INR update: OPEC cuts production but not enough

Considering that FED’s Brainard sounded optimistic about the global economy it seems that the FED does not intend to bring down June hike probabilities (up @ 85% now). Therefore my view for lower yields on the back of dovish FED is fading. I would wait to go long on the dollar as the second round of Trump - Comey  drama starts next week. ECB’s Coeure who has been hawkish and has been arguing for a case to end asset purchases speaks today at 12-30PM IST and going by the recent past he can take EURO higher than 1.1250 levels (CMP 1.12). US GDP (significant revisions if any) and durable goods order can move markets today in the NY session.

The fact that OPEC did not cut production as much as market anticipated, shows that oil supply is not going to drive prices higher in the visible future, this is INR positive. USDCNH has moved from 6.89 to  8.84 in 2 days. Considering that the government gave 30%-40% weight to China in its new REERs, this should have a positive impact on INR. USDINR 1m NDF is trading 5p left indicating some offshore buying pressure as compared to yesterday. Equities in Asia are mildly in the positive while other EM currencies have mildly depreciated or are flat since yesterday. Given the mixed signals elsewhere I would think USDINR could track CNH appreciation for the remaining days of the month. CMP 64.60, Range 64.69-64.45.

INR update: Cautious FED and CNH appreciation

The FED wants more evidence to ascertain that the economic weakness is only transitory, before hiking rates. The evidence received after the meeting therefore is likely to indicate that the economic weakness was not transitory and therefore I would think that US near term yields can fall more in the next week driving USD index lower. At the same time Draghi said that asset purchases can have more undesired side effects than negative interest rates hinting at ECBs growing discomfort with its asset purchases program. Next week sometime we have the Comey testimony and I would continue to pay attention to FED speakers for June rate hike probability movements. I continue to hold USDJPY shorts and EURUSD long views.

USDCNH moved lower today from 6.88 to 6.8650 as nationalized banks in China sold dollars (perhaps in defiance of the severely criticised Moody’s downgrade) . This is one of the sharpest movements in CNH that we have seen in the recent past. This along with KRW appreciation led to a stronger opening in INR although India Pakistan related military skirmish will prevent any sharp appreciation in INR immediately. FPI flows in equities are largely negative while debt inflows are mildly slowing down. USDINR 1m NDF is trading 7p left showing offshore selling pressure. Looking at CNH significant up move in USDINR is unlikely today. CMP 64.55, Range 64.60-64.45.

INR update: US budget fails to change sentiments

Reports seem to suggest that Trump’s budget blueprint released yesterday is politically very ambitious and therefore impractical. Mnuchin expects the tax reforms to pass in 2017 but not by August 2017 indicating further delay in Market’s expectation from Trump. New Home sales and Manufacturing index yesterday surprised on the downside. Harker who had previous been hawkish showed signs of change when he said that another surprise on inflation on the downside would worry him a little. Today we have the FOMC minutes which would drive markets shedding light on FEDs discussions regarding balance sheet unwinding. A weekly close on dollar index below 96.5 would start a new downtrend and otherwise a bounce could be expected.

USDINR got bought yesterday on the news of India-Pakistan border skirmish where we can see follow up developments as both countries take turns to deliver an aggressive reply. EM currencies have mildly depreciated since yesterday while equity markets are in the green. We continue to see bids in USDINR from various quarters. We can expect RBI to intervene above 65 levels. I would continue to remain overnight long for a move to 65.25 in May. CMP 64.95, Range 65.02-64.85.   

INR update: Increasing Trade deficit driving USDINR?

Merkel comments on the Euro (Germany’s trade surplus is because of a weaker Euro) indicate that there is some pressure on Germany from USA to correct the trade imbalance. It was not yesterday that Euro weakened or German trade surplus increased so the timing of the comment indicates that in the background there have been talks of how a weaker Euro is hurting the US. This comment coupled with ECB statements indicating confidence last week, and the data release from the EU, indicates that the Euro might be heading to 1.15 and higher.

