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.
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