Morning INR update

March rate hike probability is at 50% currently as market awaits Trump to speak on tax cuts today. It will be interesting to see how Trump justifies his plans for increase in fiscal spends, given that on 15^th March 2017 the US debt ceiling will freeze at USD 20bn and by the summer, the US government might not be able to spend. Therefore I would think, political brinkmanship to increase the debt ceiling should have preceded the announcement of tax cuts. Debt ceiling related slowdown risks, lack of clarity on fiscal plans and seasonal Q1 GDP slowdown should prevent the FED from hiking rates in March and therefore we might see a retracement in yields leading to mild dollar weakness against G7 currencies  in the next 1 week. This week is heavy on data (although NFP is on the 10^th March) and I would expect the dollar index to trade in  a range of 101.50-99.80 (CMP 101.15).

USDINR 1m NDF is trading 6p left even though KRW and CNH have registered mild depreciation overnight. Equity markets continue to look resilient although momentum seems to have decreased as the market awaits Trump’s statements. FPI inflows into the country is continuing at a moderate pace. For the next one month depreciation factors on INR seems to be limited and I would use upticks to 66.85 levels to crease USDINR shorts. Although overnight today I would want to stay square given the event risk. CMP 66.80, Range 66.85-66.60.  

Morning INR Update

The global theme currently is that of US and EM equity market strength on the back of expected tax cuts by Trump (more details expected on Feb 28^th ). I would not classify the current theme as that of dollar strength as US yields are in range, and as EM currencies appreciate while on the other hand Euro remains under pressure due to French political risks. Looking at CNH, JPY and MXN it seems that the respective countries who came under Trump’s direct fire for manipulating their currency levels, perhaps do not want to irk the most powerful office and therefore these currencies are stable to appreciating currently. FOMC minutes might move rate hike probabilities today affecting currency levels, I would expect March rate hike chances to increase from the current 36% post the release resulting.

USDINR 1m NDF is trading 6p left (from 4p on Monday) while KRW has appreciated 0.5% in the last 2 days. Equity markets in Asia are trading strong on the back of gains in the Dow. Equity and Debt FPI inflows continue to trickle into the country although in small amounts. We have recently seen Nationalized banks buying aggressively around 66.90 levels although their bids don’t seem to be there today. I would continue to be an overnight shorter of USDINR and good levels to create such positions are 66.95 now. CMP 66.90, Range 66.97-66.75.

Morning INR update

Dollar and US equities are trading strong as markets remain optimistic on possibilities of tax reforms in the US. Trump is likely to give details on this in the congress on the 28^th Feb. We should see a continuation of dollar strength with risk on bias across other assets till the announcement happens. EU risks increased with Greece bail out uncertainties and French election projections which could bring EURUSD under fresh downside pressure. Last week’s price action on USDJPY (post the Trump-Abe meet the weekend before) suggests that there is limited appetite for a higher USDJPY and therefore for some time we could have 115 as the top while significant Yen appreciation (below 111.50) might not be acceptable to Japan. This week FOMC minutes on Wednesday would be critical to ascertain the March rate hike probabilities.

USDINR 1m NDF spread has contracted from 7p left last week to 5p left currently. KRW has been depreciating since Thursday while CNH is stable. Equity markets in Asia (Hang seng, Shanghai, Korea and Nifty) look strong and seem to waiting for news to break higher (Trump’s tax announcement perhaps). Given the contraction in NDF and flat to depreciating EM currencies downside in USDINR might be limited for today. But overall over the next 2 weeks USDINR could struggle to close above 67.20 levels given the buoyancy in equity markets. CMP 67.02, Range 66.95-67.15.

Morning INR update

Yesterday the Philadelphia FED business outlook survey “shocked” on the upside coming in at the highest since Jan 1984, indicating that manufacturing in the US which had been a weak link for the last 2 years, is picking up. In spite of this dollar weakened and treasury yields came off which I cannot explain through any other asset correlations. I would continue to expect USD strength given the US data prints and the expected Trump Tax cuts. Today is light on data with UK retail sales being the most important.

USDINR went up yesterday as shorts cut their position along with buying by nationalized banks. EM currencies have depreciated mildly overnight in spite of dollar weakness. Equity markets in the US continue to look resilient and might give a strong weakly closing today. Indian equities today are standing out today because of a surge in heavy weight banking stock although Nifty continues to look bullish for another 2-3% gains at least. USDINR might see bids in the first half today as the next 4 days are off for any remittances. USDINR 1m NDF continues to trade 7.5p left. I would still expect limited upside in USDINR and would look to sell the pair at 67.25 levels. CMP 67.11, Range 67.25-67.05.

