INR update: Moderate risk on sentiment

Unnamed sources in ECB said that Draghi’s comments have been misinterpreted which perhaps indicates lack of confidence in inflation and could show in tomorrow’s EU CPI data. FED gave a go ahead to US banks to do buybacks and pay dividends signalling adequate capitalization, which was risk positive while iron and other metals rose on the back of Chinese demand in commodity markets. Carney again did a U turn saying that some amount of stimulus could be removed in the second half making GBP directionally uncertain. The fall in yields for US 10 Y from 2.25 to 2.22 has helped alleviate the mild EM currency depreciation that we were witnessing on the back of hawkish central banks.

Debt inflows of Rs. 2000 cr yesterday were on the back of long term investors who brought in Rs. 1400 crs and could indicate increasing investor appetite in Indian debt. If this is sustained then it could be a huge INR positive as the long term category still has ample limits left unlike the open GSEC category.

USDCNH is trading below 6.79 while KRW has appreciated by 0.5% since yesterday. Equity markets in Asia are moderately in the green creating a better risk environment than yesterday. With month end demand mostly behind us and quarter end selling perhaps pending we can see some INR appreciation. Also the increase in debt limits in July could drive some amount of speculative selling in USDINR. CMP 64.46, Range 64.53 – 64.35.

INR update: CNH appreciation yet to reflect in INR!

Draghi perhaps took the first step to exit the continued accommodation in the EU and now Friday’s EU inflation data will be keenly watched. Fed speakers including Yellen implied that financial stability is there bigger priority and equity markets look overvalued, therefore we can see a phase wherein the FED proceeds with their rate hike rhetoric in spite of small correction in equity markets. On the other hand IMF reduced US growth forecasts from 2.3% to 2.1% while the Trump administration lost further political capital as health care bill was postponed for voting in the Senate. Today at 7pm IST 4 central bankers speak including Carney, Draghi and Kuroda, where Draghi can be expected to stand out driving EURO further higher.

CNH has appreciated from 6.8470 to 6.80 currently, a large move of 0.8% which has been ignored by other asset classes. Yesterday everyone focussed on EUR gains leading to EUR EM carry trade unwinds as yields in DM went higher. CNH is the single most important currency mirror for INR, in my view and a 0.8% appreciation in CNH in 1 day should be reflected in INR over the next week or so. This could be complemented by quarter end selling tomorrow and day after and debt inflows in the first week of July as RBI increases limits. I would expect USDINR to head towards 64.25 in a week’s time.

For the day USDINR 1m NDF is trading 4.5p left while equities are flat. KRW levels do not support the INR appreciation view currently as EM currencies face mild carry unwind pressure because of EUR and GBP gains. Debt and equity inflows continue to trickle in. CMP 64.56, Range 64.67 – 64.45.

INR update: Central banks speakers to dominate

Draghi’s speech today at 1-30PM would be critical to see if he joins the hawkish bandwagon of G10 central banks. Carney also speaks today along with Yellen preceded by other FED speakers, all this should make the day a little more interesting. The uptick in USDJPY along with lower US10 Y yields perhaps shows the carry trade environment helped by low volatility.

Modi’s meeting with Trump seemed uneventful except for the $2-3bn defence deal that US bagged.

USDCNH has depreciated since last week along with KRW. USDINR 1M NDF is trading 3p left which is insignificant. Debt inflows continue to trickle in considerable chunks. Equity markets locally and globally are struggling to break higher. I would expect Nationalized banks to buy USDINR while today and tomorrow we should see month end buying as well. CMP 64.43, Range 64.35-64.55

INR Update: Falling oil could keep risk sentiments soft

BOE’s Haldane surprised Carney and traders both, calling for a rate hike in spite of being termed as the most dovish member of the BOE, which drove GBP towards 1.27 levels. Strong existing home sales data failed to prop up dollar index reinforcing the view of dollar weakness going forward. Fall in Brent prices below 45 levels will keep risk sentiments on the back foot creating further pressure on USDJPY. Centrist FOMC member Powell speaks today at 7-30 PM.  

The RBI minutes according to traders were not as dovish as anticipated and consequently India 10 Y yields are unchanged. Bond inflows continue to flow expecting rate cuts from RBI in the August meeting. USDINR 1m NDF is trading 4p left while Asian equities are mildly positive. During the day USDINR should move in tandem with other EM currencies globally reflecting oil price action as well. USDINR should be well supported near 64.46 levels given a congestion of lines. CMP 64.52, Range 64.46-64.67.

