US-China trade war. While dollar weakness could prevail against G7 (as mentioned last week dollar index is unlikely to sustain above 99 in the medium term). EM currencies are more likely to move on account of risk sentiments which seem to be off the table for now. For the next few days USDINR should trade in a range of 71.55 to 72.20. For the day CMP 71.72, Range 71.60-71.85 with 71.85 the preferred destination.

In the medium term even if US-China trade deal doesn’t happen USDINR is unlikely to sustain above 72.44 levels.

INR update: Chinese and Indian data indicate a pause in pace of slowdown

Today morning market sentiments are a tad positive given China manufacturing PMI (Caixin) which came in at its highest in 3 years (51.8 vs 51.7 last month). On the trade front China seems to have laid down clear terms which is a rollback of all existing tariffs as a part of phase 1 deal. 

India’s GDP was expected by many to be much below 4.5%, making the print at 4.5%, a relief. On the other hand GST collection figure at higher than Rs. 1.03 lakh crores for November indicates that growth momentum has perhaps stopped getting worse, first sign of bottoming out. Although it is too early to form a definitive view on domestic growth as yet. 

This week RBI is likely to cut rates again and many believe that this could be the last cut in this cycle given that inflation is running higher than 4%. Contrary to normal economics, INR appreciates in a run up to a rate cut perhaps because it is seen as growth supportive. Dollar index closed November well below 98.9 levels indicating price action to be likely range bound for global currencies. USDINR failed to sustain above 71.75 in the first hour of trading today indicating that the pair returns to the  71.75-71.40 range for the rest of the week. First half of December should see some inflows making 71.40 the preferred direction. For the day, CMP 71.69, Range 71.78-71.55. 

Thanks 
Saket Agarwalla 

INR update: Month end price action watched as US-China deal goes down to the wire

The market continues to remain uncertain on the trade deal as the fresh tariff deadline of 15^thDecember nears. Mostly USDCNY fix moves in one direction during a given week and this week it started from 7.0397 before making a low of 7.0271 yesterday and registering a bounce to 7.0298 today. This indicates that the US and China were moving closer to the deal before the HK bill became law on Wednesday. 

A monthly closing in dollar index above 98.9 (not the preferred view) would be significantly bullish in an otherwise range bound market. 

Nifty is at a crucial juncture and a weekly closing below 12,050 (CMP 12,111) would perhaps indicate 11,400 and the same would be accompanied with risk off sentiments across currencies (not the preferred view). 

USDINR 1m NDF is trading 0.5p left while EM currencies have mildly depreciated since yesterday. Asian equities are in the red today as China threatened retaliation to the HK bill. Yesterday USDINR was bought aggressively by custodian banks and commodity importers. A weekly closing for USDINR outside 71.30-71.75 is important for a fresh trend. For the day CMP 71.72, Range 71.80-71.50.   

INR update: HK bill become a law; US growth surprises

 
One would think that the President’s signature on the Hong Kong bill would not bode well for a US-China agreement on the Phase 1 of a trade deal before 15^th Dec 2019. But the fact that the USDCNY fix has come in lower at 7.0271 vs yesterday’s 7.0349 indicates that the development is unlikely to affect the trade deal, the same is also indicated by a reasonably stable USDCNH today. Equity markets continue to price the phase 1 to be signed by December 15^th. 

US growth continues to surprise with the Q3 GDP getting upwardly revised to 2.1%. This along with other indicators makes it certain that the FED is likely to stay on hold for the next 3 months at least. A monthly closing above 98.9 on the dollar index would be a breakout (and therefore unlikely) and significantly bullish. 

USDINR 1m NDF is trading flat as compared to yesterday 3p left which indicates reduced selling pressure. EM currencies have moderately depreciated since yesterday evening as risk appetite looks subdued as compared to yesterday. We have seen buying from Nationalized banks since morning. Inflows have been driving USDINR since the last 1 week, and today morning they seem to be missing. For the day, CMP 71.46, Range 71.60-71.30. A couple of hours of trading below 71.30 would indicate that 71 figure is on the cards. A closing above 71.55 would bring in the range of 71.-40-71.70 again. Preferred view is 71.30 and below.

INR update: Rare unscheduled Trump-Powell meet; Trade deal optimism fading

For the first time in 37 years a US President called the FED Chairman for an unscheduled meet. Every effort was made to keep the meeting confidential. Post the meeting the President said that the meeting was to discuss negative interest rates, trade war, economy, inflation and dollar strength. The President would have realized by now that Powell cannot help him in lowering interest rates if the economy doesn’t warrant more cuts. The only thing that the elected President and independent Fed chair can work together on is on the currency. Logically it seems that there is a high chance that the meeting was about dollar strength and the options USA has if it wants to weaken the dollar. This also suggests that there could be some negative news on US-China trade deal which is making the President explore alternative options. But although logical the above is still a conjecture, I would look to sell USDJPY at 108.80-109.20 region with stop above 109.40 to participate in the eventuality of a risk off because of negative news on the US-China trade war. Or in case there is some action on Trump’s concern that the dollar is too strong for USA’s competitiveness then also USDJPY could move lower. 

On the other hand in spite of the US administration talking up trade deal hopes nothing has materialized. Reports suggested that China is pessimistic about possibilities of a trade deal being reached in a hurry. Meanwhile the university siege in HK might suggest that at this juncture China might not want to concede victory to the US on the trade deal. USDCNH is now well above 7 levels at 7.026 indicating increased concerns on the trade deal. 

USDINR 1m NDF is trading 1.5p right as compared to 0.5 left yesterday morning indicating moderate buying pressure on the pair.  EM currencies have moderately depreciated since yesterday afternoon. Risk sentiments are muted today morning while participants are largely neutral on their short term positioning indicating scope of long positions being built. Nationalized banks continued to buy aggressively as it seems that the authorities locally do not want INR to appreciate much in the wake of a weakening economy. CMP 71.96, Range 71.82-72.20. 

INR update: Trade deal optimism; China struggles with economy and unrest

It is a lighter week for fresh data prints but the FOMC minutes will be closely watched as every incoming piece of information would now be dissected  to ascertain if the FED is going to hold or cut in the December FOMC. USDCNH has been firmly held above 7 levels for a week now which indicates that the next bout of yuan appreciation would need incremental positive information on the trade war front. Although phase 1 deal sentiments have improved substantially in the last one week, the trade war in its entirety will mostly likely extend to the November 2020 US presidential elections. With HK unrest increasing and China cutting rates on the back of weaker growth prints, the other factors for CNH (except trade war related sentiments) indicate to depreciation pressure. 

