INR update: Exit polls show BJP victory, INR can head to 63.50 next week

In the US retail sales painted a rosy picture while the tax bill faces some uncertainty. BOE and ECB were as expected. ECB has continued to be slightly dovish indicating that there will be no rate hikes until 2019 perhaps. BOE does indicate that a couple of rate hikes are coming in 2018. For now the setup for GBPUSD looks more bullish than EURUSD.

 

Exit polls suggested that BJP would garner 110-135 seats in Gujarat along with a substantial majority in Himachal. Basis recent exit polls experience in India, I would think that the actual results on Monday would be closer to the polls. On actual results we should see further gains in equities and gains in INR, i.e., on Monday.

 

USDINR 1m NDF is trading 1p left only. EM currencies are flat since yesterday so INR can completely focus on the domestic story. Nifty is up 1.1% while INR appreciation has been limited to 20p by nationalized banks. Nationalized banks would not buy USDINR significantly to depreciate the INR on the back of government’s victory as that sends the wrong message. More participants in the market are convinced that 64.10 would not break, which would make me think that the market is not overtly short here and therefore there is further room for INR to appreciate. 30mins trade bellow 64.10 can show us 63.90 and I would expect. CMP 64.15, Range 63.90-64.20. Next week we can see the familiar 63.55 (if exit polls don’t go wrong) but not much lower from there.

INR update: Higher inflation fails to impact INR

US bond yields were pricing less than 1 rate hike in 2018 in Sep 2017, now they are factoring in more than 2 rate hikes. This shows the change of sentiments for 2018 in the recent past, backed by better US economic performance and policy traction.  Today we have the FOMC where a rate hike is a foregone conclusion, but what the market would look at is the number of hikes projected in 2018 along with inflation forecasts. The comments of Yellen would not matter as much given the fact that from March 2018 it will be the new Trump nominated chairman who will preside over the committee.

 

RBI increased bond limits by Rs. 12k crores from Jan 2018 which was kind of expected and insignificant because only Rs. 1600 crs has been increased in the general category where incremental investments can be expected. USDINR 1m NDF is trading 1p right. The inflation print of 4.88% against expectations of 4.5% was unable to drive USDINR higher significantly and the offshore market topped out at 64.56 yesterday. Since morning we are seeing exporters selling as well. The lack of upward pressure in spite of the inflation data would be make me abandon my view of 64.85 before Gujarat exit polls tomorrow evening. The medium to longer term view remains of further INR appreciation from here. CMP 64.49, Range 64.55-64.40.

INR update: CPI expectations drive India yields higher

European finance ministers have warned the US that the tax cuts are against international treaties and undermines trade. Similar concerns have been expressed from China. Perhaps the US tax cuts would lead to a series of competing fiscal dole outs across the globe pushing yields higher along with growth, with the potential to make 2018 a bullish risk year like we have not seen in the last 11 years. Oil prices (Brent) moved higher than 65 on the back of supply concerns which in the short term will create pressure on oil importing currencies.

 

USDINR 1m NDF is trading flat while EM currencies have mildly depreciated since yesterday. India bond yields have headed to 7.23% in a hurry, led by domestic selling as market expects inflation to go higher than 4.3% in today’s release. There are also expectations of the government announcing extra borrowing in the next fortnight for the March quarter (20-30k crores). Oil prices would maintain the pressure on INR for the day along with moderately negative equities in Asia. CMP 64.51, Range 64.45-64.63.

INR update: Range bound December markets with improving sentiments

Trump’s plan to cut taxes seems to be going through and soon it is likely to become law. On top of it reports suggest that a $1 trillion infrastructure revamp draft would be released before 30th Jan 2018. Brexit phase 1 talks getting through also is a shot in the arm for global risk sentiments. In the larger scheme of things a 0.3% or 0.2% average earnings growth doesn’t make too much of a difference. This week we have the FOMC where rate hike is given but what the market would watch out for are the forecasts on inflation for 2018 and 2019. Some analysts have already started projecting 3 and even 4 rate hikes  next year which looks possible to me given the current sentiments.

 

USDINR 1m NDF is trading flat while EM currencies have also not moved much since Friday. Equity markets locally have registered a sharp turnaround in the last 3 sessions. Indian bond yields continue to inch higher and now is closer to 7.1%. Market chatter suggests that there is an inflow of $500 mio going through today because of which the market seems to be offerish. I would continue to think that nationalised banks would protect INR appreciation beyond 64.25 levels before Gujarat elections. CMP 64.36, Range 64.25-64.45.

INR update: Pair can head to 64.85 next week before Gujarat election results

Reports that Trump will come up with his infrastructure plan in Jan 2018 boosted the dollar unexpectedly while the debt ceiling deadline was postponed till 22nd Dec 2017 which helped the cause as well. Today we have the NFP wherein recent ISM data suggests limited room for disappointment, therefore I would expect dollar index strength going into next week’s FOMC.

 

Next weekend (18th Dec) we have the Gujarat election results while on the 14th Dec evening we will have the exit polls. Basis reports, I would think that a BJP tally of 120+ will be pro risk and 100- will be adverse for sentiments. In case of 120+, USDINR trends lower but RBI would continue to intervene unless fresh FDI and FII flows also flow in, therefore from a trading perspective the risk reward lies in higher USDINR. I would think that the market is not positioned for the same and that positioning should happen between today and Wednesday, which can take USDINR to 64.85 levels. Caveat is there is a PSU inflow of USD 500 mio between today and Tuesday (not certain) and the positive equity markets can also keep USDINR offered.

 

USDINR 1m NDF is trading 1p left as compared to 2p right yesterday. EM currencies have depreciated yesterday on the back of dollar strength and local factors in a few countries. Asian equities seem to have broken their losing streak and are substantially in the green today. FII flows into Indian equities are substantially in the red while debt flows are positive but not huge. India 10 Y yields are at 7.08% again showing lack of positive sentiments. Since morning we are seeing selling pressure in USDINR from various banks. CMP 64.48, Range 64.44-64.60.

INR update: Moderate global risk off

Moderate risk off environment continues globally with US bombers flying over Korean peninsula yesterday morning and then Trump recognizing Jerusalem as Israel’s  capital. On the other hand commodities have registered mild losses this week as Chinese shares continuously and gradually edge lower. On the charts the price action is similar to profit taking and does not show any panic though.

 

USDINR 1m NDF is trading 2p right similar to yesterday. EM currencies have mildly appreciated since yesterday night. Asian equities are mixed while Nifty is positive 0.45%. Market chatter suggest inflow of USD 500 mio over the next 2 days which can keep INR strong. CMP 64.53, Range 64.60-64.40.

INR update: RBI could be less dovish driving USDINR higher

With US tax reforms passed and digested by markets, risk sentiments need a fresh impetus to continue soaring. Till then we are witnessing December profit taking in equity markets globally. Global PMIs hover around 54 which would suggest substantial scope of improvement going forward. In the US the focus might gradually shift to the Mueller’s Russia investigation where Trump’s position is weakening gradually. The view remains of a weaker dollar which has been corroborated by the fact that the actual passing of the bill last week, was not able to boost the greenback either.

 

Today we have the RBI monetary policy where higher inflation reading since the last policy would prevent the RBI from cutting or sounding dovish. The RBI could actually sound hawkish with higher inflation projections for 2018. USDINR had moved lower in the last couple of occasions before and immediately after the policy. But with the central bank likely to be less dovish in a relatively lower growth environment, I would think this policy could bring in a mild risk off immediately after driving USDINR higher.

 

 

USDINR 1m NDF is trading 2.5p right while other EM currencies have depreciated since yesterday. Asian equities are deep in the red with Nifty slipping gradually for the last 1 week. I would expect USDINR to head higher before the Gujarat election results next weekend. For the day, CMP 64.42, Range 64.34-64.65.

INR appreciation beyond 64.20 unlikely before Gujarat Elections

The first USDINR lower breakout happened on 14th March 2017 on the back of UP elections along with a 2% downward move in dollar. After a week the dollar selloff reversed while INR strength continued. Importantly, this was allowed by RBI because of landscape change resulting in higher FII/FDI flows structurally. RBI had bought $11.5bn in Mar2017 post which it allowed INR appreciation and bought only $3.3bn in Apr 2017 followed by $5bn in Apr 2017. I would think RBI reduced its buying after the first half of March 2017 and reconciled with INR strength.

 

The second break (which was false) happened after RBI allowed appreciation post 2ndAug 2017 monetary policy which was short lived, in spite of the continued dollar weakness in the month. This was allowed temporarily by the RBI and then RBI bought USD 10bn in Aug 2017 to reverse the move.

 

Now, there is no local reason (comparable to UP election results) for RBI to allow further appreciation. Having crossed the 2% GDP mark substantially for intervention for the current calendar year, RBI would want to wait for Gujarat election outcome before taking a call to allow further lower move in USDINR. The government has received a lot of criticism for a stronger INR and GST implementation which has hurt domestic business, therefore government would not want incremental INR appreciation immediately. Therefore the next decision point for RBI is Gujarat elections only. 6th Dec 2017 RBI monetary policy would be a non event for currency, as rate action is unlikely.

