INR update: Retracement or reversal?

EURUSD respected the 200 WMA at 1.1720 as USD index got rejected at 93.65. US 10 Y yields retraced from 2.36% to 2.32% as market digested the tax reform plans. With the FED projecting 3 rate hikes for 2018 and market factoring in 1 hike only and tax reforms looking like creating a fiscal stimulus at least in the near term, US rates look more likely to move higher than lower. With US rates higher I would not think that dollar weakness will resume unless wage growth and CPI data in the US disappoints. USD strength would be more visible against other G7 currencies than Euro and specially visible against EM currencies. Today US personal income and outlays at 6PM can move markets along with a EU inflation and UK GDP.

 

USDINR moved higher on the growth concerns and fiscal slippage wherein there has been no fresh news. Other EM currencies depreciated along with USD strength and higher US yields. Yesterday USD strength paused on account of post tax reforms announcement cool off. There is no new news on India front or the US to suggest that the USD strength against EM currencies has reversed and therefore I would take this move as a temporary retracement only.

 

USDINR 1m NDF is trading flat today indicating the cool off in buying pressure. CNH and KRW continue to trade at weaker levels although have retraced since yesterday morning. Asian equities today are in the green with India 10Y yields coming down to 6.62 from yesterday’s 6.67%. A close below 65.15 on weekly basis would make the target 64.80 while a close above 65.35 would again make me target 65.75 next week. CMP 65.43, Range 65.30-65.50.

INR update: Higher US yields to weaken EM currencies

US tax reform announcement was as expected, ambitious. Whether it passes and becomes legislation or not will be seen in 2018 but what would become clearer in the near term are the budgetary implications of the plan. To take a step back the tax reforms or fiscal stimulus was first ideated in Jackson Hole 2016 from where the FED has accelerate policy normalization and now a fiscal stimulus is being worked upon. This essentially means that the trajectory for US yields is on the higher sides as US government’s appetite for fiscal deficit increases. With higher US yields we should see USD strength against low yielders like JPY and EM currencies like INR. EURUSD should not lose as much given that EURO story is more to do with reserve reallocations with improving political scenario.

 

Nifty is showing increasing signs of weakness as FPI outflows continue. NDF 1m USDINR is trading 3.5p right indicating sustained offshore buying. Other EM currencies have depreciated 0.5% or more since yesterday same time. IPO post allotment outflows should result in significant USDINR buying  today. 65.50 was 200 DMA and that has been convincingly broken which should make the medium term target 66.50 for USDINR. CMP 65.87, Range 65.75-66.05.

INR update: NIFTY losses indicate changing views while INR trades stronger

EURO longs in CFTC cut their positions by USD 3.5bn showing increasing signs of a pause in the EURO rally as GBP gains while US yields rise on the back of tax reform expectations. 25th September that is today, is when markets are expecting an announcement which could take the corporate tax rate lower to 20% while lowering the top individual tax bracket from 39.8% to 35% in the US. This could give US equities a boost along with higher US yields which could drive some amount of dollar strength. The price action could be somewhat similar to what we saw immediately after Trump came in without the volatility involved. But US politics remains highly unpredictable and a failure of these reforms could drive US yields lower as well.

 

Markets ignored North Korea and Trump’s war of words.

 

India allocated Rs. 44k crors of Masala bond limits to corporate bonds which would release Rs. 17.5 k crores to open corporate bond category from Oct 2017. USDINR 1m NDF is trading 1p right only as compared to 5p right on Friday. EM currencies are trading stable to stronger vs USD and that should keep INR supported for the day. Indian equities are getting sold depicting changing views on India fundamentals which should keep USDINR supported at 64.55 in the medium term. For the week I would expect a range of  64.55-65.20 and would expect 65.55 to be seen in October 2017. An hourly close below 64.73 could take USDINR to 64.60 for the day. CMP 64.75, Range 64.70-64.90.