Last two days saw long positions being cut in USDINR as risk sentiments improved. USDINR 1m NDF is 0.5p left which is mostly the same as Friday indicating no additional pressure. Emerging market currencies are largely flat since Friday in spite of mild dollar weakness against G7. The positivity about possible inflows into India is digested in price. A daily close below 71.56 (unlikely though) might indicate 71.35 this week otherwise we should again head towards 72.10 levels during the next week. For the day, CMP 71.65, Range 71.55-71.85. 

INR update: Trade war campaign expands to EU; USDINR could see 74 by november end

Trump slapping tariffs on EU imports indicate two things. First, trade war is not getting resolved in the Oct 2019 round of  talks with China because of which Trump is expanding the conflict. Second the long held view that the trade war will end sometime before Nov 2020 elections with a Plaza kind of accord which would result in dollar depreciation against major exporting currencies like CNH and EU has progressed with EU being made part of Trump’s campaign. Trump mentioning repeatedly that dollar is too strong also asserts the theory of a Plaza 2 accord in 2020. The president is trying to make a problem (if it is one) as Top of Mind, which he will solve with dollar depreciation.

So October and subsequent months would be a time of uncertainty in global markets which is symbolic of dollar strength. Trump’s impeachment proceedings will add to uncertainties but this is no way indicative of Trump’s popularity or lack of it. A failed impeachment (most likely outcome) might indicate Trump’s victory and result in higher votes for the incumbent president.

US manufacturing ISM weakens further which is the first sign of a slowdown that’s approaching the world’s largest economy. But relatively the US is still better placed that EU or Japan.  This would weigh on US yields but more so on equities resulting in a risk off sentiment which should ensure that this factor would have limited negative impact on the dollar.

In India, September 2019 recorded the lowest GST collection in 19 months which would weight on fiscal concerns from revenue side. The approaching festive reason would be critical to ascertain if the fiscal concerns alleviate or accentuate from here. Therefore Oct2019 GST collection numbers should now be the focus along with other high frequency indicators. RBI is likely to cut rates tomorrow which is a consensus view. RBI’s comments on fiscal and growth outlook would be more critical.

Given that trade war seems to be heating up again, USDINR should remain well bid and track USDCNH and now EURUSD closely.  Given the lack of BOP concerns a benign oil price should not have positive impact on INR for now. The tax cut euphoria is totally digested in equity price.  Given the backdrop of expected dollar strength, trade war related risk off globally, slowing growth domestically and increasing fiscal slippage possibilities one can expect USDINR to touch 74 by November end. One can go long at current levels with stop at a daily closing below 70.80.

INR udpate: Oil supply concerns alleviate as Geo Political stress remains

Oil

The Saudi regime has swiftly announced that the supplies have been restored; the attack would not impact the production for September as a whole. This swift action was perhaps to help Aramco valuations whose IPO has been a source of anxiety within Saudi Arabia. The energy minister was changed a fortnight back perhaps to expedite this IPO. At the same time Saudi Arabia did not lose the opportunity to squarely blame Iran for the attacks. So we can say for now that the oil supply shock fear is behind us as Brent trades at 64.50 levels. But will the Geo political tension between US and Iran increase; fanned by Saudi Arabia (Iran’s arch enemy) and it’s motive to raise international oil prices before it dilutes its stake in Aramco. On the other hand Trump seems to have recently realized that international tensions are not helping his approval rating and fired his hawkish security advisor; it is unlikely that Trump will do a U turn on Iran within a week. With these factors in the backdrop geo political uncertainties remain.

US-China trade war

Trump said yesterday that US-China trade deal could come one day before the November 2020 elections. The President also stated that if the trade deal comes in his second term it will be much worse for China. These comments indicate that China is playing hard to get realizing Trump’s eagerness to get a deal before next year elections. Next info on this story is due after the first week of October when trade talks are likely to resume.

FOMC

Disruption does not seem to be FED’s motive so a rate cut today is a foregone conclusion. What remains to be seen is where an incremental rate cut chances for November which hovers at 67%  currently moves to post the FOMC. The FED is unlikely to be overtly dovish given that US data is still relatively better (current quarter GDP tracking at 1.8%). The fact that dovishness would indicate a lack of confidence and a self fulfilling prophecy the FED would not want the near term rates to move lower which should underpin the dollar.

US overnight rate spike

US overnight Repo rate traded at 10% yesterday on the back of dollar shortage in the system. The trigger for this was the debt ceiling respite that the US government secured on 1^st August 2019. This enables the US government to borrow more and shore up its cash balances with the FED thereby sucking out liquidity from the system. This balance has increased by almost $180 billion in the last 45 days. Historically these balances can be expected to move towards $400 bn (Currently at $300bn) thereby sucking out another $100 bn from the markets. But the FED can address this by arranging for overnight Repos among other tools; it need not go for a QE to address such liquidity concerns. Therefore at present the chances of this overnight rate spike to spill over to the rest of yield curve looks limited.  

USDINR

CNH and other EM currencies continue to trade weak which should underpin USDINR. FII outflows continue at a steady pace. Geo political uncertainties in the middle east is likely to keep markets tentative if not on the edge. China and US are done wooing each other and it’s unlikely that there will be another round of concession or appreciation bout in CNH before October (if at all). USDINR should stay supported at 71.35 with 71.85 as an immediate possibility. CMP 71.46, Range 71.35-71.65 for the day.   

Regards

Saket Agarwalla

INR update: Oil supply restoration news to drive markets

The attack on Saudi oil reserves comes after Trump fired Bolton (his National Security advisor) who was seen as an overt hawk on US-Iran relations. Observers thought that Trump might be moving towards a deal with Iran which has now become difficult given that Iran has been blamed for the attack by Saudi Arabia. The timing of the attack suggests that the same has been carried out to ensure isolation of Iran from the international energy markets via US sanctions.

Saudi Arabia on the other hand has downplayed the impact asserting that they will restore one third of the lost supply by today itself. One news report suggested that Saudi Arabia will restore 100% of lost supplies by tomorrow (Tuesday). Saudi Arabia’s motive to restore supply as soon as possible is to indicate that its facilities are not vulnerable to geo political tension. This assertion is in turn motivated by getting a better valuation for Aramco it seems.

The disruption in oil supply is the largest the world has seen since the gulf war in 1992. The total disruption is 5% of global oil supplies which commodity experts suggest is significant to take Brent prices towards 70, i.e., if the disruption is sustained.