FED speakers called for 2 more rate hikes today morning although Harker did not speak on monetary policy. Looking at US 10Y Yields, USDJPY and equities, the risk off created due to US political uncertainty is not over as yet and therefore that will be my baseline theme for market action immediately.

USDINR 1m NDF has moved right and is trading 5p lower only. KRW has depreciated slightly since yesterday while Indian equities are in the red. The buying in USDINR shows that there is some India specific outflow/factors which is driving the pair higher, could be the increasing trade deficit story (April was -13b $ as compared to -10b $ in March) and seasonality thereof; but still a conjecture. Debt inflows continue indicating a positive view on India as far as FPIs are concerned which gives weight to the trade deficit hypothesis. I would continue to expect 65 – 65.25 on USDINR in May. CMP 64.78, Range 64.70-64.95.

INR update: USD weakness and mild risk off

The markets have calmed down but the Trump-Comey issue is far from over. We could witness a fresh round of volatility when Comey testifies after 29th of May as the exact schedule is yet to be decided. Tuesday 23rd the US draft budget would be tabled but could be ignored by the markets like previous tax cut announcements. On 24th the OPEC meeting is likely to result in members agreeing on production cuts. FED speakers line up this week and we could see them speaking dovish to bring down the June rate hike probability as currently it indicates to a certainty of a rate hike, effectively leaving the FED with no option but to hike, i.e., if yields don’t come down.

 

Dollar weakness could continue given the political uncertainty in the US and my expectation that US near term yields would come lower to open up the June FOMC meeting. This could drive USDJPY lower towards 110 this week and EURUSD could test new highs. ECB speakers last week suggested that it might signal an exit from accommodative monetary policy in the next ECB policy meeting.

 

USDINR 1m NDF is trading 7p left while other EM currencies have appreciated moderately on the back of dollar weakness. Equity markets are moderately in the green today. US 10 Y yields at 2.25% along with gold at 1253 is signalling an overall risk off environment. FPI investments continue to come into debt while equity remains mixed. RBI intervened strongly on Friday bringing USDINR lower from 65.00 to 64.65 levels. I would think that given the mild risk off scenario we could see 65.00 again over the next fortnight. CMP 64.45, Range 64.40 – 64.60.

INR update: Magnified reaction in Rupee as compared to other EMs

Risk off continues even though a video showed Comey, under oath, testifying that there was no obstruction of justice, but that was before he was fired. Stronger US data along with this video contributed to the partial retracement in the Memo Gate move across asset classes. ECB minutes showed that confidence in policy makers is growing which should help EURUSD move higher in the current USD weakness move. Brazilian assets are under stress because of fears of its President getting impeached.

The main story yesterday was in USDINR which moved much more than other Asian and EM currencies. This was a reflection of the naked USDINR shorts markets were running before the Memo gate move, as stops got triggered. Anecdotes suggest that large USDINR buying in the offshore market contributed to the move, indicating unwind of carry trades. USDINR 1m NDF is trading 3p left as compared to 4p yesterday. 3p left spread shows that there is room for significant buying in the offshore market if the sentiments warrant. The view for USDINR till 24^th May remains on the higher side with 65.15 as the first target with stop below 64.60. For the day, CMP 64.81, Range 64.70-64.95.

INR update: Risk off sentiments to stay for some time!

Trump has not tweeted his mind for more than 24 hours now which is unprecedented in the last 6 months. The issue is more serious than what equity markets are pricing in even now as obstruction of justice has been taken up strongly by both the parties historically. Needless to say that there will be enough members of the Republican party also who would want to use this opportunity to create trouble for a not so popular President. Comey testifies sometime next week and regardless of the end result, the ongoing risk off scenario is likely to continue.

Yesterday I expected June rate hike expectations to come down from 95% to below 70%. Yields have brought it down to 86% already and I believe that such a high percentage will be troubling for FED members given the political situation. 86% suggests that a rate hike is given and therefore I would expect this to fall in the 60-70% range over the next few days, driving US yields lower and USDJPY towards 110 and lower levels.