INR update: Oil falls with EM currencies

Another FED member (Rosengren) highlighted low interest rates as a risk to financial stability, essentially reiterating the FED’s concern on easy financial conditions. Oil prices fell on the back of a supply glut creating moderate risk off across asset classes with RUB falling over 2%. Over the weekend Russia said it will target US fighter jets in Syria after US struck down a Syrian jet. If the US and Russian tensions are for real then oil prices can fall further given my belief that US uses oil as a leverage against Russia. Brent prices below 50 is neither good for risk nor for global inflation.

EM currencies weakened with fall in oil prices even though US yields softened mildly. USDINR 1m NDF is trading 5.5 p left which indicates some selling pressure. In the recent past depreciation in INR has been on the back of dollar strength which doesn’t seem to be the case currently therefore I would expect limited upside in USDINR on the back of this move. SGD depreciation is also controlled as compared to other EM currencies along with CNH which perhaps is also positively affected by MSCI inclusion. Equity markets in Asia are moderately in the red. I would expect a lower high in USDINR as compared to last week’s 64.74 and would try and trade the range of 64.70 – 64.35 (intra week). CMP 64.63, Range 64.68-64.45.

INR update: Hawkish FED speak!

A hawkish Dudley mentioned that financial conditions have not tightened to any significance in spite of the rate hikes and lower bond yields indicate the same. Perhaps we could infer that the FED wants higher bond yields and therefore US10 Y yields could be near its medium term bottom. Financial conditions index are loose if equities are high, local currency is weaker and bond yields are low. Therefore if the case is that the FED is worried about the easy financial conditions then it will continue on its hawkish path in spite of small correction in equity markets and the consequent reaction could me moderate dollar strength as US yields rise, in the medium term.

The overnight dollar strength is reflected in KRW and CNH today while the gains in US equities are not. Yesterday also Rs. 1800 crs came into GSecs although USDINR edged higher. NDF is not showing any significant direction. Last week’s selloff will prevent players from taking aggressive long positions in USDINR. Farm loan waivers do not seem to be concerning markets as of now. CMP 64.51, Range 64.66-64.45.   

INR update: Slowing inflows and rising trade deficit

US short term yields fell by 4bps on the back of weaker US data while the GDP tracking for Q2 for US were revised downwards. Consequently the mild dollar strength seen since the FOMC fizzled off. This week the focus will be on FED speakers as the data calendar is light (housing on Wednesday and Friday).

USDINR led the appreciation in EM currencies on Friday. Chatter hinted at central bank intervention near 64.70 which was later accelerated by others. While the longer term trend in INR could be of appreciation, but the turn in central bank strategy globally could create spikes in US yields as fresh data and FED comments come in which could result in the pair moving towards 65 in the medium term again. Equity flows have been flat while debt inflows are coming lower as limits are exhausted and local yields fall. Trade deficit numbers indicate that in the absence of FPI flows we might see some buying pressure on the pair. I would want to enter the pair from the long side near 64.30 levels. CMP 64.35, Range 64.28-64.50.

INR Update: BOE helps dollar strength

The fact that BOE vote was hawkish proves that central banks have changed direction and the era of accommodative policy is perhaps over. BOE vote gave further credibility to FED’s plan which the market seemed to be doubting and consequently we saw US10 Y yields rising mildly and USDJPY reacting sharply.

To reiterate, I expect USD10Y yields to move towards 2.25% (Currently 2.17%), USDJPY towards 112+ (currently 111.15) and GBPUSD to move lower towards 1.2550, by next Friday. Today EU inflation data can trigger a either direction move in EURUSD. Noteworthy is that EU data surprise in the recent past has turned lower.

USDINR is moving along with other EM currencies as US yields rise and USDJPY heads higher. USDINR 1m NDF is just 2p left now indicating buying interest in the pair. A move to 64.85 would be just in line with other related pairs like CNH, KRW and SGD. I would remember that RBI would use this opportunity to sell dollars so as to create room for further intervention during the year, or in other words the need for RBI to sell dollars will prevent a runaway move in USDINR. Therefore around 65 levels exporters can look to sell longer term. In the intraday and 1 week horizon the view on USDINR is for the pair to go higher. CMP 64.69, Range 64.55 – 64.85.