Therefore at the moment news from Saudi Arabia about restoring oil supplies would determine direction for oil prices and by tomorrow morning the supply shortfall should be clearer. If the supplies are restored then we can expect a pull back in oil towards 64 levels.

Trump on the other hand has become dovish on his international relations outlook last week and it would take some time for him to change his stance on Iran again.

Therefore incoming news would determine the direction of oil prices and risk sentiments globally. USDINR should track oil directly. In the absence of fresh news we could see USDINR heading to 71.30 today while a closing above 71.60 would indicate elevated concerns on account of recent events. 

INR update: Trade war Recess might last through September

Both China and US are paving the way for a more conducive environment to facilitate the October trade talks. Trump’s announcement to delay the increase of 5% incremental tariff on $250 bio of Chinese imports from 1^st Oct to 15^th Oct, further strengthens the argument that Trump is changing his stance on foreign policy across because of his fall in approval ratings over the last 3 months. The fall in approval rating is primarily on account of trade war concerns resulting in recession fears in the US which was reflected in equity markets plus the yield curve inversion. The yield curve 10-2y USTs is mildly upward sloping again with the spread at 7bps. This risk sentiment should now be supported till the conclusion of October trade talks which is still 4 weeks away. Therefore for the time being the markets might stop looking at US-China trade war as a theme, unless there is further development before the expected time frame.

Today the ECB is most likely to cut rates by 10bps but the market will closely watch whether a QE is announced. Quantitative easing can be argued both ways with those in support saying that EU economic weakness warrants incremental liquidity. On the other hand those against say that it signals and facilitates further weakness in business confidence while the data is not bad enough as yet for the ECB to pull that trigger. In case there is no QE or a less dovish surprise then EURUSD can give a bounce towards 1.1084 where I would like to sell the pair for a move lower towards 1.08.

USDINR moved lower overnight along with USDCNH and EM basket. Equity markets across have registered gains on account of the thaw in US-China trade war. Yields have risen across markets although the yields in India rising is also to do with the rising fiscal concerns. Today’s CPI print for India should be read for growth with a higher than 3.3% reading positive for growth and perhaps INR as well. A mildly positive CPI print is unlikely to change the course for RBI which is expected to cut rates by more than 25bps in October. September is seasonally a positive month for INR and now with risk sentiments supporting USDINR can head towards 71.05 in this month. A daily close above 71.45 can again bring 71.65. CMP 71.38, Range 71.45-71.25 for the day.

INR update: US-China seem to be moving closer; Risk sentiment improves

There were 3 positive news yesterday for global risk sentiments. China lifted limits on FII investments into local bonds and stocks which is a positive step as China become more open to overseas investments. Ease of investments has been one of the complains US has with Chinese administration. Yesterday evening Chinese media reported that China might be now ready to make concessions and import more from US to facilitate a trade deal. In the US, Trump fired his National security advisor John Bolton who anecdotally was behind the increased US animosity with Iran, North Korea among other countries. This would indicate that Trump perhaps wants to soften his stance against Iran and other foreign countries wherever US was nearing a military standoff.

Trump’s approval ratings have gradually fallen from 46% (in April 2019) to 39% currently (source news.Gallup,com) primarily on the back of recession and trade war concerns. Perhaps this gradual fall in approval rating has resulted in Trump trying to make a trade deal with China and now firing the hawkish NSA. On the other hand this is the first time China seems to giving ground to the US on the trade war. If this is the case then the market assumption that a US-China trade deal could be a possibility in October looks more palatable (today). Till this landscape changes, risk sentiments should remain supported in the short term.

Since 1^st August, USDINR has moved higher by 4% as compared to a 2% on USDCNH. India 10Y yield at 6.6% shows that markets are now worried about local growth and therefore fiscal slippages. Tomorrow the India CPI print will be critical to read from a growth perspective. Most of the market participants now expect more than 25 bps rate cut in October RBI policy. Broad range for USDINR remains 71.35-72.25 and currently with improving risk sentiments the pair looks like a sell for a move to 71.50 levels by tomorrow. For the day, CMP 71.74, Range 71.80-71.55.

INR update: US economy's relative strength; No hard Brexit for now?

If contraction in US manufacturing ISM on Tuesday (at 49.1) showed that the US is also slowing down, yesterday’s services ISM at 56.4 debunked that interpretation for the economy in general. Therefore the manufacturing slowdown which looks like a global phenomena could be more to do with a slowdown in global trade while the robust services PMI indicates the relatively better shape US economy is in. This makes cutting rates for the FED even more difficult with the markets pricing in a near 100% chance for September FOMC while the economy giving signals of it not being as weak; preventing the FED from ushering in a rate cut cycle. The same doubt does not extend to the European economy (which undoubtedly is on a very weak footing) but the ECB is being careful so as to not signal a weakness in confidence and making recession a self fulfilling prophecy. The ECB meets on 12^th Sep next week where a rate cut is a significant possibility which does not seem priced into EURUSD as yet.

Price action and political developments seem to suggest that the risk of a hurried hard brexit on 31^st October has been averted. The short covering seems to be complete with GBPUSD rallying 4 biggies this week. A weekly close below 1.2287 should make the pair a short again, with a stop above 1.2360 for a move towards 1.21 levels again.

USDINR continues to follow USDCNH and EM basket. Risk sentiments across have improved in the last 2 days. USDINR has moved lower from 72.40 to 71.70 for most of this week and today being a Friday we might see a 38 to 50% retracement of this down move taking the pair back to 72.05. Broad range should be 71.35-72.25 while for the day range could be 72.05-71.65. CMP 71.72.

INR update: Hard brexit chances reduce; HK unrest eases; US-China to talk again!

Taking a step back the main reason for a global risk off recently was US-China trade tensions and not Hong Kong civil unrest. Therefore the reaction to yesterday’s positive news on Hong Kong unrest seems to be overdone. US-China would be talking at a ministerial levels in the first week of October but the fact remains that the two sides are far apart to come to a common ground swiftly and Trump does not get any votes for solving the issue one year before elections. On the other hand China-Iran strategic tie up will result in some reaction from the US which could again spoil risk sentiments. The view on EURUSD remains a sell on the back of last week’s bearish close (below 1.1050) with a stop above a weekly close of 1.1144 for a target of 1.06.

GBPUSD is caught between Brexit news swings. No one can reasonably predict where its headed politically but fundamentally against the dollar cable looks weaker only. A weekly close below 1.1975 will indicate hard brexit expectations crystallizing and a weekly close above 1.23 would indicate that market is expecting that a hard brexit has been avoided.