 

Last 1 month move in other EM currencies show that INR should be around current levels while a last 6 month comparison would warrant another 0.5% INR appreciation but given India’s weaker export growth performance I don’t think RBI would take this as a reason for further appreciation immediately.

 

Therefore I would not want to incrementally sell at the current levels in spite of the momentum that the current price action shows. I would go long at 64.20 for 64.85 before 18thDec 2017, with a stop below 63.95 (weekly close). On the other hand post Gujarat elections we can witness fresh round of INR appreciation taking it towards 63.50, but that’s subjected to the outcome.

INR update: Mild dollar strength and risk off sentiment in Asia

US data continues to show robust growth while the tax bill goes on vote today/tomorrow which is preventing further dollar weakness for the time being. Once the bill is behind us I think markets will start looking at the future, i.e., of a higher fiscal deficit US where the administration itself wants a weaker dollar. Today we have the Euro zone inflation which would be important.

 

USDINR 1m NDF is trading flat to slightly left while EM currencies have depreciated moderately since yesterday. KRW has lost significantly to 1188 from 1174 yesterday on the back of dovish comments from BOK post the rate hike. Asian equities are in the red as Chinese shares continue to inch lower everyday because of regulatory crackdown on speculative activities locally. Although Chinese risk off sentiments for now are confined to their local markets. Since yesterday INR has registered a 20p move up which should be enough given the global changes. CMP 64.51, Range 64.57 – 64.35.

INR update: US stocks rally, N Korea Missile test ignored

J Powell’s comment that banking regulations are already too tough indicate one of the expectations markets had from the Trump administration, i.e., of toning down restrictions on the financial sector, consequent to which US stock markets rallied. More republicans are likely to vote for the tax bill as differences get reconciled which led to a mild dollar strength except against GBP. Reports suggest that UK and EU have in principle agreed to a Brexit deal which led to the cable rallying. North Korea missile test has not resulted in a risk off as Korean equities are flat only.

 

Overall the risk on environment continues with a slight correction in the dollar weakness trend. USDINR 1m NDF is trading 1p left while EM currencies have registered a mild depreciation since yesterday evening. USDINR traded at 64.32 overnight while Nationalised banks bought the pair aggressively yesterday at 64.35 to prevent further appreciation. CMP 64.46, Range 64.55-64.35.

INR update: Medium term view of appreciation subject to event risks

Post the robust print in New Home Sales USD weakness paused and Euro fell from 1.1960 to 1.1900 levels. Powell’s senate testimony showed nothing substantial except for the fact that he is likely to continue the Fed’s trajectory of gradual rate hikes. In an otherwise risk on and dollar weakness environment, the factors to watch are falling Chinese equities, Nov 30th OPEC meeting and the senate vote on the tax bill, which can temporarily change either of the trends.

 

Gujarat election results can play a critical role in developing a medium term USDINR view. I would think that in spite of the headwinds that the incumbent BJP faces, the opposition might not be able to convert the recent gains into votes. In case of a convincing BJP win (120+ seats) we can see a bout of inflows into Indian equities (somewhat like post UP but to a smaller extent). RBI has already bought much more than 2% of GDP in USDINR in CY2017 and in case of large inflows it would have no choice but to allow INR to appreciate supported by dollar weakness. Therefore opening the doors for new lows. Having said this 64.20 levels would continue to be a strong support.

 

USDINR 1m NDF is trading left while USDINR made a low of 64.35 in the offshore markets yesterday before opening at 64.53 again. TRY and ZAR registered sharp appreciation yesterday on the back of dollar weakness while KRW and CNH are trading stable without incremental gains. Equity markets are slightly in the red while I would expect Euro to be well bid in the European session. CMP 64.59, Range 64.65-64.35.

INR update: Dollar weakness and improving local sentiments

As it looks certain that the Senate will pass its version of the tax cuts on Thursday, the market has started looking beyond, i.e., at the strong Euro zone growth and lack of higher inflation in the US which could result in lesser rate hikes in 2018. The interest rate differential theory has not been working between the USD and EURO driving EURUSD higher, at the same time the traditional correlation of stronger Yen with weaker global equities doesn’t seem to hold either. This week we have the senate vote, US ISM and US GDP data that would be critical along with housing releases.

 

India 10Y seems to have stabilised around 7% as the outlook on government finances improved in the last 15 days. USDINR 1m NDF is trading slightly right while EM currencies are mixed. Overnight as EURUSD moved to 1.1944 USDINR traded at 64.55 in the offshore market. Thus the 25p up move seems overdone to me in spite of the fact that Asian equities are moderately in the red. CMP 64.78, Range 64.85-64.60.

INR Update: India rating upgrade and dollar weakness together

US house passed the tax bill and that failed to boost the dollar although yields did move higher moderately. This shows the gathering belief in the resumption of dollar weakness. US data continues to be robust even though yield curve continues to flatten, indicating a market belief that inflation is not going to rise to higher levels. A flatter yield curve could show that a recession is approaching but looking at the US, EU, Japan and a recovering China it looks unlikely and therefore I would think the other alternative is for the longer run US yields to rise on the back of increasing fiscal deficit in the US.

 

Moody’s gave a big boost to India confidence levels by doing a rating upgrade by 1 notch. USDINR closed at 65.30 and opened at 64.75 levels onshore making a low at 64.60. Since then we have seen nationalized banks buying. Participants were not materially short yesterday so I would not think that people would buy to take profit at these levels. General market view yesterday was of a higher USDINR and therefore there would be more longs than short. Yields look attractive for bond inflows (-10bps since yesterday) and there is Rs. 15k cr limits left in corporate and GSECs for further investments. Other EM currencies have appreciated since yesterday as NDF 1W and 1M trade flat as compared to yesterdays 2-3p right levels. After the initial volatility I would think during the day exporters and fresh shorts would enter USDINR. CMP 64.77, Range 64.85 – 64.45.

INR update: Dollar weakness starts again?

Market’s have started focussing on Euro zone economic strength as the rate differentials get ignored. The fact that US is going to hike rates in December is clear and stronger CPI and retails sales data therefore had limited impact. There is still mild uncertainty on the tax bill and passing of the same can push UST yields higher. Overall in the two and a half month uptrend in USD index the momentum build up was weak indicating that the same was not a reversal. Now with the trend broken we might be seeing the major trend of USD weakness starting again.

 

Yesterday KRW appreciated strongly to its highest levels since October 2016 which shows that the North Korean crisis is behind us.  Other EM currencies have also appreciated since yesterday night. USDINR 1w and 1m NDF trades 1-2 p right indicating mild offshore buying pressure, as FIIs continue to pull small amounts out of Indian debt and equities. India 10Y yields has moved higher to 7.06 levels again. Most participants are looking to sell near 65.40 levels after yesterday’s selloff. CMP 65.35, Range 65.42-65.15.

INR Update: German GDP drives dollar weakness as India's trade deficit widens

German GDP data showed the strong and consistent growth that Germany is registering (2.8% pa). This along with EU GDP growth at 2.5% pa took EURO higher towards 1.18 handle and led to dollar longs stopping out across the board. US yields failed to convincingly break 2.4% again even though the progress on the tax bill indicates higher chances of the bill becoming law sooner. USD index has entered a make or break territory and a break today below 93.7 could bring in further weakness (CMP 93.8). We have US retail sales and CPI today which would be critical.

 

India trade deficit increased to $14bn against market expectations of $10.5bn. This was mainly due to lower exports and higher oil imports. Given the rise in oil prices and quick reversion of the increase in Exports in September, the print should lead the markets to worry about current account deficit increasing towards $45bn for this financial year which should keep USDINR bid. This along with increasing bond yields (India 10Y at 7.03%) could ensure limited downside for USDINR.

 

USDINR 1W NDF continues to trade right while 1m is flat indicating actual outflows getting hedged. USDINR opened at 65.43 and got sold off to 65.30 on account of longs cutting their position on the back of dollar weakness. At 65.30 we are seeing bids from importers. Given that the down move has already happened I would expect USDINR to stay in a small range for the rest of the day. CMP 65.31, Range 65.26-65.43.

INR update: US tax bill to be watched for further direction

US 10 Y yields continued to trade higher than 2.4% in a quiet day yesterday. The house of representatives is expected to vote on the tax bill this Thursday as the administration’s target has been to get it through both houses by 23rdNovember. Chinese data today morning was just below expectations with little market impact. Today there is a panel discussion between the biggest central bank governors, Yellen, Draghi, Kuroda and Carney, the topic being central bank communication challenges. ‘

 

India CPI data released yesterday showed that inflation continues to advance at a faster than expected pace which rules out any rate cut expectations for December policy, driving India 10Y yields to 7% (highest since Sep 2016). USDINR 1w and 1M NDF do not show any significant buying pressure today as both are flat as compared to onshore markets. Other EM currencies have mildly appreciated since yesterday. Equity markets show that risk continues to be on the back foot. Brent has retraced below 63 levels. With US and India yields both rising I would continue to think that downside for USDINR is limited and a break of 65.50 can lead to another 0.5% up move in a hurry. For the day, CMP 65.37, Range 65.30-65.50.  