Most participants were not expecting such a sharp move in USDINR overnight and there were some short positions which would now be exited. The crisis is not clear enough for people to stick out their necks and sell as yet. Risk on carry trades involving INR would be unwound. USDINR 1m NDF is trading 4p left only as compared to 7p yesterday. USDINR could see 64.65 or higher in a few days, as Nationalized banks would not intervene in a global risk off, and therefore I would want to enter only from the buy side. CMP 64.40, Range 64.32-64.55.

June rate hike overtly priced in: FED speakers could bring down expectations

Looking at recent data from the US it seems that at least immediately the FED does not have a clear case to hike rates (please see table below). The US data surprise index has been falling for the last 45 days while Growth and recent CPI print suggests a cooling off in the economy. On the other hand the Atlanta FED has kept the GDP tracking for Q2 at 4.1% which could be the argument for the FED to go ahead with the hike.

Now with some dark clouds over the Trump administration the economic outlook could weaken further and the FED might want to keep its June decision open. If it enters the final 15 days to the 16^th June FOMC meeting with a 95% chance of a rate hike (as it is now) then there is no decision the FED can make and a rate hike is given. This I assert basis the last 6 years FED policy of not surprising markets. Therefore I would think that FED speakers from now till June beginning might want to talk moderately dovish and bring down FED rate hike expectations from the current 95% to below 70%. This could drive USD index towards 96 levels with the main beneficiaries been JPY. Euro appreciation might be more time taking as ECB still seems to be against an appreciating EURO.

PS: In the last 1 month prior to the March FOMC the FED speakers drove rate hike chances from sub 40% to 80% + before the blackout period. This was of course supported by data as this time the data seems to be building a case for a pause, perhaps.

Parameter	As compared to 2016	Immediate Print
CPI	1	0
ISM Manufacturing	1	0
New Home Sales	1	1
NFP	0	1
Non Manf ISM	1	1
Personal Income	0	0
Consumer Spending	0	0
Real GDP growth	0	0
Retail Sales	0	0
Existing Home Sales	1	1
Manufacturing New Orders	1	0
Total	6/11	4/11
0 means stand alone data does not justify a rate hike and 1 means rate hike is justified. As compared to 2016 views the data absolutely year on year while in the immediate column I try to see if the immediate trend in data justifies a hawkish move or not.

 

Mild risk off due to Memo gate

Trump apparently asked Comey to stop investigations into Flyn’s ties with Russia and that has created a storm called Memo Gate. Comey testifies in front of the senate on Thursday (18th) in a public judicial hearing. Comey previously had rejected to appear in a closed door hearing on Tuesday. A lot of deal making can happen between today and tomorrow but I would think that Comey could say a few things that could hurt Trump administration. This could lead to charges of obstruction of justice against Trump which was one of the main reasons why impeachment proceedings were started against Nixon in 1974.

 

Memo Gate is creating a moderate risk off sentiment in the market along with a sharp dollar sell off against G7 specially. Large flows into European equities have happened from the US in the last week (USD 6bn in 2days) and now the falling confidence in Trump administration to execute the tax cuts can drive UST yields lower along with dollar index. I had mentioned at 1.0985 that EURO is likely to head towards 1.15 in the medium term. Politics will again drive markets making data irrelevant for some time.

 

USDINR made an overnight low of 63.93 before memo gate created a mild EM currency sell off. Markets are talking about large QIP inflows while FPI inflows continue into debt and equities on a consistent basis. With EM currencies slightly negative and memo gate hearing on Thursday RBI might not allow INR to break 63.90 today. An uptick in USDINR on account of memo gate might be a good opportunity to initiate shorts. Technically a break below 63.90 could take the comfort zone away from unhedged participants driving the pair quickly towards 63.60. For the day, CMP 64.03, Range 64.15-63.90.

Morning INR update: INR the favourite carry currency now!

Dollar index is showing signs of weakness making me accept the view that over the medium term we might witness USD weakness with EURUSD heading towards 1.15 levels. USDJPY is more tricky, given its correlation with risk assets (I expect risk assets to do well in 2017 globally) while on the other hand US would not accept further weakening in Yen. On the other hand GBPUSD seems a bit toppish as the positives seems to have been built into pricing. UK CPI would be the main data to watch today in an otherwise quiet market.