USDINR rally from August beginning was on the back of a depreciating CNH plus local slowdown concerns. Since 1^st August USDINR has moved higher by 4% as compared to CNH at 2.5% now. Given the local factors it is difficult to say that INR losses is in excess. The view remains of USDINR going higher towards 72.50+ in the next week or so. A daily close below 71.78 will likely bring in 71.50 levels, therefore long USDINR here should be stopped if we are going into a close below 71.78. CMP 71.83, Range for the day 71.78-72.05.

INR update: Trade war escalates further as locally growth slows

US-China trade war appears to be in a headlock but the match continues and so will the risk off sentiments across asset classes globally. US not agreeing to postpone the implementation of fresh tariffs is a sign of further escalation which is reflected in USDCNH today morning. EU and Japan both appear to be slowing down faster (retail sales data) while the US economy continues to show more resilience than expected. The risk off sentiment plus stronger US economy accompanied by hard brexit related anxiety should continue to boost the greenback against G7 and EMs.

Weekly closing in EURUSD last week below 1.1050 (at 1.0989) should take the pair towards 1.06 with support at 1.0860. Similarly a weekly close in GBPUSD below 1.1975 should indicate that hard brexit is a consensus expectation which should result in the pair getting sold for a 3-4% kind of movement.

USDINR continues to follow USDCNH. Local sentiments are negative considering the slowdown in GDP (Apr-June growth came in lower at 5% against expectations of 5.7%). Lower bond yields now reflect lack of growth rather than controlled inflation and might not result in bond inflows as risk of fiscal slippages increase gradually during the year. USDINR should now not go below 71.70 which is a good 50p lower from current levels making it difficult to initiate fresh longs here. 72.30 should support for the day with 72.50 as the next resistance. Range for the week 71.70-72.50++. CMP 71.23, Range for the day 72.00-72.30. I would be more comfortable buying USDINR near 71.85 levels with stop below 71.70 for a move to 72.50. 

INR update: Markets quiet but on alert for fresh jolts

US economic policy uncertainty index which measures policy uncertainty basis newspaper articles in the US rose to 400 levels in August 2019 which was the highest level seen since 2008 GFC. This uncertainty should continue to drive dollar and government bond strength. Overnight Mnuchin claimed that US doesn’t plan to intervene in dollar markets as yet, which is more driven by the Trump administration’s lack of ammunition as allowed by law rather than intent.

PBOC faces the challenge of striking a balance between arm twisting US by driving USDCNH higher  and at the same time ensuring that a weakening Yuan doesn’t result in flight of capital from China. USDCNH is higher at 7.1730 as compared to yesterday afternoon’s 7.16 levels. Indian equities are in the red along with 10Y bond yields which are at 6.57 which is the pre fiscal windfall levels. Till the time there is further and definitive development in US-China trade war, USDINR should trade in 71.35-72.25 range. Market positioning for USDINR is neutral to marginally long (this is basis anecdotal evidence only). For the day, CMP 71.96, Range 71.80-72.25.

INR update: Lack of trade war resolution visibility to keep risk sentiments subdued

Dow closing 1% lower yesterday plus deeper yield curve inversion indicates that risk sentiments remain subdued. US data continues to indicate that there is no significant slowdown fears in the US which would make the FED overtly dovish. Although the FED is on track to cut rates in September and might cut again in November but the overwhelming reason will be trade war uncertainty and not US economy. The risk aversion plus relatively stronger US economy therefore continue to put the greenback on a stronger ground. EURUSD (CMP 1.1085) can now only be sold in case of a daily close below 1.1050 as the medium term view remains of EURUSD heading lower towards 1.06.

Looking at India 10Y government bond yield at 6.56 and equities at -0.3% one can assume that the effect of the RBI transfer to government has been digested in asset prices now. Given the lack of visibility in US-China trade war and no immediate trigger which can bring a resolution, I would continue to expect deterioration in risk sentiments. USDINR should now trade in a range of 71.35 and 72.25 before it breaks higher. Market positioning for USDINR would be largely neutral now after the long unwinding seen yesterday. For the day the Range should be 71.35-71.70 and for medium term I would want to buy near 71.40 levels. CMP 71.62.

INR update: Trump eager to strike a deal; India's windfall fiscal gain; Risk sentiments improve

In a series of volatile comments yesterday what came out was that Trump is very eager to strike a deal with China now. On the other hand, instant Chinese denial of weekend talks indicate that China will continue to act tough till the time they get a trade deal that is favorable to them. Therefore although resolution to the trade war is still not in sight, but both US and China seem closer to a resolution than they seemed yesterday morning. Consequently we have seen Dow rising by 1% yesterday while Asian equities are in the green by around 0.5% today. USDCNH is following the  USDCNY fix continues to indicate the firm Chinese stance on the trade war. Risk sentiments remain off the table but things do not look as bad as they yesterday morning. Euro is picking the properties of JPY and EURUSD has moved lower to 1.11 as risk sentiments improved in the last 24 hours.

RBI has announced a dividend of Rs. 123,000 crore ($17bn) to be given to Indian government. Of this Rs 28k crore was given in Jan 2019 itself which was a part of last financial year for the government. Rs. 90k crore was already budgeted as dividend by the government. So the dividend positive surprise for the government is Rs. 5k crore only. The remaining Rs. 53k crore is a positive one time wind fall gain to government finances. Markets were expecting a number of around Rs. 40k crore to be given to the government over the next 3 years or so. Given this expectation vs outcome the development should support government bonds (yields are down 14bps since yesterday highs), equities and INR for the day at least.

Yesterday morning participants were limit long in USDINR and that confidence has reduced now. Given the development on the fiscal front we can see some further long unwinding in USDINR along with the mild improvement in risk sentiments. Medium term views are risky and dependent on tweets. For the day, CMP 71.80, Range 71.95-71.55.

INR update: Advantage China; Local stimulus not enough against a global tide

China seems to have the upper hand in the US-China trade war for now. Trump seems to have lost the plot and perhaps fears that he will be blamed in case the economy slows down or equities continue to fall. This might prevent him from raking up the trade war rhetoric against the EU for the time being but it is unlikely that he will back out now from the Chinese front. Therefore it seems rational to expect that trade related tensions between US and China should further worsen from here on.