INR update: US bonds selloff drives EM currency weakness

On Friday US bond markets got sold off driving US10Y yields from 2.31 to 2.4%. In spite of this we saw mild dollar weakness against G7 while the greenback strengthened against most EM currencies. The US tax bill is expected to become law by the end of the year or early next year in a diluted form although that didn’t deter markets to shift money out of US treasuries. I would think a weekly close above 2.43 in US 10 Year can now take the yields towards 2.6% which can result in dollar strength across the board. Fresh political trouble for PM May in the UK can keep the news driven GBP subdued.  This week has fresh retail sales and CPI data from across the globe hopefully making it an eventful one.

 

USDINR 1W NDF trading right by 2p shows outflows getting covered in the offshore market which could be the IPO application money flowing back. On the other hand markets are also chatting about a $1.5bn real estate inflow coming in this week. The pair is making higher highs and higher lows showing signs that markets are positioning for a move towards 65.65 levels. India 10Y yields show increasing signs of fiscal worries which can be alleviated or compounded by the CPI print due to be released at 5-30PM. For the day, CMP 65.27, Range 65.38-65.20.

INR update: Risk on environment could help Rupee appreciate

In spite of news of delay in implementation of corporate tax rate cut US yields did not fall and neither did USD implying the current USD strength over Euro and GBP. Republicans want to vote on the tax bill by 23rd November and therefore I would expect that gradually over the next 2 weeks USD index could head to 96.5 from the current 94.9 levels. Volatility is expected to remain low today as there is no significant data or speakers lined up.

 

USDINR 1m NDF is trading 1p right while EM currencies have mildly appreciated since yesterday. Historically INR has benefitted from a rally in oil prices which is counter intuitive. Oil price rally indicates a risk on environment which boosts capital inflows into the country more than the pressure on trade deficit. Equities are in the green and post the push in USDINR due to a one off buying I would expect USDINR to test 64.50 levels again over the next week. For the day CMP 64.90, Range 64.95-64.80.

INR update: Flows drive price as volatility sinks globally

In the US the setup is of higher equities and lower volatility with a flatter yield curve, indicating a comfortable environment with most good news priced in. This is helping commodities edge higher even though geopolitical risks in Middles east continues to rise gradually. Yesterday Euro zone retail sales surprised on the higher side along with news of 3 ECB members wanting more hawkish taper on the 26th Oct meeting, this failed to push EURO higher substantially, indicating that USD bulls are in control of the pair currently and therefore I would target 1.1510/1.1475.

 

Looking at the price action yesterday it seems that the outflow of the telecom stake sale is behind us. USDINR 1m NDF is trading 2 p right while EM currencies have mildly appreciated since yesterday evening. There are a few large inflows that might hit the markets now which include a real estate company selling stake worth Rs. 9600 cr, a private bank raising capital to the tune of $1bn and IPO inflows. All this would make me think that we can see INR appreciation when most people were expecting USDINR to break higher today. CMP 65.10, Range 65.20-64.90.

INR update: Oil price rise could limit INR appreciation

Globally the noteworthy move is in commodities which have gained across the board led by oil prices. This indicates the global growth momentum and should reflect in higher inflation expectations going forward resulting in higher yields. Today Yellen speaks as the US congress continues to deliberate on the tax bill.

 

Brent trading above 64 would ring some bells for India’s fiscal targets as the government now faces political pressure against raising fuel prices, thereby increasing the pressure on India’s fiscal deficit. Plus a higher oil would increase the pressure on the country’s current account thereby making me think that downside for USDINR is limited. 64.50 has a congestion of supports (200 DMA, retracement and recent price bottom) and therefore I would expect the level to hold. Meanwhile markets also have one eye on IPO flows plus a major real estate stake sale of Rs 9600 crs. USDINR 1m NDF is trading 2p left while KRW is trading strong at 1111 levels. For the day, CMP 64.68, Range 64.74-64.58.

INR update: Range bound price action as markets await conclusive news

The arrest of former Trump aids in relation to the Russian intervention election, is just a starting point of a long drawn investigation and whatever be the result, immediately the market would ignore the risks that this poses to Trump’s presidency. FED chair announcement is on Thursday and its likely to be Powell therefore should be a non event if there is no surprise. The congressional draft of the tax bill comes out tomorrow and that would be a major market mover. Today we have Euro zone GDP and inflation. EU GDP is picking up consistently unlike the US where GDP growth has been much more volatile.

 

USDINR 1m NDF is trading 1p left while dollar weakness has led to KRW and CNH appreciation. Asian equities are mixed while FPI flows into debt continues. I would keep an eye on India 10Y yields as further inching up might suggest fiscal concerns which are compounded by the fact that Brent continues to trade near $61 levels. CMP 64.82, Range 64.86-64.72.

INR update: US data and FOMC could drive dollar higher this week

Technically USD index looks like headed to 95.9 levels from the current 94.75. The weakness on Friday was because of the increased likelihood of Powell as the FED chair. I would have thought that Powell was already a consensus and therefore I believe an actual Powell announcement now should have limited impact on yields and USD. Muller has filed charges on the Russia investigation and there could be some arrests today (if any). It is not announced as to who that person would be but in case it is someone near the administration then we could see fresh political turmoil in the US and return of dollar weakness (although looks unlikely). Rumours suggest that Kuroda is likely to get a second term in BOJ and the BOJ meeting this week is likely to maintain its accommodative stance, both of which is negative for Yen. On 1st of November the next step on tax cuts is released, i.e., the congress’s draft of the bill which could help dollar advance. This is a data heavy week with FOMC, ISM and finally the NFP on Friday. Going by the recent macro prints in the US all/most of these could paint a rosier picture of the US economy.

 

USDINR 1m NDF is trading 1 p left. The dollar weakness has already given a 0.25% INR appreciation since Friday close which is in line with other Asians. Brent trading above 60 might mean the return of CAD worries for India. Equity markets domestically trade strong post the recapitalization of PSU banks and along with US stock markets. India 10Y yields is slowly inching higher now at 6.84. USDINR can move towards 65.30 levels during the week with USD strength, with this view I would expect limited downside today. CMP 64.90, range 64.85-65.02.

INR update: Trump tax cuts to keep USD firm

House vote on the budget got through narrowly yesterday leading to dollar strength. This vote ensures that the Trump tax cuts can pass without democrat votes. But there is enough strife within Republicans to still create issues with the tax cut bill. Next steps, the congressional tax committee will present a draft on tax cuts on 1st November, which will again be put to vote. Commentary suggests that if the bill has to go through then it will become law by 23rd November. The tax cuts would lead to significant reduction in corporate tax at the same time incentivising repatriation of global profits of US corporations back into the US, leading to USD buying. Thus it seems that the markets are going to spend the next 1 month in positive dollar expectations and I would go with the flow.

 

Today we have the US GDP where consensus is 2.5% but recent data has taken GDP tracking higher to 2.7%+. This could bring in further  dollar strength. EURUSD has broken key levels and now can accelerate towards 1.1550. USDJPY weekly closing above 114.80 can lead to another 2% upside.

 

With dollar strength globally USDINR is unlikely to go lower. USDINR 1m NDF is trading flat now while EM currencies have depreciated overnight along with EURO and dollar strength. CMP 65.01, Range 65.10-64.94.

INR update: ECB and Tax cut vote to keep INR range bound today

Today we have the ECB wherein Draghi would like to push the cart of confidence and normalization ahead given Euro areas superior economic performance. Thus I would think that he would not be dovish although he would remain measured, plus as before he would not talk down the Euro. I would not expect significant downward revisions to inflation forecasts wherein growth forecasts should move higher. If Euro trades higher than 1.1850 an hour after the press conference then we might head higher than 1.20 by EOW tomorrow.

 

On the other hand the House of Representatives votes for the Senate approved tax bill today. If this vote goes through then the tax bill could become a law by a simple majority (i.e., Republican votes only) in the Senate. This vote would be followed by further procedure and the houses bill on 1stNovember. Today’s vote going through could significantly increase the chances of the tax cuts being passed and fiscal deficit being raised, thus leading to dollar strength against JPY and EMs (temporarily at least).

 

Then there is US GDP tomorrow which can usher in further dollar strength / weakness. And the swinging moods on the next FED chair. All these make a medium term view on USDINR impossible at the moment, so let’s wait for these to pass.

 

USDINR 1m NDF is trading 2p left as compared to 2p right yesterday morning. FPIs poured in Rs. 3600 crs yesterday in Indian equities giving a big thumbs up to the government’s bank recapitalization plan. It would be unreasonable to assume that all the money came in a single day and therefore I would expect more FPI inflow in equities in the coming weeks. EM currencies have appreciated since yesterday as dollar weakened. I would not sell USDINR here given the chain of events which can bring in dollar strength in spite of the local sentiments. For the day, 64.76, range 64.68-64.85.