INR update: RBI unlikely to defend INR as market notices India fiscal slippages

USD weakness against EURO, GBP and JPY returns as the FOMC was digested by the markets. AUD fell on account of dovish central bank speech saying that Australia has no intention of joining the global rate hike bandwagon. Korea again said that it would like to test a hydrogen bomb driving risk off sentiment in Asia.

 

The India macro issues story has just been noticed by the markets at large so it will take time before things cool off. Markets would now focus on the incremental problems that can arise as fiscal room tightens. Oil price rise will create fiscal and inflation jitters. Capital account outflows can drive yields higher thereby affecting equities. RBI is unlikely to support INR as exporters need the shot in the arm and it seems that the government thinks that a higher USDINR would be good thing for exporters at the cost of national financial confidence. Best thing is to stay with the trend and set small targets, currently the same for USDINR is 65.56.

 

USDINR 1m NDF is 8p right which shows the kind of offshore buying that’s driving USDINR higher. EM currencies have depreciated overnight but USDINR is an individualistic story currently. Equity markets are significantly in the negative and I would not buy the theory that stimulus will help equities immediately. There can be some announcement by the government during the day creating volatility in the markets. 64.80 looks like a good support now till the time things change considerably. CMP 65.07, Range 64.90-65.30.

INR update: Range shifts to 64.00 - 65.50

The FED downwardly revised its inflation forecasts but kept the interest rate forecasts the same, therefore reemphasizing that the FED is not so bothered about inflation as it is about normalization. Till the time data is such that it requires the FED to support the economy, the central bank will continue its interest rate hikes and balance sheet reduction. Markets on the other hand expected the FED to reduce the interest rate hike outlook given the start of balance sheet reduction and consequently the markets read the statement as hawkish. But the lack of follow through after the initial 30 minutes suggests that nothing materially has changed for G7 post the FOMC.

 

The FED is expected to reduce the balance sheet size by USD 1.5 trillion therefore giving inherent strength to USD against EMs with weaker fundamentals. In this regard the recent slowdown in Indian growth, widening of CAD, resultant equity outflows and fiscal concerns might render INR vulnerable. The fact that INR did not appreciate on the back of positives like resolution of Doklam issue, CNH appreciation and de-escalation of North Korea crisis, suggests that for the next 2-3 months, sub 64 levels might be difficult to achieve. On the other hand USDINR upside should be capped at 65.50 in this period.

 

USDINR 1m NDF is trading 2p right. Basis last 2 day’s other EM currency movement USDINR should be around 64.30 so the up move is specific to India. Equity outflows continue without aberrations. One can expect nationalized banks to step in to sell USDINR above 64.50 given their both side intervention behaviour in the recent past. CMP 64.49, Range 64.40-64.55.

INR update: FOMC and US tax reforms expectations can lead to stronger USD

The FED has not looked at inflation prints to decide on rate hikes but has depended more on Financial conditions index. The current FCI at -0.85 (Chicago FED) shows persisting easier financial conditions (on the back of higher equities and lower trade weighted dollar) and should assist the FED to continue to be hawkish (at least not dovish) thereby increasing the rate hike probability of Dec 2017 (currently at 52%). On the other hand return of hopes that Trump will be able to pass some amount of his promised tax reforms has raised US treasury yields from 2.05% to 2.24%. The details are expected on 25th Sep and till then markets will be careful before they go short on US dollar.

 

USDINR 1m NDF is trading 2p right as most EM currencies depreciated against the dollar this week. The NDF movement to right shows changing sentiments towards INR and a hawkish FED or higher US yields will have a larger impact on INR as compared to other EM currencies.  Equity market outflows from India accelerated even though equity prices continue to be supported due to local buying. Nationalized banks sold USDINR above 64.40 today. CMP 64.40, Range 64.30-64.55.

INR update: FPI outflows from Indian equites continue

If North Korea fires a long enough ranged missile then it has to either fly over SK or Japan before reaching any target, so the headline should actually read that NK tests another missile rather than fires a missile over Japan. Japan did not try to shoot down the missile the last time around or this time either indicating that it knew it is a test and its cities are not at risk. NK is arming itself to prevent a regime change and has Chinese and Russian blessings therefore all NK related risk off should be bought into.