Short EURUSD trade in case of a weekly close below 1.1050 has not been initiated, given that Euro has attracted some safe haven bids on account of intervention fears in USD. Similarly GBP has also failed to give a close below 1.1975 and consequently short GBPUSD trade has not been initiated.

Trump can only intervene in FX markets to the tune of $95 billion which is a small number in a daily $5trillion FX market. For further intervention the FED will have to align with Trump’s political objective which seems difficult. In order for Trump to increase the size of his intervention fund from $95 billion he would need congresses approval which also looks unlikely for now. So intervention in USD will only be verbal and mostly a failure. Although the ultimate settlement of the trade war could be in the form of a Plaza  kind of accord (similar to the one done in 1985) involving FED, PBOC and ECB but we currently seem far away from that eventuality so it is best ignored.

The stimulus package announced by the Indian government is unlikely to reverse the global trend against risk assets.

USDINR failed to give a closing last week above 71.80 but USDCNH trading above 7.16 today opens the door for 72.50 and higher gradually. This week we should see USDINR supported at 71.85 with a target of 72.50. Long trades should be exited in case USDNR trades below 71.64. This calendar year USDINR seems like headed significantly higher than 72.50 but in a world that changes because of 280 character tweets, having longer term views can be very risky. For the day, CMP 72.10, Range 71.95-72.25+.

INR update: Powell likely to be hawkish

Market is eagerly waiting for Powell’s keynote speech today at the Jackson Hole Symposium of central bankers. The market meanwhile has already effectively cut interest rates by 25 basis point for the 18^th September 2019 FOMC. The latest FED speakers tried their best to reduce the rate cut chances for September 2019 but failed. The FED would not want the market’s anxiety of trade war uncertainty to push it into a rate cut cycle earlier than what it anticipates. Therefore Powell would again talk up the economy and would want yields to increase post his speech. His main concern would be the 2 more rate cut chances at 100% and 80% for September and November respectively.

An uptick in yield should support the dollar and risk sentiments temporarily. The strange fact of the argument is that if risk sentiment deteriorates then also dollar gains as yields fall. On the other hand if yields increase due a less dovish FED, then also I would think USD would gain more so against the Euro and GBP. Therefore the only outcome for dollar losses would be a dovish Powell which looks unlikely given the low level of short term yields.

In the near term EURUSD weekly close below 1.1050 (CMP 1.1070) should result in EURUSD heading to 1.06 and lower. IN GBPUSD (CMP 1.2212) a weekly close below 1.1975 should take the pair 5 biggies lower. USDINR weekly close above 71.80 should bring in 72.50. Alternatively on Monday if USDCNH trades above 7.10 then USDINR could see 72.50 next week.

INR update: Less dovish Fed lends support to the greenback

The FOMC minutes showed that the FED is not as perturbed by the trade war as one would have thought in July. The committee members continue to see the economy as reasonably strong and do not want to go on a rate cut cycle mainly because they do not want to signal a slowdown fear to the economy. This should support the dollar as the ECB and BOJ do not have the backing of a similarly strong economy.

On the other hand Trump seems to be shifting focus away from China and onto the FED stating that the FEDs policies are the main problem for the US. The FED is highly unlikely to give in to the President’s pressure and therefore would continue to act as per incoming data. Meanwhile markets factor in 100% probability of a rate cut in September.

USDCNH has inched higher than 7.085 from yesterday’s 7.045 while equities in Asia are in the red. The government’s anticipated stimulus package has not been announced indicating the difficulty in managing fiscal responsibility and growth under the given circumstances. A weekly close above 71.80 should result in 72.50. Announcement of fiscal stimulus can take USDINR towars 71.35 (temporarily only). For the day, CMP 71.72, Range 71.60-71.85.  

INR update: An uncomfortable and temporary pause in trade war to help global dollar strength

Trump had postponed tariff increase on Chinese imports till December 15^th and on 19^th August he has given Huawei another 90 days to continue dealing with American entities. These two actions indicate that for CY2019 he wants the focus to shift away from China. The trade deal with China therefore should happen sometime in 2020 only.

Meanwhile as modern politicians operate Trump has to start a new battle to occupy the mind space of his electorate. That could come in the form of a trade rhetoric against the EU. This trade war possibility, plus increasing growth differential between the US and EU, along with no deal Brexit should make GBPUSD and EURUSD a good sell for the rest of the calendar year. A weekly close in EURUSD below 1.1050 can open the door for sub 1.06 levels. While a weekly close in GBPUSD below 1.1975 can open flood gates for a 5 biggie move lower. Meanwhile the unresolved US-China trade dispute should keep USDCNH grinding higher at the same time.

USDINR primarily follows global dollar strength/weakness above all the other factors. Given the above view of dollar strength plus CNH weakness the visible future for INR does not seem promising. The domestic slowdown should at some point of time start showing in heightened fiscal concerns . A weekly close above 71.80 on USDINR should bring 72.50 in range. CMP 71.57, range 71.45-71.80.

INR update: Trade war and Brexit should continue to weigh on risk sentiments

With USDCNH trading above 7.05 and CNY fixing getting weaker every day the US-China trade war related risk cannot be ignored. Meanwhile China has continued to make aggressive statements on retaliatory tariffs while Trump administration has said that the President is not ready to make a deal as yet. These developments along with hard Brexit related news would indicate that there might be more risk negative news in store which should keep a cap on INR gains.

Domestically the market is abuzz with chatter of a growth stimulating package which can bring temporary relief to equity markets and INR as well. India-Pakistan related geopolitical developments seem to be a tail risk only for now.

Price action suggests that nationalized banks have been buying USDINR aggressively. In the medium term 70.75 should continue to hold while 71.80 can be tested on the higher side. For the day, CMP 71.10, Range 70.95-71.25.

INR update: Trade talks to resume; Risk sentiments to remain supported

US delayed tariffs on select imports from China till Dec 15^th plus they agreed to resume talks in 2 weeks time. For Trump to retrace yesterday and give ground to China would not have been easy. Headlines said that China and US will talk again in 2 weeks over phone. Now for 2 weeks at least Trump would not touch the trade war topic and at the same time we could see China ensuring that Yuan moves towards or below the 7 handle to facilitate talks.

While there is no consistent trend to a politician’s mind, it seems that the next two weeks or slightly more can be good for risk sentiments. This time leading to the talks between US and China should see both parties maintaining market calm and positivity. Plus the risk off move that we have seen in the last 10 days would be reversed leading to a decent rally in risk assets over the next fortnight.

USDINR should overall follow USDCNH. A move towards 70.55 this week should not be a surprise now considering the Yuan move plus squaring of long positions.