INR update: Recapitalization could increase rate cut chances for Dec

Starting with India, in a significantly positive step the government addressed the long standing problem of PSU bank recapitalization. The sum involved of Rs. 2.11 Lakh crore is significant and should impact growth positively. The move will also enable RBI to cut rates in December policy meeting subject to October Inflation printing at comfortable levels similar to last print. RBI had repeatedly said that monetary support alone could not help a pickup in lending unless structural steps are taken and therefore now it would have one argument less to not cut rates. All in all the move is equity market positive. The issued bonds are unlikely to be SLR status although the same is not confirmed and it does not increase the accounting fiscal deficit of the government. Public debt does go up which is a milder concern as compared to the positives. Bond yields therefore should only gradually inch up, they have not shown signs of panic sell off today morning (Yesterday India 10Y was at 6.795 and today it is at 6.804%).

 

The above announcement immediately took USDINR from 65.05 to 65.20 levels in the offshore market. But given the medium term growth positive outlook plus the fact that bonds have not shown a runaway in yields, further worry for INR seems unwarranted. Given the positive equity impact of the announcement, and an increased rate cut chance, the INR carry trade environment is ripe again.

 

USDINR 1m NDF is trading 1.5p right showing signs of concerns post the announcement. EM currencies have appreciated since yesterday while Asian equities are also in the green. Market participants would wait to see the impact across asset classes and I would expect as the announcement seeps in we could see some INR appreciation. CMP 65.14, Range 65.22-65.00.

INR update: Powell's appointment could weaken the dollar

Markets are giving more than 55% chance to Powell as the next FED chair with the second likely candidate having around 15% chances. This tells us two things that market consensus is Powell and since surprises cannot be predicted, therefore it is likely to be Powell only. Powell’s stance is mostly similar to Yellen except the fact that Powell being a Republican is likely to be less strict with Banking regulations. Therefore Powell announcement could lead to moderate dollar weakness and should be equity market positive.

 

The other major event would be the Trump tax cut bill which could be tabled as early as next week. The move in US 10 Y from 2.2% to 2.37% shows that markets are pricing in some chances of the bill going through. Overall the USD strength has failed to sustain and Powell’s likely announcement might take USD lower. On the other hand markets eagerly await ECB announcement on Thursday wherein Draghi is expected to infuse confidence in Euro area economic outlook as he tapers. Draghi has not been worried about an appreciating Euro and in the recent past post Draghi’s speech Euro has exhibited strength.

 

Given the expectations of Powell coming in plus failure of USD strength in spite of higher US yields one is tempted to think that USDINR might break lower. On the other hand US tax bill can create dollar strength giving upticks in USDINR. Locally more commentary suggests that India would meet its fiscal deficit target this year which should help continue the India positive environment. USDINR 1m NDF is flat while EM currencies have appreciated slightly since yesterday. The Chinese congress ends today post which Yuan might be made to demonstrate the strength of a new global power. CMP 64.94, Range 65.00 - 64.85.

INR update: Trump's tax cuts become more likely leading to USD strength

Comments from Republicans and other developments makes it seem that Trump’s tax cuts are more likely to become law by the end of the year driving yields higher with dollar strength. Senior republicans are now calling the tax cut plan revenue neutral stating increased growth as the justification, this in turn could ensure that Democrat support is not required in finally passing the bill. The bigger picture remains that US fiscal deficit increased to 3.5% from 3.2% last year and is likely to increase further in the coming year. My thoughts would be that till the time tax cuts don’t become a reality we would see USD strength but once the uncertainty is over markets will focus on the higher deficit and would search for impact on growth driving USD lower. This week US durable goods and US GDP will be the key data to watch along with the all important ECB.

 

USDINR 1m NDF is trading 2.5p left while EM currencies have depreciated along with moderate dollar strength. Nifty which was up 0.6% has given up most of its gains. Although the local concerns of slowdown and fiscal slippage is no more on focus, overall USD strength can still keep USDINR well bid. CMP 65.07, Range 65.04-65.20.

US treasury's currency manipulator report - RBI could sell agressively at upticks in 2017

US treasury published its bi-annual currency manipulation report. This takes into account the period Jun2016 to July 2017. Quotes from the report.

 

https://www.treasury.gov/resource-center/international/exchange-rate-policies/Documents/2017-10-17%20(Fall%202017%20FX%20Report)%20FINAL.PDF

 

“India is very close to meeting this criterion for the four quarters ending June 2017, with net purchases of foreign currency slightly below 2 percent of GDP.”

 

“Over the first half of 2017, there has been a notable increase in the scale and persistence of India’s net foreign exchange purchases, which have risen to around $42 billion (1.8 percent of GDP) over the four quarters through June 2017. India has a significant bilateral goods trade surplus with the United States, totalling $23 billion over the four quarters through June 2017. Treasury will be closely monitoring India’s foreign exchange and macroeconomic policies.”

 

Other observation from the report

-        The report says that according to IMF measure of reserve adequacy India’s reserves are USD120 bn more than required. China is higher by 1300 bn and Brazil by 170bn.

-        In the first half of 2017 India added 10% of total FX reserves added globally, whereas India holds only 3.5% of total FX reserves.

-        Korea and Taiwan have reduced their foreign exchange purchase, the same has been acknowledged. Taiwan consequently has been removed from the watch list.

-        China has been praised for preventing undue depreciation of Yuan.

-        Japan and Germany have been acknowledged to have not intervened in FX markets for over multiple years.

-        Switzerland has been, as earlier, acknowledged as a special case of currency intervention given their safe haven demand.

 

Conclusion

The report doesn’t provide for any penalties on countries which are on the watch list and therefore Indian authorities might not be too worried about the same, but getting qualified on the watch list might have implications on any negotiations related to the IT sector or other trade agreements. The next report is due in Apr 2018 which will consider CY107 where India is specifically at risk of getting listed on the monitored list. India’s current intervention for CY 2017 stands at 2.27%.

 

It could mean that for rest of 2017 the highs of 65.50 would be aggressively sold by RBI in order to unnecessarily avoid getting highlighted in the next report.

 

Current Intervention figures for CY2017.

 

Details

USD bn

sign

Total Addition to headline reserves from 1st Jan 2017

39.64

+

Revaluation impact due to  Currency

13.57

-

Revaluation impact due to movement in yields

-1.72

-

Forward intervention in CY 2017

32.2

+

Expected intervention from the last record date (spot and forward)

-2

+

Total Intervention by RBI till now

57.99

 

India GDP FY18 at USDINR 64.5

2,590.00

 

2% of GDP

51.80

 

Room left for intervention

-6.19

 

 

INR update: Receding local concerns and positive global environment

The improvement in Trump’s presidential career has come on the back of him listening to his team. Basis this I would think, that if Mnuchin backs Powell then Powell should be the next FED chair which is fairly dovish or a continuation of existing FED policies. US data (Empire state manufacturing survey) continues to show signs of robust economic activity which should help the FED to continue normalizing policy (rates and balance sheet) irrespective of sub target inflation. Therefore I would continue to think that US yields have further scope of moving higher as they price more of the FED projected rate hikes in the curve itself.

 

The next major global event is the ECB on the 26th October. The recent fall in Retail sales would make the ECB circumspect about giving an end date to the asset purchase program. On the other hand they would use the positive global and EU economic environment to ensure that they take an incremental step towards tapering. Thus the approach should be similar to the other successful DM central bank, i.e., FED, which is to keep taking incremental steps towards policy normalization without scaring the markets with a hawkish overtone.

 

In India the fear of fiscal deficit increase and higher current account deficit has somewhat receded though not conclusively. Basis the recent trade data along with CPI and less reliable IIP it seems that immediately a case for immediate weakening of Indian macros is not warranted. On the other hand comments from the government showed that there is caution and fiscal purses would not be loosened immediately.

 

USDINR 1m NDF is trading 1p left which is in line with improvement in Indian macro expectations improving. Nifty which a week back was looking like heading towards 9600 is now trading at highs although majorly due to domestic buying. EM currencies have mildly depreciated since yesterday which is reflected in the price of 64.90 up from yesterday’s 64.75. Exporters who have recently seen sub 64 levels, are now more likely to sell at upticks while importers continue to gain in confidence. CMP 64.90, Range 64.95-64.80.

INR update: FED chair race changes in favour of a more dovish Powell

Trump’s tax plans have been criticised saying that it might actually raise taxes for the middle class plus the fact that it reduces inheritance tax is also been sighted as a sop to the wealthy. This along with Trump’s spat with a fellow senior Republican has taken the steam out of UST yields reducing expectations of the tax cuts going through effectively. On the other hand markets assumed Warsh to be the front runner for the FED chair given Trump’s friendly relations with his family but a hawkish FED chair might be counterproductive to Trump’s growth plans. Mnuchin apparently wants Powell to lead the FED and this news has also helped to ensure that the dollar index does not go up further. Catalonia separation has provided a breather to the mild Euro concerns.