FED's Balance Sheet reduction still to be priced in by the markets?

FED's Balance Sheet reduction still to be priced in by the markets?

If taper tantrum resulted in May 2013  US 10 Y yields rising from 1.9% to 2.9% in 4 months, then the data dependent balance sheet reduction plan, laid down by the FED yesterday, has not had a remotely comparable reaction as yet. The fact that the May 2013 announcement had caught market unprepared as compared to a highly more communicative FED these days, should result in a far lesser move but still a 20bp up move in yields could be warranted.

The FED has potentially laid out a plan to reduce its $4.5 tr balance sheet by $500 bn in 2018, subject to data supporting the move. I don’t think that most of the market expected a 11% of a wind down so soon. To add to that the FED did not revise the inflation forecast for 2018 and 2019 lower suggesting that it expects data to support.

US10Y – US2Y treasury yield spread is near its lowest level since 2007 which shows that the market has been overly pessimistic about long term US growth prospects as against what the FED expects. US 10 Y yields therefore have the potential to rise further towards 2.25-2.30% (CMP 2.14%) taking the USD index towards 99.5 (CMP 97.3)

While we might see some uptick in yields today in the US session, over the next week I would target the following levels in various trades.

·        I would trade USDJPY from the long sides for 112 levels (CMP 109.76).

·        GBPUSD has the potential to move towards 1.2550 (CMP 1.27)

·        USDINR can move towards 64.75 (CMP 64.43).

Hawkish hike against expectations

 Seems the FED is focussing on the FCI (Financial Conditions Index) and continues on the rate hike path with hawkish outlook.

Fed has made a hawkish hike unlike what market expected. It has taken into its stride the recent data and said that conditions are in  place for inflation to rise further. Overall growth forecasts have been retained or raised, unemployment forecast has been reduced while interest rate forecasts have been kept as it is, except for 2019 which has been reduced by 10 bps. Inflation forecast for 2017 has been reduced by 20 bps.

Most importantly the FED has given a clear path of balance sheet reduction which was unexpected. It will start later this year at USD 10 bn per month and gradually rise to USD 50 bn per month and the revision will depend on data which will be revised every quarter.

US yields are up, 2 year at 1.343 as compared to 1.292 before the FOMC release.

USD index can move higher as 96.50 was acting as a critical support (CMP 96.93). USDJPY can head towards 110.20-110.50 (CMP 109.65).

Equities have reacted marginally only. USDINR up 10 p in offshore markets near 64.20 from 64.08 pre FOMC.

INR update: Dovish hike from FED

It’s consensus that the FED would do a dovish hike today. Therefore dollar weakness trades around the FOMC would be crowded. Euro area data has been surprising on the lower side and therefore Euro might be in for some correction. One could use uptick above 1.28 in GBP to sell or in Euro above 1.1260 to initiate short term trades. US Retail sales data would be keenly watched for Q2 GDP tracking.

Markets are exceptionally quiet. Expecting US 10 y yields to fall post FOMC we might see USDINR headed towards 64.20 tomorrow morning and therefore I would look to initiate shorts at 64.40 levels. USDINR 1m NDF is trading 4p left giving no significant direction while EM currencies are flat to mildly positive. Equity markets seem to be lacking momentum. Medium term I would expect USDINR to break the range of 64.20-64.60, on the lower side only. CMP 64.35, Range 64.42-64.25.

RBI intervention nearing its limits?

How much can a country intervene in the FX markets?

The answer could be dependent on the domestic liquidity where India is already struggling with addition systematic surplus post demonetization. Or the answer could be derived from the US filter used to derive a list of currency manipulators. The US would label a country a currency manipulator if it meets the 3 criteria below:

1.      More than 2% of GDP of current account surplus

2.      More than USD 20 bn of bilateral trade surplus with the US

3.      More than 2% of GDP of intervention in the currency markets to depreciate the non US currency

Currently India only meets the 2^nd criteria. None of the countries met all 3 criteria and 6 countries which met 2 out of 3 were put on a watch list (Switzerland, Germany, Japan, China, South Korea and Taiwan). India now is running the risk of meeting the 3^rd criteria of intervention and therefore could be put on the watch list.