What next for Trump on US-China trade war?

It has been a week that Yuan broke 7 levels without any concrete reaction from Trump administration (naming China currency manipulator was at most cosmetic). The options and their viability for the administration to reply to China or to divert public attention from the US-China trade war are as follows:

1.      Treasury intervention in FX markets: Trump administration can intervene in the FX markets through the $100 bn US government stabilization fund. The fund size is too small to make any impact in global currency markets. China has far more firepower (USD 3 trillion) and independence than US government and FED put together for FX intervention. For intervention of more than $100 bn Trump would need Congress’s approval which might be difficult to obtain given the increasing domestic reservation against Trump’s rhetoric on the trade war.

2.      FED cutting rates: The FED would want to maintain its independence and therefore it is unlikely to deviate from a rational monetary policy track based solely on Trump’s coaxing.

3.      Iran: Trump can take on Iran in the strait of Hormuz but to what end / political victory remains uncertain. Therefore this seems a no go option given military involvement and the empirical evidence of no action against North Korea.

4.      Increase trade rhetoric: Trump can increase its trade rhetoric on EU / slam additional tariff on China.

  

Of all the options above it seems that the lowest hanging fruit is to increase the trade dispute rhetoric against the EU or increase tariffs on Chinese goods. This would help Trump garner more support for a future dollar devaluation domestically. The increasing trade dispute concern would also reflect in the yield curve pushing the FED to cut and therefore keeping the dollar muted.

Therefore Trump administration would most likely step up the trade war roiling risk sentiments further. Driving USDCNH and USDINR higher. With this thought USDINR looks like a good buy at the current 70.75 levels for a move to 71.50 next week. The fact that intervention looks like a difficult option for Trump a sudden dollar slide looks like a smaller possibility in the near future.  

INR update: Trade war to drag on keeping risk sentiments muted

In spite of the last shot being played by the Trump administration in the trade war (labeling China as a currency manipulator), the ineffectiveness of the action ensures that the ball is still in Trump’s court. Trump seems to be scrambling for options pushing the FED to cut rates aggressively or intervene in the dollar market. Both these options seem to have been turned down by the US Fed and Cabinet respectively. Between the two options the Fed is less likely to give in while currency intervention might be more under Trump’s control.

Trump would want to raise the trade rhetoric with EU as well, before going in for currency devaluation/intervention. Therefore trade war should worsen before it gets better. End of August Jackson hole might be the catalyst for the FED to become more dovish than it was in the last FOMC, which in turn could result in a fall in dollar against the majors at least.

USDINR is largely tracking USDCNH plus nationalized banks are protecting a runway INR depreciation by selling dollars at the current levels. USDINR 1m NDF is 10p right showing that buying pressure would have taken USDINR well above 71 if it was not for nationalized bank selling. I would think that Kashmir related geo-political tensions are still to be factored in dollar rupee pricing. Overnight longs are recommended. USDINR should continue trending higher till the Jackson hole (22-24^th August) going towards 71.80 levels. CMP 70.83, Range for the day 70.65-70.95.

INR update: Yuan depreciates; Trade war turning into a currency war

China seems to have reacted with a change of policy taking USDCNH well beyond 7 (CMP 7.077). China till now had a very accommodative and non provocative approach in the trade war which seems to have changed. Now it is Trump’s turn to react or retract, the latter looks unlikely though. Given the situation we can expect a 5-10% depreciation in CNH from 6.95 levels taking the pair to 7.3-7.5 levels.

Yuan depreciation is also accompanied with Kashmir related uncertainties plus intermittent news of disturbance in Hong Kong. All these should heighten the risk off sentiments locally taking USDINR to higher levels (immediate target 70.80+).

The risk to this view (Long USDINR) is that CNH depreciation gives Trump the chance and argument to depreciate the dollar also. Therefore the trade war is now becoming a currency war.

At 68.75 (30^th July), I was expecting USDINR to head higher towards 69.50 in the first fortnight of August while maintaining a view of 67 by September end. This was based on the premise that China will continue to prevent 7 levels on USDCNH, which has been proved wrong. Therefore the view of 67 by September on USDINR has been proved incorrect.

INR update: Trump hits back with tariffs, CNH nears the red line of 7

Trump had tweeted that China is unlikely to close a deal before Nov 2020 elections. This along with yesterdays 10% tariff announcement on $300 bn of Chinese imports show that Trump is finding it difficult to get the terms he wants from the Chinese. Therefore it is likely that Trump would now start a new battle and most likely that would be a trade war with EU. If PBOC prevents USDCNH from crossing 6.98 as it has been till now then within a few days markets will start ignoring the US president again.

The negative dollar repercussion of the tariffs is that markets have started factoring a 96% chance of a second rate cut by FED in September. A 3^rd rate cut in December is now 77% likely. These chances were at 62% and 40% yesterday morning. If the elevated rate cut chances persist then dollar index will eventually break lower as markets will get more convinced that a rate cut cycle has started.

Therefore the arguments are evenly balanced on both sides of dollar weakness and strength. I believe China will again be able to control CNH at 6.98 and within a week the markets would start ignoring the trade war threats.

Although on 30^th July at 68.75 I had expected 69.30 to be seen and then after the FOMC I was of the view that 69.50 is likely, I would continue to  hold on to the view of 67 by September end. I would want to revisit this view after RBI policy next week by which time the heightened trade war tensions would also have alleviated.

USDINR CMP 69.28, Range 69.20-69.40 for the day. Overnight longs are suggested for the time being given NFP and heightened trade war tensions.

INR update: Less dovish FED to keep USD supported; INR to draw strength from easier global financial conditions

Historically dollar weakness starts 3-6 months after the first rate cut of the FED interest rate cycle. This is precisely for what happened yesterday, which is the FED calling this rate cut as mid cycle adjustment and not a change in trajectory of rates per say. If economic growth follows cycles then US growth does seem to have peaked in 2018 and therefore the next rate movement by the FED should again be a cut. But will the next move happen in 2019 or 2020 remains debatable for now. This debate should provide support to the dollar index for the next couple of months ensuring that it does not break its 200 WMA at 96 (CMP 98.8). The view that Trump will push for a weaker dollar remains but again the timing of the same remains uncertain.  

On the other hand the ECB is now much more dovish than the FED. The EU has bigger growth worries than the US plus UK is threatening to go for a hard Brexit. All these factors might bring in further dollar strength against Euro and GBP specially. GBP remains a sell on upticks as markets push UK to tone down its stance of a hard Brexit.