 

EM currencies have mildly appreciated since yesterday along with broad dollar weakness. IPO inflow (or expectations) is keeping USDINR offered. The fact that USDINR 1m NDF is continuously trading right by 1-2p prevents me from making a lower USDINR view as seldom have I seen INR appreciation with offshore buying (only happens on days of sudden large inflows). Today we have the CPI at 5-30 PM where a higher print would reduce chances of monetary stimulus and make the economy tend towards higher inflation with lower growth. Therefore a higher print should be INR and equity negative. For Oct I would continue to see a range of 65 to 65.70. For the day, CMP 65.12, Range 65.05-65.20.

INR update: Offshore buying USDINR even though other EMs appreciate

Trump was severely criticised by another senior republican, Corker. The altercation brings forth concerns about Trump’s support and therefore the ability of his tax cuts to go through without revenue neutrality. Which in turn puts into question a substantial run up in yields and USD. Therefore while we expect a mildly stronger dollar over the next 2-3 months, the reversal could be surprisingly fast. Meanwhile today Catalonia can announce independence which would create some political uncertainty for Euro driving it lower.

 

USDINR 1m NDF is trading 4p right which should prevent accelerated INR appreciation despite CNH and KRW appreciating overnight. IN10Y yield is at 6.77 while the high has been  6.78 therefore there doesn’t seem to be any abatement in India fiscal concerns and therefore a reversal is not in sight. Oct Range 65 – 65.70 or higher. Day, CMP 65.26, Range 65.17-65.33.

INR update: Wage growth to help USD strength

Wage growth in the US has picked up (September and previous revisions) taking YOY levels to 2.9%. This was the one big concern against the rationale of raising interest rates and now with 1%+ real wage growth, the market would expect the FED to normalize policy without much hesitation. This should keep the dollar bid along with the noises of tax reforms in the medium term. The impact could be magnified in USDJPY as Japan heads into election on the 22nd Oct 2017. I would buy USDJPY at current levels for the next 2 weeks for a target of 115. This week we will have the FED minutes on Wednesday and US Retail sales and US CPI on Friday as the most important pieces of information.

 

USDINR 1m NDF is trading 1p right. EM currencies have appreciated since Friday with CNH appreciating 0.4%. UDSINR traded at 65.60 post NFP in the NY session but then retraced as USD gave up its gains. Equities today are in the positive. GIC being a PSU, market does not expect oversubscription from FPIs and therefore inflows should be limited on account of this IPO. The political certainty related equity market gains post BJP’s (ruling party’s) victory in India’s largest state election in March 2017, is at risk as market now looks at Gujarat elections in Nov-Dec 2017. I would expect USDINR to trade in a range of 65 – 65.70 for the rest of October with a chance of breaking higher. CMP 65.30, Range 65.25-65.40. 

INR update: Dollar strength but local factors to help INR

The passing of the budget resolution in the US along with hawkish comments from FED speakers drove US yield higher along with USD index. Expectations of Warsh being nominated as the new FED chair is taken as a hawkish development. The political capital of Teresa May deteriorated driving GBPUSD lower.

 

Today we have the NFP wherein expectations have already been lowered to 50k-100k because of the hurricanes. Other US data suggests that there could be positive surprise as against consensus levels. On the other hand the consensus for wage growth print is at 0.3% mainly on account of base effect. Given the lower forecast for headline number, market has already positioned for dollar strength and post the number we could see some amount of retracement.

 

Asian equities are trading in the green on account of all time highs on the Dow. USDINR 1m NDF is trading 1p right like yesterday. Non Asia EM currencies depreciated yesterday night on account of dollar strength while Asians are more stable today. Positive announcements are expected from the Central government which could take USIDNR lower. Corporate bond investments of an average Rs.1k crores is seen every day and another Rs.9k crores of limits are left in this category. FPIs continue to pull out money from equities which are more than matched by DIIs. In the next 1 week there are a couple of IPOs which should result in inflows. The upside for USDINR looks limited for the next 1 week and therefore I would expect a range of 65.35-64.90 for this period, in spite of dollar strength. CMP 65.28, Range 65.33-65.10.

INR update: Stronger US data points to dollar strength

US manufacturing and service ISM are both touching 60 and that for now should put to rest any doubt about the robustness of the US economy. While price pressure has eluded the US economy, basis these 2 pieces of information I would bet on a stronger NFP and inflation data in October first half. On the other hand EU retail sales saw a second month of decline from the August peak. Improving US data vs peaking EU data, plus fresh worries on Euro zone politics plus ECB confusion, lends further credibility to expectations of  a stronger dollar for the next 1 month.

 

USDINR 1m NDF is trading 1.5p right. Corporate bond inflows along with IPO flows have led to longs stopping out and USDINR moving to 65 from 65.30 levels. The RBI policy was prudent and independent but it contained nothing to boost the INR or Indian equity markets. India 10Y bond yields are at 6.73% from 6.62% since yesterday pre policy. Since ISM services data yesterday USD has gained mildly against other EM currencies. Risk remains supported in the Asian session today. USDINR upside view remains intact till a daily closing below 64.70 is obtained. CMP 65.15, Range 65.25-65.08.

INR update: Trump trade is back? RBI policy a non event? Intervention continues in USDINR.

In the US comments from corporate bigwigs about the need and effectiveness of tax cuts brought US yields marginally lower along with USD index. US equities on the other hand continue to price in the valuation gains from the proposed tax cuts. Commentary suggests that Trump’s political effectiveness has increased substantially over the last 1 month and consequently we can expect significant positive surprises on the budget resolution which is to be passed this week and then the tax reforms which might have to wait till December 2017. Overall to a certain extent, let me admit that the Trump trade is back (higher US yields, stronger dollar and higher DM equities).

 

RBI cannot argue for a rate cut any more with inflation picking up (although expected) and fiscal slippages accelerating (unexpected). What RBI would do is revise growth forecasts lower and sound dovish. An actual rate cut today might not be as useful as compared to a dovish RBI which can help in keeping rates lower across the curve. Broadly these are market expectations also and therefore RBI policy should be a non event, except for the chance of RBI raising a few red flags on growth or fiscal which could become India risk negative.

 

Latest forward data shows RBI has bought more than USD 61 bn in spot and forward reserves put together in CY 2017. This shows that RBI does not pay heed to the US currency manipulator parameters, or it could also show that RBI would sell USDINR aggressively if there is upside volatility. CY 2017 data would be used for the Apr 2018 report while the report due shortly in  Oct 2017 will be basis the data July 2016  to June 2017, where there is no risk of India breaching the limit.

 

USDINR 1m NDF is trading 7p left which indicates offshore selling. This is surprising given the overall environment for INR and therefore one can assume that this is flow driven. EM currencies have all appreciated since yesterday while Asian equities are in the green. Yesterday Nationalized banks bought the pair aggressively and we can expect the same to continue. CMP 65.35, Range 65.25-65.50.

INR update: Retracement or reversal?

EURUSD respected the 200 WMA at 1.1720 as USD index got rejected at 93.65. US 10 Y yields retraced from 2.36% to 2.32% as market digested the tax reform plans. With the FED projecting 3 rate hikes for 2018 and market factoring in 1 hike only and tax reforms looking like creating a fiscal stimulus at least in the near term, US rates look more likely to move higher than lower. With US rates higher I would not think that dollar weakness will resume unless wage growth and CPI data in the US disappoints. USD strength would be more visible against other G7 currencies than Euro and specially visible against EM currencies. Today US personal income and outlays at 6PM can move markets along with a EU inflation and UK GDP.

 

USDINR moved higher on the growth concerns and fiscal slippage wherein there has been no fresh news. Other EM currencies depreciated along with USD strength and higher US yields. Yesterday USD strength paused on account of post tax reforms announcement cool off. There is no new news on India front or the US to suggest that the USD strength against EM currencies has reversed and therefore I would take this move as a temporary retracement only.

 

USDINR 1m NDF is trading flat today indicating the cool off in buying pressure. CNH and KRW continue to trade at weaker levels although have retraced since yesterday morning. Asian equities today are in the green with India 10Y yields coming down to 6.62 from yesterday’s 6.67%. A close below 65.15 on weekly basis would make the target 64.80 while a close above 65.35 would again make me target 65.75 next week. CMP 65.43, Range 65.30-65.50.

INR update: Higher US yields to weaken EM currencies

US tax reform announcement was as expected, ambitious. Whether it passes and becomes legislation or not will be seen in 2018 but what would become clearer in the near term are the budgetary implications of the plan. To take a step back the tax reforms or fiscal stimulus was first ideated in Jackson Hole 2016 from where the FED has accelerate policy normalization and now a fiscal stimulus is being worked upon. This essentially means that the trajectory for US yields is on the higher sides as US government’s appetite for fiscal deficit increases. With higher US yields we should see USD strength against low yielders like JPY and EM currencies like INR. EURUSD should not lose as much given that EURO story is more to do with reserve reallocations with improving political scenario.