 

USDINR 1m NDF is trading 8.5p left as compared to 4.5p yesterday indicating increasing offers. Debt inflows yesterday were more than INR 20 bn again. The theme to buy INR for its carry seems to be building globally now, as markets gradually change their view from, INR appreciation might be overdone to flow dependent moves from here on. Since morning we have witnessed Nationalized banks on bids along with precious metal importers buying. CNH is trading below 6.89 again while equities in Asia are flat. CMP 64.10, Range 64.15 -63.95.  

Morning INR update: Lower CPI could accelerate debt inflows

Weaker US data (CPI and Retail sales) has not had a material impact on short term US yields (US2yT yields came down by 4bps). Fed speakers now would determine if the FED would want to change its June rate hike outlook although it looks unlikely given their hawkish tone recently. Recovery in commodities over the last 10 days would keep the reflation trade alive helping EURUSD move higher with support from weaker US data.

India CPI print below 3% on Friday would make the market believe that there is more than trivial chance that the last rate cut of the cycle by RBI is not behind us. This should facilitate further inflows in bonds which have been registering steady and large investments consistently. On the other hand we continue to hear of inflows on account of various IPOs and QIPs which should keep USDINR capped at 64.25 in May with a possibility of 63.50 before month end. USDINR 1m NDF is trading 5p left while other EM currencies have also appreciated on account of weaker US data. The lower CPI pricing in USDINR is still pending I would think. We have seen mild bids from Nationalized banks since morning. CMP 64.06, Range 64.11 – 63.90.

Morning INR update: Freeway ahead for risk?

The selloff in oil and commodities has abated and equity markets have sustained at the highs. The scare higher US yields were having on EM assets doesn’t seem to be worrying the markets anymore. With so much of landscape there can never be a time without any geo political risks but other than that most risks seems to be factored in and the rally in risk assets could gain momentum again. Today we have retail sales and CPI in the US which would be could be critical to ascertain US growth trajectory, given the fact that consumer spending has been the biggest concern in Q1 and a rebound there could bring cheer to the Dow.

Markets are talking about Masala bond and QIP inflows and expecting USDINR to move lower. USDINR 1m NDF is trading 3.5p left which is not reflective of such inflow expectations. Other EM currencies have appreciated significantly over the last 2 days along with INR. Asian equity markets are flat to mildly negative. FPI inflows into debt continues while equities flows remain dependent on large issues or one offs. I would like to maintain overnight shorts in USDINR. CMP 64.30, Range 64.15-64.40.

Morning INR update: Higher US yields driving markets

On Friday markets ignored the strong NFP print because of the focus on French elections. Yesterday helped by hawkish tone of FED speakers UST yields went higher bringing in moderate USD strength. The mild concern on commodities and equities seen yesterday rubbed off on EM currencies (ZAR, BRL, MXN etc) and drove USDINR higher in the NY session. EURUSD got sold off as markets were disappointed with the high of 1.1022 post the results and EURO bulls were perhaps forced to exit longs. USDJPY is trading above 113 on account of higher US yields.

FPIs continue to pour in money in Indian debt (Rs. 14 bn yesterday) while equities continue to see mild outflows (Rs. 5bn). USDINR 1m NDF is trading 4.5 left similar to yesterday. USDINR was bought along with the larger EM currency basket which I would think fundamentally is very different from India currently. Today Chinese equities and commodities look stable and therefore risk sentiments are not so weak in Asia. Yuan is reacting to US yields and Chinese equities weakness over the last few days. The move in USDINR is kind of overdone for the day at least. CMP 64.48, Range 64.52 – 64.40.

Morning INR update: Pro Risk recipe but for Chinese equities

Looking at Euro levels French election results seem to be a non event. On Friday night post NFP commodities registered a bounce which moderately improved risk sentiments. Improvement in oil prices and other commodities are reflected in Asian equities today except Shanghai stock markets. Shanghai stock markets are near critical support levels and below 3000 they would threaten for a 10% fall. In contrast the US NFP prints a healthy picture of the US economy and is reflected in DM yields. Commodities and Chinese stocks are the last remaining doubts on an otherwise pro risk global macro setting.