Morning INR update

Yellen’s speech pushed March rate hike chances from 28% to 34%; Even if March rate hike looks difficult to me, FED members would want near 50% probability going into every meeting to keep market expectations aligned to FED’s 2017 intentions of normalizing policy. I would think that the next couple of weeks will be spent anticipating tax breaks from Trump and that could take dollar index towards 102.50 (currently at 101.15). Today’s CPI print and Retail sales data in the US would be an important test for USD after Yellen’s moderately hawkish comments yesterday.  

As we see USD strength returning with US yields rising and Dow registering gains, which was dubbed as the Trump trade in Nov and Dec 16, what is different now is that EM currencies are not getting sold off and are stable to appreciating. USDINR 1m NDF continues to trade 7p left. China is showing signs of substantially higher confidence with CNH stable, CNH1y forward points lower near 2000 pips and most importantly Hang Seng Index on 24k. Basis Dow and Hang Seng I would think Nifty can also break higher towards 9000. I would carry overnight shorts in USDINR in this environment as intraday volatility remains low. CMP 66.93, Range 66.98 – 66.80.

Annual Economic Survey and USDINR. New REER Indexes and Excess RBI Capital

NEW REER Indexes

As per the annual Economic Survey 2016-17, released on 30^th Jan 2017, INR overvaluation is overemphasized by the IMF REER and RBI REER, as it places undue weights on Euro and AED. The report goes on to make two new indexes for measuring INR valuation calling it Asia H and Asia M. Both these indices focus on India’s manufacturing trading partners and simultaneously on countries who have increased their global manufacturing export share from 2010 to 2015. This has been done to come up with an index which measures INR valuation against countries with whom India actually competes for its trade share. These indexes give a 44% and 31% weight to the Chinese Yuan (as compared to ~11% in the other REERs). As of Oct 2016 both these indexes (ASIA H and ASIA M) are under 105.

The report goes on to say that INR has not lost competitiveness as much as previously thought and therefore we can assume that accelerated INR depreciation might not be a policy (this is in contrast to my earlier assumption).   

Excess RBI capital

Interestingly the survey seems to make a case to use the excess RBI capital to extinguish government debt or recapitalize PSU banks (pg99). The survey states that RBI is one of the highest equity central banks in the world. A closer look at the RBI annual report and accounting methods show that the free capital (as on 30^th June 2016) apart from issued notes (Rs. 17 lakh crores), CRR (Rs. 5 Lakh crore) and contingency fund (Rs. 2 Lakh crore), is sitting in Currency and Gold Revaluation account (CGRA) of Rs. 6.5 lakh crore.

This revaluation is nothing but the notional gains that RBI has recorded because of INR depreciation over the years. RBI is a dollar asset heavy entity which gains when INR depreciates. Thus if INR appreciates to let’s say 60.00 then this account would record a notional loss of Rs. 2.4 lakh crore (10% of total FX reserves of Rs. 24 Lakh crore / USD 360 billion). Now I would conjecture that if the government is eyeing these notional gains as a means to improve fiscal health then any chance of significant INR appreciation is out of scope going forward. 1% INR appreciation would contract RBI capital by Rs. 24 k crore and would indirectly affect RBI’s ability to declare dividends for the government.

Thus while significant or accelerated INR depreciation is not something that seems to be on the government’s agenda, substantial INR appreciation from the current levels also looks unlikely. These observations would make me revise my yearly range on USDINR from 67-71.50 to 66.50-70.00 for the CY 2017.

Morning INR update

Dow has broken higher, out of the pause in January on the back of tax cut expectations and dollar strength is gaining steam again. Reconciling to the one China policy, mellowing down on the travel ban and by not making too many headlines after meeting Abe, could suggest that Trump’s advisors are taking charge now which could reignite the Trump trade. Today Yellen testifies and I expect her to push the March rate hike chances higher although an actual rate hike in March looks difficult to me. Overall I would position myself for further dollar strength from here.

Today EM currencies have appreciated (KRW and CNH) while NDF 1m continues to trade left by 7p. Dow breaking higher should be positive for Indian equities although continued dollar strength could still drive USDINR higher in the medium term. EM currencies appreciation and USDINR NDF spread seems to suggest that INR can appreciate today. CMP 66.94, Range 67.00-66.80.