 

In the US, chances of Trump passing a tax reform have increased driving yields higher. Although Trump might be getting into a political complication by garnering support from the opposition leaving his fellow republicans seething. Today we have the retail sales while the FOMC on the 20thwould ensure that dollar sellers wait it out before creating new shorts.

 

USDINR 1m is trading 3p left only while other EM currencies have not depreciated on the back of the NK missile test news. More worrying in India is the continuous large FPI outflows from equity markets locally (in the last 1.5 months we have seen outflows of almost $3bn). This along with a strong RBI resolve to protect INR appreciation could lead to an uptick in USDINR if we get a weekly closing above 64.25. On the other hand IPO flows over the next 1 week could provide support to INR. CMP 64.11, Range 64.05-64.25.

INR update: Global risk supported as USD fails to move higher

World equity markets corrected from August beginning on the back of North Korea tensions and speculations of tapering by ECB along with balance sheet reduction by the FED. Since then North Korea tensions seems to have cooled off, ECB seems to have postponed its plans and the FED is awaited. The FED seems to pre-committed to go ahead with balance sheet reduction and the market seems to have digested the news already. This change in global construct in the last 1 month could drive global equity markets for a week towards new highs.

 

There is news that Trump might visit China in November 2017 and that might ensure that PBOC keeps USDCNH alone and therefore CNH appreciation could continue. Last time Xi and Trump met in April, the US ended up igniting the North Korea debate which required 5 months to cool off. This time perhaps Trump has learnt his lessons and the discussions could end up being more risk positive.

 

I would think that the dollar index broke the 200 week MA (92.60) convincingly on the 8th Sep 2017 after hovering around those levels for 1 month. Immediately after breaking those levels it went down to 91 levels which shows follow through. After this significant breakout I would continue to trade for further dollar weakness and expect Euro to head towards 1.21. USDJPY becomes more complicated as higher equities brings new bids into the pair even though I would think the safe haven logic doesn’t apply to Yen against USD in the current risk on environment. GBPUSD has given a significant breakout above 1.3250 and looks like headed higher.

 

India CPI came in higher than expected without affecting markets. High frequency data locally shows some amount of slowdown in economic activity as FPIs continue to pull out money from equity markets. DIIs make up for FII selling and this is perhaps attributed to demonetization cash coming into main stream. Overall one needs to watch out for local macros including growth and CAD.

 

USDINR 1m NDF is trading 5 p left with mild appreciation in KRW and CNH since yesterday. Equity markets in Asia are flat as nationalized banks continue to buy USDINR. The conviction in USDINR breakout lower is waning as time passes but a breakout higher looks as unlikely. Range for the next fortnight seems to be 64.20-63.65. For the day CMP 64, Range 64.05-63.90.

INR update: North Korean tensions behind us?

Any future chances of USA taking on NK can be measured by the fact that US avoided going against Russia and China in the UN yesterday, by pushing through a toned down version of UN sanctions. Yesterday’s diluted UN sanctions should put into perspective how unlikely a war is in the North Korea scenario as US would not get a go ahead from Japan or SK and at the same time face China and Russia on the other side.

 

With the 2 hurricanes causing less damage than previously envisaged US stocks rallied and certainly NK situation helped. Next major market event is FOMC where the FED is expected to announce balance sheet reduction timelines. Market seems to have priced in that the FED would announce the same on Sep 20th but given the recent inflation readings and the added pressure of the 2 hurricanes the FED might want to wait and watch. If the FED delays on balance sheet reduction then dollar can be further sold off while it would equity positive.

 

USDINR has moved up above 64 as USDCNH is trading near 6.55 (up from 6.52 yesterday). 1M NDF is trading 5p left indicating offshore selling pressure. Equity markets in Asia are mildly in the green while all other EM currencies have mildly depreciated in the dollar correction. Given the risk on sentiment and dollar strength, opposite forces are at play on INR but currency sentiments should weigh more. Positional shorts should only look to take a stop at a daily close above 64.25 as the medium term view on INR remains constructive. CMP 64, Range 63.95-64.10.

