INR update: Rate cut expectations could drive INR appreciation

Inflation concerns in the US continue as the GDP data shows that price index rose lesser than expected while growth numbers weren’t too impressive either. For this kind of inflation numbers coupled with Trump’s inability to push through the healthcare bill, US10Y yields at 2.28% looks a little high, as compared to 1.8% in Oct 2016 before Trump came into power. This is an important data week with major prints everyday from US and EU.

 

RBI announces its monetary policy on Wednesday. I am expecting a 50bps rate cut as against market expectation of 25 bps. The rationale being that real rates in India are currently very high (4%+) while even if we take inflation average of 3% over the next 6 months, the real rates will hover around 3% at current rates. RBI has previously given a guidance of real rates of 1.5%-2% and therefore a 25 bps rate cut does not seem enough. High real rates increase hot money inflow into debt increasing appreciation pressure on the INR which seems to be something that RBI is against as of now. Therefore a higher rate cut will also release the debt inflow pressure on the currency subsequently.

 

USDINR gave a weekly close below 200 week MA for the first time since July 2011. In July 2011 the low was made with an RSI divergence while this time the 200 MA has been broken with considerably more momentum and therefore technically it seems we can see follow through. USDINR 1m NDF is trading 6p left and INR appreciation over the last 2 days seems to be in divergence to other EM currencies showing RBI’s willingness to allow INR appreciation. I would expect INR to appreciate towards 63.75 by Wednesday. For the day, CMP 64.08, Range 64.15-63.91.  

Inflation Projections and actual reading suggests a 50 bps cut

50 bps cut?

RBI affected the last rate cut in Oct 2016 expecting inflation to firm up gradually. Since February 2017 RBI has missed the inflation projection for Jan-Mar 2017 by 60 bps and for Apr-Jun 2017 by more than 2% (see table below). The Q4 FY17 inflation projection in Oct 2016 was 5% which closed at 3.57%. Given this backdrop, one can say that RBI should have cut rates may be in Apr 2017 or Jun 2017 itself. The inflation backdrop also suggests that 25 bps rate cut now is late and not enough. Therefore I would expect that with monsoon risks behind us, the case is ripe for a 50 bps cut on Wednesday 2nd Aug 2017.
 

USDINR view

A 50 bps rate cut would also ensure that debt inflows which is essentially hot money, doesn’t continue to flow in on the expectations of further 25bps rate cut in October 2017. Therefore a 50 bps rate cut would save the trouble of preventing INR appreciation for the RBI. Therefore I expect INR to appreciate into the policy and immediately after, where it could form a bottom till the time debt limits are raised. Target 63.75. CMP 64.15.

 

Needless to say a 50bps cut would be positive for equities and specially banking stocks.

 

On the other hand a 25 bps rate cut is priced in and should not result in large movements in any asset class.

INR update: Mnuchin reignites currency manipulation rhetoric

Stronger Durable goods order led to mild uptick in USD index. Mnuchin comments on currency manipulators led to EM currency depreciation (because of implications on trade agreements) and controlled the dollar strength against JPY. Certain global banks have revised their US GDP forecast (due today), to 3%+ while the consensus is 2.6%. This could indicate a higher than expected print which could send US yields higher along with the dollar index.

 

Mnuchin’s comments on currency manipulators strengthens the belief that RBI would not want to breach the 2% of GDP mark for FX intervention, watched by the US, as one of the parameters to qualify a country as a currency manipulator or to put in on the watch list. RBI’s intervention till now would be near USD35 bn for the CY2017 leaving it with another ~$8-10bn for the rest of the 5 months. Therefore another month of large inflows like March 2017 or CNH and KRW appreciation might make the RBI allow INR appreciation.

 

USDINR 1m NDF is trading just 3p left which indicates offshore buying pressure. According to the overnight movement in other EM currencies USDINR could be 64.35 today. Overall sellers will line up at any upticks while nobody seems to be buying the pair. I will continue to expect 63.75 ahead of the RBI announcement on Wednesday. CMP 64.22, Range 64.30-64.15.

Crosses Intra day trades

The below are the trades I am looking at today. The 2^nd table shows the status of the last day trades.

Dollar Index			CMP	93.3			Risk Reward ratio
Strong weekly downward trend. Strong support zone is 91.8-92.2.
EURUSD			CMP	1.1743
Strong weekly uptrend.  200 week resistance at 1.18
Supports	1.1605	1.1694	1.1662
Resistances	1.18
SELL	EURUSD	1.1824	Stop	1.1866	TP at	1.1726	2.3
Buy	EURUSD	1.1696	Stop at	1.1664	TP at	1.1764	2.1
GBPUSD			CMP	1.314
Weekly upward trend has lost momentum
Supports	1.2872
Resistances	1.3233	1.3043	1.3077	1.3056
Buy	GBPUSD	1.3081	Stop at	1.3039	TP at	1.3154	1.7
USDJPY			CMP	111
Downtrend. Looking for 24% retracement to initiate fresh shorts
Supports	109.61
Resistances	112.18	111.65	111.81	111.23	111.7	111.39
SELL	USDJPY	111.34	Stop	111.76	TP at	110.26	2.6
AUDUSD			CMP	0.8052
Uptrend. Critical levels broken, weekly close above 0.80 will propel the pair to 0.83
Supports	0.7725	0.7925	0.8009	0.797
Resistances	0.8268
Buy	AUDUSD	0.8026	Stop	0.7956	TP at	0.8144	1.7

Dollar Index			CMP	93.92			Risk Reward ratio	Trade Remarks	PNL
Bearish weekly close, can take USD lower to 92
EURUSD			CMP	1.1652
Increased momentum could warrant correction to 1.1585
Supports	1.14	1.1527	1.1581
Resistances	1.1775	1.1796	1.1654	1.1685
SELL	EURUSD	1.1674	Stop	1.1706	TP at	1.1616	1.8	SL	-32.0
Buy	EURUSD	1.1586	Stop at	1.1554	TP at	1.1644	1.8	NA
GBPUSD			CMP	1.3026
Weekly upward trend has lost momentum
Supports	1.2856	1.3	1.289	1.2966
Resistances	1.3233	1.313
Buy	GBPUSD	1.2976	Stop at	1.2944	TP at	1.3026	1.6	NA
SELL	GBPUSD	1.3054	Stop	1.3081	TP at	1.3006	1.8	SL	-27.0
USDJPY			CMP	111
Downtrend. Looking for 24% retracement to initiate fresh shorts
Supports	109.61
Resistances	111.81	111.65	111.23	111.41	112.02
SELL	USDJPY	111.44	Stop	111.86	TP at	110.46	2.3	SL	-42.0
AUDUSD			CMP	0.7941
Daily charts showing reversal
Supports	0.768	0.7829	0.7786	0.7886
Resistances	0.8008	0.7932	0.7992
SELL	AUDUSD	0.7964	Stop	0.7996	TP at	0.7916	1.5	SL	-30