 

Nifty is showing increasing signs of weakness as FPI outflows continue. NDF 1m USDINR is trading 3.5p right indicating sustained offshore buying. Other EM currencies have depreciated 0.5% or more since yesterday same time. IPO post allotment outflows should result in significant USDINR buying  today. 65.50 was 200 DMA and that has been convincingly broken which should make the medium term target 66.50 for USDINR. CMP 65.87, Range 65.75-66.05.

INR update: NIFTY losses indicate changing views while INR trades stronger

EURO longs in CFTC cut their positions by USD 3.5bn showing increasing signs of a pause in the EURO rally as GBP gains while US yields rise on the back of tax reform expectations. 25th September that is today, is when markets are expecting an announcement which could take the corporate tax rate lower to 20% while lowering the top individual tax bracket from 39.8% to 35% in the US. This could give US equities a boost along with higher US yields which could drive some amount of dollar strength. The price action could be somewhat similar to what we saw immediately after Trump came in without the volatility involved. But US politics remains highly unpredictable and a failure of these reforms could drive US yields lower as well.

 

Markets ignored North Korea and Trump’s war of words.

 

India allocated Rs. 44k crors of Masala bond limits to corporate bonds which would release Rs. 17.5 k crores to open corporate bond category from Oct 2017. USDINR 1m NDF is trading 1p right only as compared to 5p right on Friday. EM currencies are trading stable to stronger vs USD and that should keep INR supported for the day. Indian equities are getting sold depicting changing views on India fundamentals which should keep USDINR supported at 64.55 in the medium term. For the week I would expect a range of  64.55-65.20 and would expect 65.55 to be seen in October 2017. An hourly close below 64.73 could take USDINR to 64.60 for the day. CMP 64.75, Range 64.70-64.90.

INR update: RBI unlikely to defend INR as market notices India fiscal slippages

USD weakness against EURO, GBP and JPY returns as the FOMC was digested by the markets. AUD fell on account of dovish central bank speech saying that Australia has no intention of joining the global rate hike bandwagon. Korea again said that it would like to test a hydrogen bomb driving risk off sentiment in Asia.

 

The India macro issues story has just been noticed by the markets at large so it will take time before things cool off. Markets would now focus on the incremental problems that can arise as fiscal room tightens. Oil price rise will create fiscal and inflation jitters. Capital account outflows can drive yields higher thereby affecting equities. RBI is unlikely to support INR as exporters need the shot in the arm and it seems that the government thinks that a higher USDINR would be good thing for exporters at the cost of national financial confidence. Best thing is to stay with the trend and set small targets, currently the same for USDINR is 65.56.

 

USDINR 1m NDF is 8p right which shows the kind of offshore buying that’s driving USDINR higher. EM currencies have depreciated overnight but USDINR is an individualistic story currently. Equity markets are significantly in the negative and I would not buy the theory that stimulus will help equities immediately. There can be some announcement by the government during the day creating volatility in the markets. 64.80 looks like a good support now till the time things change considerably. CMP 65.07, Range 64.90-65.30.

INR update: Range shifts to 64.00 - 65.50

The FED downwardly revised its inflation forecasts but kept the interest rate forecasts the same, therefore reemphasizing that the FED is not so bothered about inflation as it is about normalization. Till the time data is such that it requires the FED to support the economy, the central bank will continue its interest rate hikes and balance sheet reduction. Markets on the other hand expected the FED to reduce the interest rate hike outlook given the start of balance sheet reduction and consequently the markets read the statement as hawkish. But the lack of follow through after the initial 30 minutes suggests that nothing materially has changed for G7 post the FOMC.

 

The FED is expected to reduce the balance sheet size by USD 1.5 trillion therefore giving inherent strength to USD against EMs with weaker fundamentals. In this regard the recent slowdown in Indian growth, widening of CAD, resultant equity outflows and fiscal concerns might render INR vulnerable. The fact that INR did not appreciate on the back of positives like resolution of Doklam issue, CNH appreciation and de-escalation of North Korea crisis, suggests that for the next 2-3 months, sub 64 levels might be difficult to achieve. On the other hand USDINR upside should be capped at 65.50 in this period.

 

USDINR 1m NDF is trading 2p right. Basis last 2 day’s other EM currency movement USDINR should be around 64.30 so the up move is specific to India. Equity outflows continue without aberrations. One can expect nationalized banks to step in to sell USDINR above 64.50 given their both side intervention behaviour in the recent past. CMP 64.49, Range 64.40-64.55.

INR update: FOMC and US tax reforms expectations can lead to stronger USD

The FED has not looked at inflation prints to decide on rate hikes but has depended more on Financial conditions index. The current FCI at -0.85 (Chicago FED) shows persisting easier financial conditions (on the back of higher equities and lower trade weighted dollar) and should assist the FED to continue to be hawkish (at least not dovish) thereby increasing the rate hike probability of Dec 2017 (currently at 52%). On the other hand return of hopes that Trump will be able to pass some amount of his promised tax reforms has raised US treasury yields from 2.05% to 2.24%. The details are expected on 25th Sep and till then markets will be careful before they go short on US dollar.

 

USDINR 1m NDF is trading 2p right as most EM currencies depreciated against the dollar this week. The NDF movement to right shows changing sentiments towards INR and a hawkish FED or higher US yields will have a larger impact on INR as compared to other EM currencies.  Equity market outflows from India accelerated even though equity prices continue to be supported due to local buying. Nationalized banks sold USDINR above 64.40 today. CMP 64.40, Range 64.30-64.55.

INR update: FPI outflows from Indian equites continue

If North Korea fires a long enough ranged missile then it has to either fly over SK or Japan before reaching any target, so the headline should actually read that NK tests another missile rather than fires a missile over Japan. Japan did not try to shoot down the missile the last time around or this time either indicating that it knew it is a test and its cities are not at risk. NK is arming itself to prevent a regime change and has Chinese and Russian blessings therefore all NK related risk off should be bought into.

 

In the US, chances of Trump passing a tax reform have increased driving yields higher. Although Trump might be getting into a political complication by garnering support from the opposition leaving his fellow republicans seething. Today we have the retail sales while the FOMC on the 20thwould ensure that dollar sellers wait it out before creating new shorts.

 

USDINR 1m is trading 3p left only while other EM currencies have not depreciated on the back of the NK missile test news. More worrying in India is the continuous large FPI outflows from equity markets locally (in the last 1.5 months we have seen outflows of almost $3bn). This along with a strong RBI resolve to protect INR appreciation could lead to an uptick in USDINR if we get a weekly closing above 64.25. On the other hand IPO flows over the next 1 week could provide support to INR. CMP 64.11, Range 64.05-64.25.

INR update: Global risk supported as USD fails to move higher

World equity markets corrected from August beginning on the back of North Korea tensions and speculations of tapering by ECB along with balance sheet reduction by the FED. Since then North Korea tensions seems to have cooled off, ECB seems to have postponed its plans and the FED is awaited. The FED seems to pre-committed to go ahead with balance sheet reduction and the market seems to have digested the news already. This change in global construct in the last 1 month could drive global equity markets for a week towards new highs.

 

There is news that Trump might visit China in November 2017 and that might ensure that PBOC keeps USDCNH alone and therefore CNH appreciation could continue. Last time Xi and Trump met in April, the US ended up igniting the North Korea debate which required 5 months to cool off. This time perhaps Trump has learnt his lessons and the discussions could end up being more risk positive.

 

I would think that the dollar index broke the 200 week MA (92.60) convincingly on the 8th Sep 2017 after hovering around those levels for 1 month. Immediately after breaking those levels it went down to 91 levels which shows follow through. After this significant breakout I would continue to trade for further dollar weakness and expect Euro to head towards 1.21. USDJPY becomes more complicated as higher equities brings new bids into the pair even though I would think the safe haven logic doesn’t apply to Yen against USD in the current risk on environment. GBPUSD has given a significant breakout above 1.3250 and looks like headed higher.

 

India CPI came in higher than expected without affecting markets. High frequency data locally shows some amount of slowdown in economic activity as FPIs continue to pull out money from equity markets. DIIs make up for FII selling and this is perhaps attributed to demonetization cash coming into main stream. Overall one needs to watch out for local macros including growth and CAD.

 

USDINR 1m NDF is trading 5 p left with mild appreciation in KRW and CNH since yesterday. Equity markets in Asia are flat as nationalized banks continue to buy USDINR. The conviction in USDINR breakout lower is waning as time passes but a breakout higher looks as unlikely. Range for the next fortnight seems to be 64.20-63.65. For the day CMP 64, Range 64.05-63.90.

INR update: North Korean tensions behind us?

Any future chances of USA taking on NK can be measured by the fact that US avoided going against Russia and China in the UN yesterday, by pushing through a toned down version of UN sanctions. Yesterday’s diluted UN sanctions should put into perspective how unlikely a war is in the North Korea scenario as US would not get a go ahead from Japan or SK and at the same time face China and Russia on the other side.