India has added almost USD 37 bn of reserves in 2017 including spot and forward positions (table below). India’s GDP at 2.11 trillion USD allows it to intervene to the extent of USD 42 bn for the entire year. Therefore perhaps RBI is reaching the limit to the intervention it would want to do in the FX markets. The thought that it would ignore the US watch list looks farfetched because of the heavy dependence of India’s exports, investments and specially the performance of IT industry on the US economy.  

USD Billion	31-Dec-16	31-Mar-17	02-Jun-17	Movement in 2017
Spot Reserves	359	370	381	22
Forward Reserves	2.7	13	18 (assumed as data is not available as yet)	15.3
Total	361.7	383	381	37.3

INR update: June end meeting for Modi and Trump

The major trend in markets is that of higher equities and dollar weakness against EM currencies. Now with Comey testimony and UK elections behind us the markets would be more certain and we can see fresh momentum in equities post the FOMC on Wednesday. Markets will also keenly look at US retail sales on Wednesday which has been falling for the last 4 months.

Modi is  meeting Trump on the 25-27^th June and considering the visa issue that the Indian Prime Minister would want to solve for the IT industry, currency is the last negative discussion he would want to have with the President. In the last 1 month INR has under performed other EM currencies and therefore USDINR could be headed to a new low before the meeting. Basis this point I will abandon the June end RBI balance sheet argument which could have led to INR depreciation this month.

FPI poured in Rs. 3k crores again on Friday as limits reach 90%. FPI debt limits should not be an issue as from 1^st July another Rs. 16.5 crs would be added as per the RBI limit schedule. USDINR 1m NDF is trading 4p left not showing any significant direction for the pair. Asian equities are in the red as markets await India CPI today (consensus at 2.38% as per Bloomberg). A below 2.5% reading would accelerate debt inflows as rate cut becomes more likely in the future. CMP 64.38, Range 64.45-64.20.  

INR update: May to lose majority, possibly creating moderate risk off

Comey said a lot of things but markets seem unconcerned so we can ignore them for the time being but media says that the investigations into Russian involvement in 2016 elections will gather steam post this testimony, but that is in the unpredictable future.

When Teresa May announced elections on 18^th Apr, GBP was at 1.2560 and that time she had 330 seats (majority at 326). Results suggest that she will end up having 320 seats or less this time and therefore we can see further downside in GBP (but corrected for lower US yields in the same period) from current levels of 1.2750. One positive for the UK is the big losses suffered by the Scottish National Party which wanted another independence referendum for Scotland, as their loss of seats would lower a Scottish independence concern from the UK.

I would not expect EURUSD to move along with GBPUSD and therefore EURUSD lows should remain floored near 1.11 levels. Draghi’s mixed to dovish statements yesterday were discounted and EURUSD could not fall below 1.1180 showing the inherent bullish view market holds for the pair now.

As we near the European session EU and UK stock futures should set the tone for the day which in my view, could most likely be a risk off due to the approaching political uncertainty in the UK. USDJPY and GBPUSD shorts might be initiated if EU or UK stock futures register large losses.

USDINR was offered yesterday on account of a PSU bank QIP inflow (perhaps) and certainly for another Rs. 3000 cr of debt inflows seen yesterday. USDINR 1m NDF is only 3.5p left which would make me think that downside for USDINR is limited along with a possible risk off day once the EU session starts. I would think that in June because of RBI’s book closing, RBI would want to intervene heavily and prevent further INR appreciation which we are witnessing. CMP 64.22, Range 64.15 – 64.40.

INR update: Comey concerns alleviate but not over as yet

Comey’s written testimony which was published yesterday was less concerning and resulted in a mild uptick in yields and dollar. His live testimony and Q&A is today and could lead to mild volatility only, as his written submission does not seem to contain anything that can become discontinuous for the President. Oil inventories in the US resulted in a 4% fall in Brent. Brent has not been able to sustain above 50 levels which is negative for the entire reflation trade and this could be a factor which prevents ECB from speaking hawkish today and toe a wait and watch line.

The other big event is the UK elections where results will start becoming clear early morning tomorrow. The polls suggest a close 45% to 35% kind of a race and therefore ruling out a surprise might not be prudent. Even if May wins but gets lesser seats than envisaged, it might be GBP negative. Considering the fact that GBP rallied on the announcement of elections expecting May to win, short GBP trade (above 1.3050) looks better from a risk reward perspective.