INR update: Risk on sentiment, mild correction in USD weakness

North Korea had delivered the message that it is ready to go to any level to prevent disarmament by doing the nuclear test last weekend and therefore there was only fear this weekend but no real need to do anything more. The vote on UN sanction against NK is due today but we might not hear anything significant on this issue now as all sides realize that the best thing to do is to push the issue under the carpet. Hurricanes in the US receive a lot of attention even as Irma withered down to level 2.  Overall the week looks better for risk and equity markets than last week. This is a data light week with Chinese IIP and retail sales on Thursday along with US and Indian inflation as the main pieces of new information that we would receive. The breakout in USD index has happened on Thursday with 200 Week MA breaking convincingly so the view remains of USD weakness.

 

USDINR 1m NDF is trading 4p left only. CNH has depreciated from Friday’s peaks of 6.45 to 6.519 today along with other EM currencies which have depreciated around 0.5%. There is a retracement in dollar weakness that we are seeing across G10 and EM currencies. RBI continues to buy as I think that 2% of GDP of intervention for CY2017 would already be complete. The medium term view is constructive on INR for 63.50 and lower but today does not look like the day RBI allows INR appreciation. CMP 63.85, Range 63.78-63.96. I would want to carry overnight shorts in USDINR.

INR update: ECB accepts EURO appreciation while RBI continues to defend

ECB perhaps realizes that there is no escaping a higher EURO given the global construct and therefore it did not try to talk it down. Noteworthy is that sometime back market expected a September tapering, hawkish ECB interest rate outlook with higher Euro yields. Now Euro yields have edged lower substantially, September tapering has been postponed to October or later and ECB has asserted that rates are going to remain low till the end of asset purchases. In spite of this Euro continues to move higher which shows that it is independent of interest rate theories and the move is more of a structural dollar weakness and consequent reserve allocation into Euro. Euro appreciation will be more than expected and will continue at least till markets start bracing up for surprises in Italian elections in May 2018. The appreciation could be even sharper post that, of course with a favourable EU outcome.

 

Trump has toned down his NK war mongering after he realized that a President also needs to rationalize his decisions. Yuan continues to appreciate perhaps along with Euro. EM currencies gained sharply as dollar weakness accelerated along with improved risk sentiment. NK might test a bomb on founders day but I don’t think markets would now care. USDINR 1m NDF is trading 5.5p left while EM currencies show that basis last 1 month INR should be between 63.10 and 63.50. Large life insurance companies are hitting the capital markets with their IPOs and the same should attract FPI flows. RBI continues to buy aggressively but at some point it could stop allowing INR to catch up with other EM currencies. USDINR could see a new low below 63.50 next week subject to NK risks not escalating which is my primary view. CMP 63.89, Range 63.95 – 63.65

INR update: China's XI would want NK issue to die down without resolution

Risking a nuclear war on SK or Japan is what any military action on NK means. Neither China nor US would want that. China specially would want to avoid this situation as it looks to build confidence in the Chinese system and establish itself as a super power. The super power status goes for a toss if the first impact of that is an unnecessary war and a war would mean that China loses its NK bargaining chip with US, Japan and SK . Secondly Xi is up for election on 18th October as the Congress convenes to decide on the Chinese President and a weak NK positioning would not help his cause. North Korea would want that US doesn’t push for a regime change and Kim John rules for eternity. That’s not very difficult for China to broker. What US (and allies) would want is disarming NK which is something NK would not agree to as that takes away the leverage NK has in the first place. Hence the complexity and therefore the solution is difficult but the can be kicked down the lane to be dealt with another day and I would think this kick would come well before the Chinese congress sits. Once the two sides go silent we should see a resumption of risk on sentiment across asset classes. Yesterday China sent a strong message to North Korea through its official media and also displayed its military might to the rogue ally through exercises near its border, all this happens as Chinese public opinion becomes more critical of NK actions.