 

With the 2 hurricanes causing less damage than previously envisaged US stocks rallied and certainly NK situation helped. Next major market event is FOMC where the FED is expected to announce balance sheet reduction timelines. Market seems to have priced in that the FED would announce the same on Sep 20th but given the recent inflation readings and the added pressure of the 2 hurricanes the FED might want to wait and watch. If the FED delays on balance sheet reduction then dollar can be further sold off while it would equity positive.

 

USDINR has moved up above 64 as USDCNH is trading near 6.55 (up from 6.52 yesterday). 1M NDF is trading 5p left indicating offshore selling pressure. Equity markets in Asia are mildly in the green while all other EM currencies have mildly depreciated in the dollar correction. Given the risk on sentiment and dollar strength, opposite forces are at play on INR but currency sentiments should weigh more. Positional shorts should only look to take a stop at a daily close above 64.25 as the medium term view on INR remains constructive. CMP 64, Range 63.95-64.10.

INR update: Risk on sentiment, mild correction in USD weakness

North Korea had delivered the message that it is ready to go to any level to prevent disarmament by doing the nuclear test last weekend and therefore there was only fear this weekend but no real need to do anything more. The vote on UN sanction against NK is due today but we might not hear anything significant on this issue now as all sides realize that the best thing to do is to push the issue under the carpet. Hurricanes in the US receive a lot of attention even as Irma withered down to level 2.  Overall the week looks better for risk and equity markets than last week. This is a data light week with Chinese IIP and retail sales on Thursday along with US and Indian inflation as the main pieces of new information that we would receive. The breakout in USD index has happened on Thursday with 200 Week MA breaking convincingly so the view remains of USD weakness.

 

USDINR 1m NDF is trading 4p left only. CNH has depreciated from Friday’s peaks of 6.45 to 6.519 today along with other EM currencies which have depreciated around 0.5%. There is a retracement in dollar weakness that we are seeing across G10 and EM currencies. RBI continues to buy as I think that 2% of GDP of intervention for CY2017 would already be complete. The medium term view is constructive on INR for 63.50 and lower but today does not look like the day RBI allows INR appreciation. CMP 63.85, Range 63.78-63.96. I would want to carry overnight shorts in USDINR.

INR update: ECB accepts EURO appreciation while RBI continues to defend

ECB perhaps realizes that there is no escaping a higher EURO given the global construct and therefore it did not try to talk it down. Noteworthy is that sometime back market expected a September tapering, hawkish ECB interest rate outlook with higher Euro yields. Now Euro yields have edged lower substantially, September tapering has been postponed to October or later and ECB has asserted that rates are going to remain low till the end of asset purchases. In spite of this Euro continues to move higher which shows that it is independent of interest rate theories and the move is more of a structural dollar weakness and consequent reserve allocation into Euro. Euro appreciation will be more than expected and will continue at least till markets start bracing up for surprises in Italian elections in May 2018. The appreciation could be even sharper post that, of course with a favourable EU outcome.

 

Trump has toned down his NK war mongering after he realized that a President also needs to rationalize his decisions. Yuan continues to appreciate perhaps along with Euro. EM currencies gained sharply as dollar weakness accelerated along with improved risk sentiment. NK might test a bomb on founders day but I don’t think markets would now care. USDINR 1m NDF is trading 5.5p left while EM currencies show that basis last 1 month INR should be between 63.10 and 63.50. Large life insurance companies are hitting the capital markets with their IPOs and the same should attract FPI flows. RBI continues to buy aggressively but at some point it could stop allowing INR to catch up with other EM currencies. USDINR could see a new low below 63.50 next week subject to NK risks not escalating which is my primary view. CMP 63.89, Range 63.95 – 63.65

INR update: China's XI would want NK issue to die down without resolution

Risking a nuclear war on SK or Japan is what any military action on NK means. Neither China nor US would want that. China specially would want to avoid this situation as it looks to build confidence in the Chinese system and establish itself as a super power. The super power status goes for a toss if the first impact of that is an unnecessary war and a war would mean that China loses its NK bargaining chip with US, Japan and SK . Secondly Xi is up for election on 18th October as the Congress convenes to decide on the Chinese President and a weak NK positioning would not help his cause. North Korea would want that US doesn’t push for a regime change and Kim John rules for eternity. That’s not very difficult for China to broker. What US (and allies) would want is disarming NK which is something NK would not agree to as that takes away the leverage NK has in the first place. Hence the complexity and therefore the solution is difficult but the can be kicked down the lane to be dealt with another day and I would think this kick would come well before the Chinese congress sits. Once the two sides go silent we should see a resumption of risk on sentiment across asset classes. Yesterday China sent a strong message to North Korea through its official media and also displayed its military might to the rogue ally through exercises near its border, all this happens as Chinese public opinion becomes more critical of NK actions.

 

Trump on the other hand used the hurricane to avoid a government shutdown until Dec 2017, an example of another can been kicked down the lane. The news was mildly dollar positive only as US10Y struggled to cross above 2.1% indicating that markets do not expect Trump to be able to pass tax reforms given his slow progress. Although debt ceiling issue being resolved for now creates a higher chance of the FED embarking on balance sheet reduction in the Sep FOMC. Today we have the ECB wherein recent history suggests that Draghi is not concerned about a rising Euro. A rising Euro for a current account surplus EU is any which ways a tighter financial condition scenario therefore it is likely that ECB would wait before announcing tapering. The strength in Euro is indicated by the fact that news of delay in ECB tapering has not been able to take Euro lower, basis which I would expect Euro to perhaps touch 1.21 post the ECB today.

 

KRW has appreciated 0.5% since yesterday along with all other EM currencies. USDINR should be between 63.50 and 63.85 basis recent EM currency movements.  USDINR 1m NDF is only 4.5p left which indicates reduced selling pressure on USDINR. Asian equities are in the green as Korean markets shrug of fears of a war. I would expect USDINR to head towards 63.50 in the coming week basis the view that Korean issue will not escalate. CMP 64.02, Range 64.09-63.85.

INR update: Risk off tone as US yields edge lower

Another hurricane warning in US resulted in insurance companies getting sold and an overall risk off tone. Korean concerns have not escalated while at the same time it has not receded either. FED speakers showed signs of doubts on further rate hikes but they both have been extreme doves, nevertheless the markets reacted taking US 10 Y yields to the lowest levels since Trump elections. Today US service ISM would be important along with the beige book release.

 

USDINR 1m NDF is trading 5p left while KRW has depreciated to 1136 levels. CNH and other EM currencies are largely flat to slightly stronger than yesterday. Asian equities are in the red with Hang Seng at -1%. Participants largely expect the September range for USIDNR to be 64.50-63.80 which would make me think that at every uptick from the current levels we would see exporter selling coming in. USD weakness and other EM currencies suggest that INR depreciation would be limited while technically a break above 64.30 can result in stop losses taking the pair higher to 64.40 in a hurry. CMP 64.24, range 64.30-64.10.

INR update: Yuan Oil Benchmark could change the world order

News that China will launch a crude oil contract denominated in Yuan and backed by gold is perhaps the most significant step àny country has taken in recent times to counter the US. In the longer run what this means is that China doesn’t need its $3 trillion of reserves as Yuan could become an international currency. US Federal reserve bank today has only $120 bn of FX reserves. What this means is that oil can be traded in another currency except USD which would mean that other countries need to hold lesser USD and more Yuan. The said Yuan oil benchmark is in its infancy but this is part of the war between the US and China which is now being played out in oil markets along with North Korea and South China sea. On the other hand an appreciating Yuan should put appreciation pressure on INR because of trade linkages between the two. But all this is in the medium to long term and right now we need to continue to see CNY movements which could have implications on dollar weakness and further INR strength.

 

On the NK crisis news reports suggest that UN will vote for tougher sanctions on 11th Sep while China might come up with oil supply cut and choke North Korea. The comments of the US ambassador to the UN seemed mild and reinforces the deduction that US cannot act against NK given the geopolitical sensitivity. Euro holding up above 1.19 shows the buying pressure on the currency as market awaits the ECB meeting on Thursday.

 

USDINR 1m NDF is trading 6p left while other EM currencies suggest that USDINR should between 63.66-64.00 levels. Equity markets are in mild green even as JPY and CHF indicate towards mild risk off. KRW has depreciated mildly since yesterday while CNY appreciated to 6.5150 before bouncing to 6.5350 in the morning. CMP 64.15, range 64.20-64.00.