USDINR 1m NDF is trading 5.5p left. Equities are seeing withdrawals on a daily basis while debt market inflows continue. I would think that debt investments in India currently are driven by long INR bets. KRW has appreciated mildly over Friday. The uptick in commodities has calmed the long USDINR sentiment on Friday which happened in spite of a large 2000 cr debt inflow. CMP 64.21, Range 64.15-64.32.

Over the Weekend: French Elections and falling commodities

View on EURUSD, USDJPY and USDINR for the next 1 week

French Elections

Market has factored in a Macron victory (90% chances as per odds). I would ignore the possibility of a surprise La Pen win even though it would be catastrophic for risk assets, as it looks highly unlikely.

We can therefore see two possibilities of either a moderate move up in EURUSD and equity markets post the results or retracement of the moves post actual results. Therefore I would think because of this event the move up in EURUSD and equity markets is limited or actually we might see a correction in the move that has happened so far since the first round.

Falling Commodities

The rise in equity markets since Feb 2016 has been accompanied by a rising crude price. To the extent that charts make it look like that crude recovery was the leading force behind all stock markets globally rising from there. Since Jan 2017 various commodity indices have fallen by 10%, crude oil has fallen by 20% and iron ore in certain market has fallen by 30-40%.

A fall in commodities can be reflective of falling demand in China. The entire reflation trade was based on stable commodity markets which was making the inflation outlook look better in the US, EU, Japan and world over.

If the bearishness in commodity lingers on next week, then I would think that inflation expectations would come lower driving yields lower and EURUSD lower as well. Fall in inflation expectations would ideally drive USDJPY higher but an accompanied fall in equities and yields, can drive safe haven demand into JPY driving the pair lower, which would be my dominant expectation.

Consequently USDINR could remain well bid as EM currencies come under pressure against the USD driving the pair towards 64.60 next week.

Views  

EURUSD : Sell EURUSD at possible upticks to 1.0975 and 1.1045 with a stop above 1.1115 for a move to 1.0830.

USDJPY: Sell USDJPY at 112.85 and 113.35 with a stop above 113.85 for a move to 111.20.

USDINR: Carry overnight long USDINR for at 64.33 for a move to 64.55-64.60 levels next week.

Morning INR update: Commodities sell off affecting risk sentiments

Trump regained some political mileage yesterday while European markets are buoyant on a likely Macron win. On the other hand we are seeing a rout in commodities markets driving Chinese stock exchanges lower. Oil prices which started falling over supply glut news have now started falling on demand concerns arising from China. The positives (of France and US) seems to be factored in and another risk on move can be seen on Monday immediately post Macron win. What could last in the medium term now is the commodities fall which will start weighing on global inflation outlook too driving yields lower. Thus any uptick in risk assets over the next 2 sessions can be used to sell for a risk off market move over the next 2 weeks. My favourite would be USDJPY which has got resisted at 113 levels and an uptick to 112.50 and 113 can be sold again.

Today we have the US NFP where I would expect the data to come in weaker. This is basis the employment component in services ISM which came in weaker day before yesterday (at 51.4). Earlier we had seen personal income coming in weaker which could indicate the average hourly earnings are unlikely to surprise on the higher side.

USDINR 1m NDF is trading 5.5p left as compared to 7p left yesterday. EM currencies have depreciated slightly with commodity led EM currencies registering significant falls. Chinese and Hong Kong equity markets are looking weaker on the back of commodity fall or vice versa, but irrespective are adversely affecting risk sentiments. FPIs have been continuously taking out INR 5-6bn out of equity markets while similar amounts have been seen coming into debt markets. Any dip to 64.20 levels could be bought for the next 1-2 weeks where USDINR can head towards 64.50-64.70 levels. For the day CMP 64.27, Range 64.20-64.40.