The fact that US has ended its balance sheet shrinking endeavor and delivered the first rate cut of the cycle (still a may be), is something that should ensure that structurally INR will not weaken against the dollar because of global factors (for now global growth and politics makes me assume that oil is not breaking higher).

Locally the inflow pipeline for INR still looks promising specially till September. RBI should cut on the 7^th August and apart from the rate cut the RBI could be more dovish than markets anticipates. To reiterate a rate cut in India is generally INR positive given debt inflows and rate cut been seen as growth supportive. Therefore I have a view of dollar strength (against G7) and view of inflows in USDINR which should keep USDINR in range making a breakout in either direction unlikely.

Given the inflows and INR supportive global financial conditions, I would persist with my view of 67 till September but with a possibility of seeing 69.50 in August. Today we have seen nationalized banks selling at 69.15. Looking at CNH and overall dollar strength we could see USDINR heading to 69.30 today. For the day CMP 68.08, Range 69-69.30.

INR update: 67 by September but possible uptick in August

Trump administration’s flip flop on dollar intervention indicates that they are itching to do something on that front. It could be a ploy to push FED to be more dovish than it would otherwise be. But these comments were followed by Trump’s comment that China might not settle the trade dispute till after November 2020 US elections. This indicates US’s growing frustration with China on the trade deal which can push the US to act unilaterally which is possible only in the case of currency intervention (verbal or otherwise). All in all there is no reasonable basis to predict this unless it actually happens but the chances of the same are not ignorable currently.

Weaker economic outlook, dovish ECB and no deal Brexit is pushing EURUSD lower. On the other hand markets could likely hammer GBPUSD to new lows to prevent the new Prime Minister from pushing through with a politically motivated no deal Brexit. The FOMC would be the most critical event this week followed by beginning of the month data and then potential sharp reactions from President Trump.

If there were a business confidence index for India, it would definitely be deep in the negative territory currently. This is getting reflected in the FPI outflows from the equity market in July (more than $2bn). This benign economic outlook plus low inflation should make RBI more dovish than market anticipates currently (market expects a 25bps rate cut) for the 7^th August RBI policy. Contrary to general economic theory INR appreciates  around RBI cuts, because of debt flows plus the fact that rate cuts are seen as growth supportive.

Seasonality is a global phenomena and dollar index generally strengthens in August. For INR August consequently is the 2^nd most negative month after May. On the other hand September is normally a very positive month for rupee.

Given the current dollar strength, seasonality and equity outflows, I would think a move up to 69.30 is possible in the next 2 weeks, which could be a good opportunity to create shorts. Therefore I am revising my near term outlook from an unlikely close above 68.95 to a possibility of 69.30 in the next 2 weeks. I would continue to hold the view that by September end we would see USDINR headed to 67 primarily driven by a weaker outlook on dollar (Trump’s threat and dovish FED) plus the strong inflow pipeline for USDINR.   

Regards

Saket Agarwalla

INR update: ECB today, then FOMC and US-China trade negotiation to drive markets

Looking at the Fed fund rate along with the dollar index since 1971, it seems that dollar starts falling well after the fed fund rate has peaked or 3-6 months after the first rate cut. The reason could be that the market is always unsure if the first rate cut is an insurance cut or the start of a new cycle of cuts, as is the case this time. Therefore the factor to watch out for now is the near term yield curve which would make it clear whether the FED is going to cut for a third time in 2019 itself. Rate cut chances for 31st July is 100% (therefore it is a foregone conclusion) with a 20% chance of a 50 bps cut. For September 2019 market is factoring in a 75% chance of a second rate cut. While a 3rd rate cut is only 60% probable by November 2019. In the near term if the chances of a 50bps rate cut for July increase or the 3rd rate cut for 2019 become 75%+ probable, the markets would be more convinced of a series of rate cuts coming our way which could result in a dollar sell off.

The complication here is that EURO is similarly placed with the ECB monetary policy due today. The chance of a 10bps rate cut today is 50% while the probability of another 10% rate cut by Dec2019 is only 60%. Therefore if the ECB makes rate cuts more likely and sustainable, then in spite of the FED also easing we could see EURUSD moving lower in the near term as expectations are set for rest of 2019.

USDINR has been held in a tight range like USDCNH. Nationalized banks continue to buy aggressively. Last week market chatter suggested a defense outflow while this week it is accompanied with equity outflows. At the same time bond issuance inflows are also in the pipeline and perhaps continuing in the background. The economic guidance accompanying corporate results, generally is the most accurate estimate of future growth. The guidance given by FMCG companies specially is not very encouraging which at some point of time would result in fiscal concerns matching the ongoing equity concerns.

USDINR has not broken 68.30 but at the same time fails to follow through on the upward momentum. My view of 67 on USDINR by September end remains given the inflow pipeline plus the view of dollar weakness. Next week US-China start face to face negotiations on the trade dispute which could result in CNH gains and the same could be mirrored on INR.

INR update: IMF says dollar overvalued; DM central banks seen easing

The IMF says that the US dollar is overvalued by 12% while Euro and Yuan are fairly valued. This should give fodder to Trump’s demands of a stronger Euro and Yuan against the dollar. US data has been better than expected in July but not significant enough (Bloomberg data surprise index is still at -0.3) to rule out a 3^rd rate cut in 2019 itself. The yield curve shows a 90% chance of ECB also cutting its rate in September 2019 by another 10bps to -0.5%. The FED in addition to two cuts by September 2019 is expected to tweak its asset purchase program also in order to support a slowing economy. Therefore basis economic data and central bank stance only the USD is unlikely to get support, unless the US data surprise index moves into positive territory that is diametrically against expected lines.

USDINR was bought aggressively by nationalized banks yesterday while rumors of a bond outflow was also doing the rounds. A daily close above 68.85 can drive the pair higher. USDCNH is back below 6.88 while Brent has also retraced below 65  again. Medium term view of 67 by September remains on the back of a softer dollar and large inflow pipeline. A daily close above 68.95 should call for stops on this view. CMP 68.80, Range 68.90-68.68.   

INR update: Dollar index likely to continue in range; Inflows should help INR break 68.30

Dollar index continues to move sideways, a weekly close below 96 should signal the start of a downtrend, but it could be some time (perhaps not before 24^th August Jackson hole) before that happens. Chinese retails sales and GDP data yesterday calmed fears of a higher than expected slowdown in China.

