INR update: India-China standoff worsens but approaches resolution during Brics

In Jackson Hole, Yellen did not want to increase expectations of balance sheet reduction in September, indicating that she is perhaps worried about debt ceiling and spending bill (read Trump). This is dollar negative as markets currently fully expect balance sheet reduction to start the coming month. Yellen opposed easing of financial regulation putting her at the opposite end of the Trump administration which indicates that she might not get a second term. Draghi’s lack of substantial comments and the above resulted in dollar weakness particularly against the Euro. Japan continues to emphasize on its asset purchase program while the political issues in UK prevent further GBP appreciation, resulting in most of the dollar weakness being expressed against the Euro only.  Strong Euro weekly closing above 1.19 last week would make me think that we will see today’s day end above 1.20. The week is data heavy with NFP (where earnings are most important) and flash CPIs in EU and US PCE data.

 

What markets are ignoring at the moment is the worsening of the India-China standoff over the last 48 hours. India has started building a road in Ladakh which is similar to what China is doing in Doklam. Chinese foreign ministry has made strong comments on the same while issuing a second warning for its citizens in India. Commentators suggest that the Brics summit in China (3rd-5th September) where Modi could bilaterally meet Xi can end up in the crisis getting resolved. September is historically the second most positive month for INR after March. After March 2017 India has not seen equity inflows and if the India-China issue gets resolved during the Brics summit it might prove to be a trigger for fresh inflows. If the standoff does not abate then we would see small spikes in USDINR and new lows would be difficult.

 

USDINR 1m NDF is trading 9p left which indicates further offshore selling. KRW indicates that Korean geopolitical risks can be ignored for now as Tillerson said that US would maintain peaceful pressure on North Korea. Last 1 month movement of other EM currencies indicates that INR’s equivalent level is between 63.80 and 64. Nationalized banks have aggressively bought dollars since morning preventing further appreciation of INR. CMP 63.89, Range 63.80-63.96.