USDINR 1m NDF is trading 7p left showing offshore selling pressure which could be because of higher debt inflows post policy yesterday. Rs. 3000 crores were invested in debt yesterday and mostly after the policy, which shows that RBI bought USDINR aggressively at 64.30 levels. We have seen large commodity buyers (gold and oil) actively bidding today morning. I would expect INR appreciation to be limited to 64.30 for today while market could buy the pair before day end going into major events overnight. CMP 64.38, Range 64.30-64.55. 

INR update: No rate cut but inflation forecasts will be watched

Mild risk off sentiment continues to grip markets ahead of Comey’s testimony on Thursday 10 AM ET even though the Qatar situation has alleviated. ECB policy on Thursday could give fresh direction to Euro while a surprise Teresa May defeat in UK elections can increase uncertainty thereby creating risk off sentiment. EURUSD is too uncertain a pair to trade under these circumstances as multiple factors are at play. USDJPY has continued to trend lower in spite of higher equities which make short USDJPY my preferred trade for the eventful Thursday ahead. I would look for a pull back towards 109.75 and 110.30 to create shorts for a move towards 108.20 by Friday with a stop above 110.60.

USDINR 1m NDF is trading 4p left as compared to 6p yesterday. USDINR gave a higher open at 64.48. Both of this would make me believe that the QIP flow of nationalized bank that is being talked about is already digested in price. Asian equities are flat to mildly positive along with Nifty. Debt inflows continue as RBI continues to buy. Expecting risk off sentiment to prevail due to Comey testimony, I would expect INR appreciation to be limited to 64.35/64.40 levels for the day. RBI is expected to stay on hold but a downward revision in inflation forecast could drive yields lower leading to mild INR appreciation. I would buy USDINR at 64.40 levels for the next couple of days for a move towards 64.75 levels. CMP 64.47, Range 64.35-64.65.

Why the FED has continued the rate hike rhetoric in spite of weaker data?

Why the FED has continued the rate hike rhetoric in spite of weaker data?

The question that baffled me for the last 2 months can perhaps be answered by the financial conditions index (FCI). FCI takes into account the exchange rate, bond yields, credit spreads and equity markets to ascertain whether the financial conditions are pro growth (loose) or anti growth (tight). A look at the National FCI index published by the Chicago Fed shows that financial conditions have continued to ease in spite of the Dec and Mar rate hikes and is the loosest levels since 2014. FCI indexes of other global banks also paint the same picture indicating that the FED might want to continue on the tightening path in spite of weaker data. This is no surprise as a June rate hike is priced in.

But what it means is that the FED might not be as dovish next week in the FOMC, as the recent data might suggest leading to dollar strength post FOMC (where a rate hike is a foregone conclusion).

https://www.chicagofed.org/research/data/nfci/background

INR update: Middles east unrest and Comey in the horizon

 In terms of religious sects, Qatar has the same state sponsored brand of Islam as that of Saudi Arabia making them historical allies. But on the other hand the world’s largest gas fields are shared by Qatar and Iran (the pipelines for which are potentially the cause of the unrest in Syria). This co linkage with Iran makes it difficult for Qatar, to take an outright anti Iran stand (diplomatically) which is what Saudi Arabia desires. Trump singling out Iran as a source of terrorism shows that US is looking for a new front in Middle east and the steps against Qatar are perhaps the start of another US led conflict.

UK elections (results on Friday early morning India time) seems like going in favour of Teresa May and could lead to a moderate uptick in GBP. James Comey testifies in the Memo Gate crisis on Thursday which has the potential to create a political storm in the US and could lead to weaker USD against G7 and a significant risk off situation. Weaker US data coupled with these developments could create a bear rally in USD index. USD index closing below 96.3 on weekly basis can lead to another 2% kind of move.    

Debt inflows continue to be strong as the economy slowed down with lower inflation numbers. Tomorrow RBI is expected to stay on hold as changing their stance to accommodative from neutral would take time. USDINR 1m NDF is trading 6p left which indicates moderate offshore selling pressure. Although the view on INR remains constructive but first the Comey-Trump standoff can result in a risk off taking USDINR towards 64.50-64.70 levels on Friday. RBI continues to protect further INR appreciation at 64.30 levels. CMP 64.34, Range 64.25-64.40.