 

Trump on the other hand used the hurricane to avoid a government shutdown until Dec 2017, an example of another can been kicked down the lane. The news was mildly dollar positive only as US10Y struggled to cross above 2.1% indicating that markets do not expect Trump to be able to pass tax reforms given his slow progress. Although debt ceiling issue being resolved for now creates a higher chance of the FED embarking on balance sheet reduction in the Sep FOMC. Today we have the ECB wherein recent history suggests that Draghi is not concerned about a rising Euro. A rising Euro for a current account surplus EU is any which ways a tighter financial condition scenario therefore it is likely that ECB would wait before announcing tapering. The strength in Euro is indicated by the fact that news of delay in ECB tapering has not been able to take Euro lower, basis which I would expect Euro to perhaps touch 1.21 post the ECB today.

 

KRW has appreciated 0.5% since yesterday along with all other EM currencies. USDINR should be between 63.50 and 63.85 basis recent EM currency movements.  USDINR 1m NDF is only 4.5p left which indicates reduced selling pressure on USDINR. Asian equities are in the green as Korean markets shrug of fears of a war. I would expect USDINR to head towards 63.50 in the coming week basis the view that Korean issue will not escalate. CMP 64.02, Range 64.09-63.85.

INR update: Risk off tone as US yields edge lower

Another hurricane warning in US resulted in insurance companies getting sold and an overall risk off tone. Korean concerns have not escalated while at the same time it has not receded either. FED speakers showed signs of doubts on further rate hikes but they both have been extreme doves, nevertheless the markets reacted taking US 10 Y yields to the lowest levels since Trump elections. Today US service ISM would be important along with the beige book release.

 

USDINR 1m NDF is trading 5p left while KRW has depreciated to 1136 levels. CNH and other EM currencies are largely flat to slightly stronger than yesterday. Asian equities are in the red with Hang Seng at -1%. Participants largely expect the September range for USIDNR to be 64.50-63.80 which would make me think that at every uptick from the current levels we would see exporter selling coming in. USD weakness and other EM currencies suggest that INR depreciation would be limited while technically a break above 64.30 can result in stop losses taking the pair higher to 64.40 in a hurry. CMP 64.24, range 64.30-64.10.

INR update: Yuan Oil Benchmark could change the world order

News that China will launch a crude oil contract denominated in Yuan and backed by gold is perhaps the most significant step àny country has taken in recent times to counter the US. In the longer run what this means is that China doesn’t need its $3 trillion of reserves as Yuan could become an international currency. US Federal reserve bank today has only $120 bn of FX reserves. What this means is that oil can be traded in another currency except USD which would mean that other countries need to hold lesser USD and more Yuan. The said Yuan oil benchmark is in its infancy but this is part of the war between the US and China which is now being played out in oil markets along with North Korea and South China sea. On the other hand an appreciating Yuan should put appreciation pressure on INR because of trade linkages between the two. But all this is in the medium to long term and right now we need to continue to see CNY movements which could have implications on dollar weakness and further INR strength.

 

On the NK crisis news reports suggest that UN will vote for tougher sanctions on 11th Sep while China might come up with oil supply cut and choke North Korea. The comments of the US ambassador to the UN seemed mild and reinforces the deduction that US cannot act against NK given the geopolitical sensitivity. Euro holding up above 1.19 shows the buying pressure on the currency as market awaits the ECB meeting on Thursday.

 

USDINR 1m NDF is trading 6p left while other EM currencies suggest that USDINR should between 63.66-64.00 levels. Equity markets are in mild green even as JPY and CHF indicate towards mild risk off. KRW has depreciated mildly since yesterday while CNY appreciated to 6.5150 before bouncing to 6.5350 in the morning. CMP 64.15, range 64.20-64.00.