FOMC outlook: GBP, EUR & JPY

I would expect the FOMC to be less hawkish given the negative US data surprise over the last 1+ months. The fall in core PCE should also prevent the FED from talking much about balance sheet shrinking in this meeting. Whenever growth outlook starts to waver the FED has sounded dovish to infuse confidence. At the same time the FOMC would not take out June rate hike probability totally (it would want it to hover around 50% from current 67%). Therefore maintaining a fine balance between infusing confidence and maintain a rate hike outlook is the task that the FED has at hand tonight. I would expect US10Y yields to move lower from current 2.29 levels towards 2.20 by the end of NY session.  Consequently the trade ideas for major currency pairs would be below.

GBPUSD

A down move in GBPUSD should not last long on account of change in US rate hike outlook. Therefore any dollar strength (if the FED turns out to be more hawkish than I expect) could give a buying opportunity in GBPUSD.

Daily Tknsen is at 1.2861, I will put an order to buy GBPUSD at 1.2866 for the FOMC evening with a stop at 1.2829 for a move to 1.2960.

Alternatively, if one would want to go long GBPUSD before the FOMC expecting a less hawkish FED, then buying at 1.2920 with a stop at 1.2874 could be recommended.

EURUSD

EURUSD should trade in a range of 1.0880 and 1.1020. Both the ends could be used to enter the pair as a less hawkish FED would drive the price higher while ECB’s lack of confidence on inflation achieving target should prevent price from sustaining above 1.10 levels.

USDJPY

USDJPY is in a downward channel since the beginning of 2017 and is currently near resistance levels of 112.75 (CMP 112.37).

Pre FOMC (only), one can sell USDJPY at 112.75 with stop of 113.35 for target 1.1065.

Alternatively one can stop sell USDJPY at 111.65 (post FOMC) with stop at 112.10 for a target of 1.1065 post FOMC.

Morning INR update: INR appreciation in spite of slowing inflows

Today we have the FOMC where the FED might acknowledge the recent string of weak data but would not want the June rate hike probability to fall below 50% (currently at 67%), in order to keep the June rate hike on the table, provided data over the next 1 month supports. US manufacturing ISM has been printing lower in the last 3 months and if the trend shows in services ISM too today, then we might see USD index falling too as upward momentum failed in spite of the debt ceiling deal reached over the weekend. For USD index a daily close below 98.5 could start a down trend towards 96 levels.

USDINR 1m NDF is trading 4.5p left like yesterday. FPIs continue to pull out moderate sums from equity markets while debt continues to witness mild inflows. FPI inflows have slowed down considerably over the last 2 weeks. We have not witnessed significant importer interest in USDINR at the current dips while the market largely expects INR appreciation suggesting that largely the positioning will be short USDINR. The range for the May 2017 should be 63.80-64.70 with a possibility of a break lower. I would expect an uptick to 64.70 given the slowdown in FPI inflows and large short USDINR positioning while the major trend remains lower, as regular FDI/debt inflows can continue. Uptick to 64.70 over the next month can be used to create new positional shorts/longer term export hedges. For the day CMP 64.13, Range 64.20-64.05.

Morning INR update: Improving geo political outlook

US data continues to surprise on the downside as the debt ceiling can was kicked down until September 2017 making yields rise and supporting USD index. On the other hand Q2 GDP tracking hovers well above 3% supporting the dollar index. Oil fell on the back of increased production in Libya. Oil price stability or rise is critical for the entire global reflation theme and a further decline in price can adversely affect all risk sentiments. Trump’s willingness to talk to North Korea helped KRW and Asian stocks even though Chinese PMI marginally disappointed.

The chief economic adviser on Friday commented on INR appreciation’s negative impact on exporters but contradictorily Nationalized banks sold aggressively at 64.35 to prevent USDINR from going higher. The failure of CEA to verbally talk up USDINR would further embolden the sellers. Since morning we are hearing chatter about custody flows and have seen large nationalized banks on offers. Risk sentiments seem supported as KRW has appreciated 0.7%. May seasonality would have to be ignored for now. CMP 64.16, Range 64.20-63.95.