INR update: Nuke tests largely ignored by markets

With what happened with Gadaffi in Libya or Saddam in Iraq or Asad in Syria (ongoing), North Korea has learnt that an actual nuclear arsenal and threat is the only way it can avoid a regime change at the hands of the US. A threat of an actual nuclear attack would prevent the US from taking any military action against NK as it's allies Japan and SK would never risk a nuclear attack. Thus the nuclear test can only push China to review its decades old NK policy which is of maintaining the balance of power in the Korean peninsula by avoiding US intervention in NK. China has been helping NK economy by going around the sanctions in one way or the other and the testing of hydrogen bomb can only lead to NK loosing it's ally which makes it significant. The world knew that NK had nuclear weapons so yesterday was no surprise but only to the extent that NK is more provocative than China might like. So if anything the testing can be risk positive as it pushes China to side with the rest of the world. Trump is perhaps insignificant in the entire scheme of things after his bluff was called by NK.

 

US data continues to point at robust growth but without price pressure. The ECB news of postponing tapering to Dec 2017 and discomfort with higher Euro would get further clarity in the ECB meeting on Thursday. Overall if the main reason for Euro appreciation is reserve money allocation, then short term data and minor ECB actions would have little impact and the dips will continue to be shallow. This is a data heavy week as well with EU GDP, EU retail sales, US factory order tomorrow.

 

CHF indicates mild risk off because of NK. JPY might not be a good indicator of NK related risks. USDINR 1m NDF is trading 6p left. USDINR spot offshore had gone towards 63.80 on Friday night so we have already seen a 15p upmove. KRW has depreciated to 1130 from sub 1120 levels, other than which other EM currencies have not depreciated significantly. CNH continues to appreciate. Equity markets indicate mild concern only with Korea at -0.8% while other markets are largely flat. CMP 63.96, Range 64.05-63.90. I would continue to sell on upticks and if someone wants to protect against the tail event of a war then buying puts would be a better strategy.

RBI has bought $49bn already leaving limited room for further buying

Basis the latest forward outstanding position of the RBI, it seems that in the first 8 month RBI would have bought USD 48.75 bn of USD from the market. Therefore in case of large inflows (either hot FPIs or FDI or ECBs) the room for RBI to buy further dollars from the market is limited. Corollary is that the need for RBI to sell dollars at upticks is even higher. This is basis the assumption that RBI is paying heed to the limits set by US treasury, for which we do not have any confirmation. Therefore selling calls for 64.50-64.75 and buying puts of 63.50-63.75 seems like a good strategy along with vanilla USDINR shorts at 64.20.

Details	USD bn	sign
Total Addition to headline reserves from 1st Jan 2017	34.25	+
Revaluation impact due to  Currency	14.95	-
Revaluation impact due to movement in yields	-0.54	-
Forward intervention (till Jul 17)	25.9	+
Expected Forward intervention from the last record date (spot and forward) - assumption	3	+
Total Intervention by RBI till now	48.75
India GDP FY18 at USDINR 64.5	2,590.00
2% of GDP	51.80
Room left for intervention	3.05

INR update: September is INR's month to register further appreciation

US PCE (YOY) increased from 0.2% in Nov 2015 to 2.2% in March 2017. Since Mar 2017 it has fallen to 1.4%. Basis this measure the chances of the FED going ahead with the Balance sheet reduction in September 2017 FOMC is limited, but the FED seems pre committed as of now. Today’s wage growth in NFP release would tell us more. On the other hand EU inflation which fell from 2% in Mar 2017 to 1.3% in July has registered an uptick to 1.5%. Euro can be bought with a stop below 1.1850 for a move back above 1.20.

 

September is the second most positive month for INR after March. In this Financial year FPIs have pumped in only USD 1bn into Indian equities which would make me expect equity FPI flows in September. Other capital account transactions like ECBs/FDIs also tend to get clubbed in quarter ends. CNH appreciation has not been reflected in INR till now even though geopolitical tensions have reduced. Basis these factors if INR has to continue its appreciation trajectory then we might see a move lower to 63.20 in the month of September.

 

USDINR 1m NDF is trading 5.5p left while other EM currencies have registered moderate appreciation. Asian equities have moderate gains as dollar weakness returns post 2 days of a strong correction. India’s GDP growth was a negative surprise and hopefully it will make the government take more growth focussed measures and also make the RBI consider incremental rate cuts. CMP 63.93, Range 63.98-63.85.

INR update: RBI's annual report suggests that INR is fairly valued

USD Index bounced on the back of tax reform comments by Trump and better than expected GDP revisions and ADP. Tax reform expectations should ideally result in higher US yields and therefore I would carefully watch the weekly closing on US10Y (critical levels 2.16%). The uptrend in Euro is intact till 1.1750 weekly close (200 Week MA) and dips should be used as an opportunity to buy.  Today EU CPI and US PCE data would be critical.

 

RBI’s annual report states that INR is fairly valued. Given the productivity improvement and dollar weakness, INR appreciation in recent months is not a worry. RBI also states the inflation differential between India and US has come down which is a building block for an appreciating currency . Therefore lower inflation in India is a prerequisite for appreciating INR from here on. RBI also clearly states that FPI money is hot while FDI inflows lead to justified appreciation of the local currency. Therefore if large FDI flows come in then further INR appreciation can be expected. RBI also states that in India’s case a current account deficit of 2.3% of GDP is sustainable. This year we are likely to touch 1.9% which would therefore not be a worry for the RBI. RBI also thinks that a consumption led growth is not totally undesirable.

 

USDINR 1m NDF is trading 6p left while KRW and CNH have mildly depreciated since yesterday. Asian equities are also moderately in the red as Korean geopolitical tensions refuse to go away. I would use upticks to sell USDINR for a move towards 63.50 and lower in September. Buying 63.75 strike put for September end might be a great idea as it also limits losses in case of an unexpected US-NK flare up. CMP 64.04, Range 64.11-63.94.

INR update: Measured Trump response and CNH appreciation, INR positive

After the convincing move yesterday and day before we can say that USD Index is convincingly trading below the 200 week moving average (92.57) and basis the Euro demand that has been seen in the price, I would think that we would close week below 92 (CMP 92.40) with Euro above 1.20. Trump made a unusually measured response against North Korea’s reckless missile test, perhaps indicating that the war of words is over. From here on either US would want to pursue North Korea diplomatically with decreasing tensions (more likely) or would take action against the non conforming state (unlikely in my view).

 

USDINR 1m NDF is trading 7p left with KRW stable at 1123 indicating reduced risk aversion than yesterday morning. CNH is below 6.60 which should reflect on INR sometime soon. September is the second most positive month for INR and with CNH appreciation we can see new lows on USDINR during the month. Asian equities are in the green and with dollar weakness in general uptick in USDINR should be limited. CMP 63.95, Range 64.00-63.85.

INR update: NK issues resurface spoiling risk sentiments

The NK missile test which made Japan tell its citizens to take cover is rare and escalates the situation, driving gold and US 10 Y at their highest levels since Trump came into power. In the last few months of escalating tensions between US and NK this perhaps is the most compelling reason for any country to do more than talk. UN meeting today and its outcome would be carefully watched for further queues.

 

USDINR 1m NDF is 5p left which is less than yesterday’s level. KRW has depreciated 0.6% since yesterday while CNH is on an appreciation path nearing 6.60 now. Further developments in the Korean peninsula can create a risk off environment ensuring that USDINR downside will remain limited for the day. Overnight lows for USDINR was 63.72. CMP 63.96, Range 63.90-64.10.  

INR update: India-China standoff worsens but approaches resolution during Brics

In Jackson Hole, Yellen did not want to increase expectations of balance sheet reduction in September, indicating that she is perhaps worried about debt ceiling and spending bill (read Trump). This is dollar negative as markets currently fully expect balance sheet reduction to start the coming month. Yellen opposed easing of financial regulation putting her at the opposite end of the Trump administration which indicates that she might not get a second term. Draghi’s lack of substantial comments and the above resulted in dollar weakness particularly against the Euro. Japan continues to emphasize on its asset purchase program while the political issues in UK prevent further GBP appreciation, resulting in most of the dollar weakness being expressed against the Euro only.  Strong Euro weekly closing above 1.19 last week would make me think that we will see today’s day end above 1.20. The week is data heavy with NFP (where earnings are most important) and flash CPIs in EU and US PCE data.

 

What markets are ignoring at the moment is the worsening of the India-China standoff over the last 48 hours. India has started building a road in Ladakh which is similar to what China is doing in Doklam. Chinese foreign ministry has made strong comments on the same while issuing a second warning for its citizens in India. Commentators suggest that the Brics summit in China (3rd-5th September) where Modi could bilaterally meet Xi can end up in the crisis getting resolved. September is historically the second most positive month for INR after March. After March 2017 India has not seen equity inflows and if the India-China issue gets resolved during the Brics summit it might prove to be a trigger for fresh inflows. If the standoff does not abate then we would see small spikes in USDINR and new lows would be difficult.

 

USDINR 1m NDF is trading 9p left which indicates further offshore selling. KRW indicates that Korean geopolitical risks can be ignored for now as Tillerson said that US would maintain peaceful pressure on North Korea. Last 1 month movement of other EM currencies indicates that INR’s equivalent level is between 63.80 and 64. Nationalized banks have aggressively bought dollars since morning preventing further appreciation of INR. CMP 63.89, Range 63.80-63.96.