INR update: Nuke tests largely ignored by markets

With what happened with Gadaffi in Libya or Saddam in Iraq or Asad in Syria (ongoing), North Korea has learnt that an actual nuclear arsenal and threat is the only way it can avoid a regime change at the hands of the US. A threat of an actual nuclear attack would prevent the US from taking any military action against NK as it's allies Japan and SK would never risk a nuclear attack. Thus the nuclear test can only push China to review its decades old NK policy which is of maintaining the balance of power in the Korean peninsula by avoiding US intervention in NK. China has been helping NK economy by going around the sanctions in one way or the other and the testing of hydrogen bomb can only lead to NK loosing it's ally which makes it significant. The world knew that NK had nuclear weapons so yesterday was no surprise but only to the extent that NK is more provocative than China might like. So if anything the testing can be risk positive as it pushes China to side with the rest of the world. Trump is perhaps insignificant in the entire scheme of things after his bluff was called by NK.

 

US data continues to point at robust growth but without price pressure. The ECB news of postponing tapering to Dec 2017 and discomfort with higher Euro would get further clarity in the ECB meeting on Thursday. Overall if the main reason for Euro appreciation is reserve money allocation, then short term data and minor ECB actions would have little impact and the dips will continue to be shallow. This is a data heavy week as well with EU GDP, EU retail sales, US factory order tomorrow.

 

CHF indicates mild risk off because of NK. JPY might not be a good indicator of NK related risks. USDINR 1m NDF is trading 6p left. USDINR spot offshore had gone towards 63.80 on Friday night so we have already seen a 15p upmove. KRW has depreciated to 1130 from sub 1120 levels, other than which other EM currencies have not depreciated significantly. CNH continues to appreciate. Equity markets indicate mild concern only with Korea at -0.8% while other markets are largely flat. CMP 63.96, Range 64.05-63.90. I would continue to sell on upticks and if someone wants to protect against the tail event of a war then buying puts would be a better strategy.

RBI has bought $49bn already leaving limited room for further buying

Basis the latest forward outstanding position of the RBI, it seems that in the first 8 month RBI would have bought USD 48.75 bn of USD from the market. Therefore in case of large inflows (either hot FPIs or FDI or ECBs) the room for RBI to buy further dollars from the market is limited. Corollary is that the need for RBI to sell dollars at upticks is even higher. This is basis the assumption that RBI is paying heed to the limits set by US treasury, for which we do not have any confirmation. Therefore selling calls for 64.50-64.75 and buying puts of 63.50-63.75 seems like a good strategy along with vanilla USDINR shorts at 64.20.

Details	USD bn	sign
Total Addition to headline reserves from 1st Jan 2017	34.25	+
Revaluation impact due to  Currency	14.95	-
Revaluation impact due to movement in yields	-0.54	-
Forward intervention (till Jul 17)	25.9	+
Expected Forward intervention from the last record date (spot and forward) - assumption	3	+
Total Intervention by RBI till now	48.75
India GDP FY18 at USDINR 64.5	2,590.00
2% of GDP	51.80
Room left for intervention	3.05

INR update: September is INR's month to register further appreciation

US PCE (YOY) increased from 0.2% in Nov 2015 to 2.2% in March 2017. Since Mar 2017 it has fallen to 1.4%. Basis this measure the chances of the FED going ahead with the Balance sheet reduction in September 2017 FOMC is limited, but the FED seems pre committed as of now. Today’s wage growth in NFP release would tell us more. On the other hand EU inflation which fell from 2% in Mar 2017 to 1.3% in July has registered an uptick to 1.5%. Euro can be bought with a stop below 1.1850 for a move back above 1.20.

 

September is the second most positive month for INR after March. In this Financial year FPIs have pumped in only USD 1bn into Indian equities which would make me expect equity FPI flows in September. Other capital account transactions like ECBs/FDIs also tend to get clubbed in quarter ends. CNH appreciation has not been reflected in INR till now even though geopolitical tensions have reduced. Basis these factors if INR has to continue its appreciation trajectory then we might see a move lower to 63.20 in the month of September.

 

USDINR 1m NDF is trading 5.5p left while other EM currencies have registered moderate appreciation. Asian equities have moderate gains as dollar weakness returns post 2 days of a strong correction. India’s GDP growth was a negative surprise and hopefully it will make the government take more growth focussed measures and also make the RBI consider incremental rate cuts. CMP 63.93, Range 63.98-63.85.