USDINR continues to trade in a tight range as debt inflows (both FPI and corporate borrowings) seem to be absorbed by nationalized banks. India 10y bonds have rallied by 35 bps to 6.36% now since the budget and there could be some more room left for the rally to continue. Indian equity markets continue to show resilience in spite of slowing growth. The trade balance of $15bn deficit was near expected lines. The medium term view remains of USDINR heading towards 67 by September end. A daily close above 68.95 should call for stops on this view. CMP 68.55, range for the day 68.68-68.40. We could see 68.30 breaking this week as news reports suggest a quite a few inflows in the near term.

INR update: FED is focussed on slowing growth

Powell confirmed the need for rate cuts and told us that the US growth slowdown (in the shadow of a trade war) is the FED’s focus and not US labor market specifically. July rate cut chances are at almost 100% now with September rate cut chances at 75%. The watch now is for the 3^rd rate cut where market is pricing in a chance of 58%.

Slowing US and global growth, softer FED and trade war are the three themes driving the market. The markets COULD at some point start selling the USD when trade war rhetoric rises, which would be a diametric change from the market reaction till now. This is still an expectation only, basis Trump’s last couple of comments directly demanding a weaker USD accusing China and EU of currency manipulation. Larger view remains of a softer USD.

Brent has moved higher this week from 64 to 67 but market is not following small moves in Brent now. Market assumes that Brent is going to stay in and around $65, till such time that this assumption is broken with a breakout Brent could be ignored for short term USDINR movements. Empirically it seems that not many participants are sitting short USDINR therefore I would think that short USDINR is still not a crowded trade. As expected for the last fortnight 68.30 target has been achieved. On the other hand nationalized banks seem to buying USDINR aggressively here, therefore this might not be a good level to create fresh shorts. A convincing break of 68.30 should lead to stop sells on the pair. Otherwise one could get around 68.45-50 to create fresh shorts. The larger view till September 2019 remains of 67. CMP 68.35, Range 68.50-68.25.

INR update: Powell could at most be less dovish; Dollar gains to be temporary

US services ISM of 55+ and manufacturing ISM of 51+, notwithstanding the US GDP is coming off (latest forecast of 1.3% growth for the current quarter). The turning economic cycle plus headwinds from the trade war will ensure that the FED continues its rate cut rhetoric. Currently market is unanimous in its expectation of a rate cut in July and September. The 3^rd rate cut by Dec 2019 is highly likely with a 45% chance in market pricing.

Today Powell testifies in front of the congress at 7-30PM IST where it is highly unlikely that he would take the July and September rate cuts off the table. At the same time he doesn’t gain much by increasing the chances for a third rate cut so much in advance. Therefore he might be less dovish resulting in a mild and temporary uptick in yields and therefore the dollar.

USDINR continues to be driven by nationalized banks action on both sides. Price action continues to show dominance of selling pressure on the pair. The larger view remains of USDINR heading to 67 by September end. For the week the range should be 68.85-68.30. For the day CMP 68.58, Range 68.68-68.45.  

INR update: USDINR headed to 67 by end September?

Since Friday morning we have two new pieces of meaningful information. The first being that the government intends to focus on fiscal discipline much more stringently than anticipated earlier (FY 20 fiscal deficit targeted at 3.3% against Thursday’s expectations of 3.4%). Second is that the government is going to raise around $10bn in the second half of the financial year through foreign currency bonds. First factor ensures that overall supply of India government bonds is going to be on the lesser side which should ensure high FPI inflows in the next 3 months into Indian Gsec markets considering the high real rates. Second factor will ensure that the domestic money markets will have $10bn of additional appetite to buy bonds plus dollar inflows of the said amount. Even if RBI sterilizes these dollar inflows then the central bank’s appetite to buy dollar from the market on a daily basis would reduce, in either case both these news are positive for bonds and INR.

Considering the above development plus the view of continued dollar weakness on account of a slowing US economy and  a dovish FED. This accompanied with the view that the trade war will ultimately result in the US pushing for a weaker greenback should ensure a strong INR for the next 3-6 months. The view on oil remains that it should remain capped at 70 with a potential to break lower given the slowing global economy.

Given the above broad factors I would think that by September end USDINR is headed to 66.85-67 levels. Meanwhile nationalized banks would continue to buy aggressively slowing the pace of INR gains. Given the high forwards, shorting USDINR looks like a very attractive trade plus not a crowded one as yet. My stop would be a daily close above 69.20 for a medium term trade. CMP 68.59, Range for the week 68.85-68.10, Range for the day 68.67-68.30. 

INR update: Trump's comments indicate that US wants a weaker Dollar

 President Trump’s latest comments (accusing EU and China of currency manipulation) seem to be laying ground for a forced currency revaluation for China and EU which is consistent with the theory, that the ultimate outcome of the trade war between US and China (and EU ultimately) would be an agreement to depreciate the USD against Yuan and Euro. After the 2013 EU fiscal crisis Euro was devalued by the ECB through interest rate cuts and blatant comments on the currency taking the single currency from 1.4 to 1.05 levels. Now with Trump threatening EU and China with tariffs the EU would not mind returning the favor to help the US president win the November 2020 reelections. The big unanswered question for this outlook is when would this happen, for which I would think that the ultimate resolution is still a few months to a year away. But the markets will start seeing through the eventuality sooner than later. Weakening US economic print and softer FED stance will also help the soft dollar outlook.

USDINR continues to trade in its new range of 68.80-69.20 with clearly selling pressure on the lower side outweighing bids. Nationalized banks continue to buy USDINR aggressively near 68.80 levels and for them to allow further appreciation we would need a fall in USD or oil prices. Medium term view continues to remain of 69.20 and 68.30. For the day CMP 68.86, Range 68.80-69.10.

INR update: Range prevails as nationalized banks continue to buy

Chinese, Indian and Korean data releases suggests that  emerging markets in Asia are struggling for growth but the impact on their respective currency is made difficult to comprehend with a slowing US economy and ongoing trade war. ECB and FED seem to be tilting more and more towards easier monetary policy. Overall given the dovish DM central banks and trade war I would continue to expect a weakening dollar in the medium term (3-6 months). This week US Services ISM, EZ retail sales and NFP would be critical for global currencies.

USDINR continues to see heavy intervention by nationalized banks and therefore in the short term 68.90-69.20 range should prevail unless crude oil or CNH moves substantially. I would continue to expect limited but further INR appreciation, a break of 68.80 should bring in 68.30. Today there seems to be an inflow which is getting absorbed by nationalized bank buying. For the day CMP 68.98, Range 69.10-68.85.