Morning INR update

Not much came out from the meeting between Abe and Trump and therefore I would concentrate on price action on USDJPY this week to understand the implication of the meeting, if any. Yellen speaks tomorrow in front of the Senate and basis data and other recent FED speakers I would think that Yellen might want to increase the rate hike probability for March (currently at 28%) pushing dollar index higher. Market now seems to be focussing on the tax cuts that Trump promised last week, which is kind of putting the Trump trade back on track and could push yields, equities and dollar index higher.

In spite of the dollar strength and EM currency weakness USDINR might not go substantially higher today as NDF 1m continues to trade 7p left, which has been the driving force for the pair on the lower side. Equity markets in Asia are supported as Indian bond yields have stabilized after the post policy sell off last week. We might have seen the bottom for USDINR and the up move will be supported by the moderate dollar strength but this could happen later in the week. CMP 66.96, Range 67.05-66.80.

Morning INR update

Trump reportedly called Flynn (national security advisor and an ex military lieutenant) to ask him if a strong dollar is better for the US or a weaker one, and was told that Trump should rather direct this question to an economist. But then reports suggest that the Trump administration will finally announce tax reforms in the next few weeks, which partially reinstated the Trump trade and brought dollar strength back. Point being that if the US President is not sure then there is no way we can be and markets will continue to move on tweets. Noise apart, looking at 5 year USD IRS which has moved from 1.1 in Sep17 to 1.95%% now, I would think that a substantial correction of 38.2% or 50% is on the cards (momentum has faded), as markets correct due to the uncertainty about first, what US wants, and second what it can manage to get.

KRW and CNH have both depreciated along with the moderate dollar strength overnight. Equity markets are  mildly in the green due to the chatter about US fiscal stimulus. USDINR on shore and offshore price action indicates aggressive USDINR selling in the NDF market which is leading the price lower in spite of EM currency depreciation and Indian bond yields moving higher. The lower trend would stay till the time the offshore flow continues and 1m NDF-onshore spread narrowing will be the indicator to suggest that the flow has ended, currently at 6p. We have seen Nats in buying and foreign banks in selling since morning. CMP 66.90, Range 67.00-66.75.

Morning INR Update

US yields have come off to 3 week lows which can put dollar on the back foot. USDJPY is trading in a range of 111.50-112.50 and I would continue to enter from the short side in the pair.

I got the RBI policy stance wrong as RBI surprised the market driving 10 Y India yields from 6.44 to 6.77 currently. There are two significant market takeaways from the policy. First being that RBI mentions currency as an upside risk to inflation in 2017. Theoretically currency is always a risk but mentioning it at this juncture when INR has been stable and under control for last 3 years while dollar strength doesn’t seem to be as big a risk as it seemed two months back, makes me feel that RBI’s own currency projections are of INR depreciation. This could be an outcome of government’s desire to correct REER this year.

Second being that with yields higher by 30 bps, India might see bond inflows. Post Trump’s victory as global yields rose, due to demonetization Indian yields fell and consequently investors took money out of India, chasing higher yields elsewhere. Now with higher yields we might at some point of time see these bond investments coming in which might explain the INR move yesterday night and today morning. We have seen foreign banks in selling.

USDINR 1m NDF continues to trade 5p left while EM currencies are mostly flat since yesterday. DM equities seem to have lost momentum while Asian equities are mildly in the green today. I did not expect USDINR to trade below 67 and stubbornly now I would not expect it to sustain at these levels, but the risk of bond inflows remain. CMP 66.97, Range 66.88-67.20.

RBI policy expectation

Most economists (32 out of 39) expect a rate cut today (25 bps) while bond traders are more divided (roughly 50% expect a rate cut while the others expect a status quo). Given the fact that GST and pay commission revisions along with oil price spike are going to be inflationary in 2017, RBI is going to find it difficult to cut rates later in the year. The government seems to have favoured a lower interest rate to support growth and empirically it seems that the government has significant control over RBI’s decision making, therefore I would expect a rate cut of 25 bps today.

Given that markets are divided, as far as traders are concerned, therefore positioning would suggest that a rate cut would lead to moderate rally in equities and bonds and USDINR can head towards 67.20 (CMP 67.31) post the decision.

Morning INR update

In the absence of any comments from team Trump the markets are directionless with opposing forces in EUR and JPY keeping dollar weakness at bay for the time being. A 4 hourly close below 112 in USDJPY can take the pair towards 111.30 while 99.50 on dollar index is still critical to watch on a weekly basis. In the US the JOLTS data yesterday showed that job openings are still higher than actual hiring, indicating that demand for labour in the US is very strong and employment is not the biggest problem that Trump could be addressing.

Today we have the RBI policy where market expects a 25bps rate cut. Given that the economic survey indicated that inflation has come lower plus there is a temporary growth impact due to demonetization, I would think that a 25bps rate cut is on the cards and would not move the markets by much given that the eventuality is priced in. On the other hand no rate cut might be taken negatively by equity markets and USDINR could move higher.

USDINR 1m NDF is trading 5.5p left while KRW and CNH are at similar levels as yesterday. Equity markets in Asia are mildly in the red while dollar continues to trade well above 100 levels. CMP 67.33, Range 67.40-67.20.

Morning INR update

The growing support for the far right French presidential candidate Le Pen (who wants France to exit EU), is driving peripheral yields higher in Europe and affecting risk sentiments globally. Consequently reserve currencies like USD, JPY and CHF strengthened while EUR remained offered. The major theme still would be what the most powerful administration in the world desires and therefore I would stay away from EURUSD as a pair for the time being. Risk off sentiment coupled with dollar weakness policy folds in perfectly to add to USDJPY shorts for a move below 110 by EOW.

Today we have the Chinese FX reserves data which can affect risk sentiments in Asia. Equity markets are mildly in the negative while USDINR 1m NDF is trading 7p left. Immediate global factors seem to be INR negative (as EM currencies depreciated) but the fact that we have the RBI policy tomorrow (where it seems that RBI is most likely to cut) makes me believe that upside for USDINR is limited and risk locally should remain supported. CMP 67.34, Range 67.39-67.15.

Morning INR update

Headlines from Trump administration will remain the focus for currency markets globally as he meets Abe on 10th Feb, before which I would expect USDJPY to trend lower (a break of 112 can take the pair towards 110). US data although relatively strong printed below consensus last week further increasing the bet on dollar weakness, although USD index failed to give a close below 99.5, which could open the door for another 2% down move. Expectations of Dodd Frank regulations being relaxed drove equity markets higher last week making the risk sentiments positive currently.

Dollar weakness has led to significant appreciation in KRW (6% since January lows) while CNH and INR appreciation seems to be more administered. Recent Chinese rate hikes plus the January intervention in CNH indicates that China’s Yuan strategy has changed from gradual depreciation to range bound levels (similar to INR), as the threat of being labelled as a currency manipulator by the US increased along with capital outflows being accelerated by a depreciation expectation. Asian equities are in the green while USDINR 1m NDF is 5p left which should help further mild appreciation of INR. Last year Arvind Subramanian (India’s chief economic advisor) had said that India’s reserves should then had been USD 700 bn which would make me think that substantial INR appreciation from here on is difficult, unless Trump’s coming leads to a change in government’s currency policy. I would expect a move towards 67.30 during the day as RBI exercises control while INR should move towards 67.05 overnight. CMP 67.20, Range 67.30-67.05.

Morning INR update

Markets continue to move by what Trump and his advisors say and yesterday the target was a “weaker” Euro. I would think that data release or central banks (FOMC today) would hardly matter against such verbal interventions by government. On 10th of February Abe meets Trump in the US before which USDJPY can come under significant pressure and perhaps test 110. The argument here is that a stronger Yen should be good enough for the US to make Japan to agree on anything.

On the budget, I buy the argument that the government would not want to state that growth is lacklustre and therefore high fiscal dole outs are not required at the cost of 3% target for fiscal deficit. Therefore 3% target could be met and any dole outs that are given will be out of the remaining balances. This is partially reflected in equity and INR moves before the budget. This should be positive for INR and India bonds (not sure about equities).

USDINR 1m NDF is trading 5p left with KRW having appreciated 2% in the last 2 days. A weaker dollar outlook (till Feb 10th at least) can keep INR on the appreciating trajectory but room for further strength is limited as REER hovers around 116. As I stated at the beginning of the year the lower range for USDINR for the year should be 67 (higher being 71.5) and therefore I would encourage import hedging if we see 67.30 or something today. CMP 67.67, Range 67.78-67.45.