INR update: Range bound price action as markets await conclusive news

The arrest of former Trump aids in relation to the Russian intervention election, is just a starting point of a long drawn investigation and whatever be the result, immediately the market would ignore the risks that this poses to Trump’s presidency. FED chair announcement is on Thursday and its likely to be Powell therefore should be a non event if there is no surprise. The congressional draft of the tax bill comes out tomorrow and that would be a major market mover. Today we have Euro zone GDP and inflation. EU GDP is picking up consistently unlike the US where GDP growth has been much more volatile.

 

USDINR 1m NDF is trading 1p left while dollar weakness has led to KRW and CNH appreciation. Asian equities are mixed while FPI flows into debt continues. I would keep an eye on India 10Y yields as further inching up might suggest fiscal concerns which are compounded by the fact that Brent continues to trade near $61 levels. CMP 64.82, Range 64.86-64.72.

INR update: US data and FOMC could drive dollar higher this week

Technically USD index looks like headed to 95.9 levels from the current 94.75. The weakness on Friday was because of the increased likelihood of Powell as the FED chair. I would have thought that Powell was already a consensus and therefore I believe an actual Powell announcement now should have limited impact on yields and USD. Muller has filed charges on the Russia investigation and there could be some arrests today (if any). It is not announced as to who that person would be but in case it is someone near the administration then we could see fresh political turmoil in the US and return of dollar weakness (although looks unlikely). Rumours suggest that Kuroda is likely to get a second term in BOJ and the BOJ meeting this week is likely to maintain its accommodative stance, both of which is negative for Yen. On 1st of November the next step on tax cuts is released, i.e., the congress’s draft of the bill which could help dollar advance. This is a data heavy week with FOMC, ISM and finally the NFP on Friday. Going by the recent macro prints in the US all/most of these could paint a rosier picture of the US economy.

 

USDINR 1m NDF is trading 1 p left. The dollar weakness has already given a 0.25% INR appreciation since Friday close which is in line with other Asians. Brent trading above 60 might mean the return of CAD worries for India. Equity markets domestically trade strong post the recapitalization of PSU banks and along with US stock markets. India 10Y yields is slowly inching higher now at 6.84. USDINR can move towards 65.30 levels during the week with USD strength, with this view I would expect limited downside today. CMP 64.90, range 64.85-65.02.

INR update: Trump tax cuts to keep USD firm

House vote on the budget got through narrowly yesterday leading to dollar strength. This vote ensures that the Trump tax cuts can pass without democrat votes. But there is enough strife within Republicans to still create issues with the tax cut bill. Next steps, the congressional tax committee will present a draft on tax cuts on 1st November, which will again be put to vote. Commentary suggests that if the bill has to go through then it will become law by 23rd November. The tax cuts would lead to significant reduction in corporate tax at the same time incentivising repatriation of global profits of US corporations back into the US, leading to USD buying. Thus it seems that the markets are going to spend the next 1 month in positive dollar expectations and I would go with the flow.

 

Today we have the US GDP where consensus is 2.5% but recent data has taken GDP tracking higher to 2.7%+. This could bring in further  dollar strength. EURUSD has broken key levels and now can accelerate towards 1.1550. USDJPY weekly closing above 114.80 can lead to another 2% upside.

 

With dollar strength globally USDINR is unlikely to go lower. USDINR 1m NDF is trading flat now while EM currencies have depreciated overnight along with EURO and dollar strength. CMP 65.01, Range 65.10-64.94.

INR update: ECB and Tax cut vote to keep INR range bound today

Today we have the ECB wherein Draghi would like to push the cart of confidence and normalization ahead given Euro areas superior economic performance. Thus I would think that he would not be dovish although he would remain measured, plus as before he would not talk down the Euro. I would not expect significant downward revisions to inflation forecasts wherein growth forecasts should move higher. If Euro trades higher than 1.1850 an hour after the press conference then we might head higher than 1.20 by EOW tomorrow.

 

On the other hand the House of Representatives votes for the Senate approved tax bill today. If this vote goes through then the tax bill could become a law by a simple majority (i.e., Republican votes only) in the Senate. This vote would be followed by further procedure and the houses bill on 1stNovember. Today’s vote going through could significantly increase the chances of the tax cuts being passed and fiscal deficit being raised, thus leading to dollar strength against JPY and EMs (temporarily at least).

 

Then there is US GDP tomorrow which can usher in further dollar strength / weakness. And the swinging moods on the next FED chair. All these make a medium term view on USDINR impossible at the moment, so let’s wait for these to pass.

 

USDINR 1m NDF is trading 2p left as compared to 2p right yesterday morning. FPIs poured in Rs. 3600 crs yesterday in Indian equities giving a big thumbs up to the government’s bank recapitalization plan. It would be unreasonable to assume that all the money came in a single day and therefore I would expect more FPI inflow in equities in the coming weeks. EM currencies have appreciated since yesterday as dollar weakened. I would not sell USDINR here given the chain of events which can bring in dollar strength in spite of the local sentiments. For the day, 64.76, range 64.68-64.85.

INR update: Recapitalization could increase rate cut chances for Dec

Starting with India, in a significantly positive step the government addressed the long standing problem of PSU bank recapitalization. The sum involved of Rs. 2.11 Lakh crore is significant and should impact growth positively. The move will also enable RBI to cut rates in December policy meeting subject to October Inflation printing at comfortable levels similar to last print. RBI had repeatedly said that monetary support alone could not help a pickup in lending unless structural steps are taken and therefore now it would have one argument less to not cut rates. All in all the move is equity market positive. The issued bonds are unlikely to be SLR status although the same is not confirmed and it does not increase the accounting fiscal deficit of the government. Public debt does go up which is a milder concern as compared to the positives. Bond yields therefore should only gradually inch up, they have not shown signs of panic sell off today morning (Yesterday India 10Y was at 6.795 and today it is at 6.804%).

 

The above announcement immediately took USDINR from 65.05 to 65.20 levels in the offshore market. But given the medium term growth positive outlook plus the fact that bonds have not shown a runaway in yields, further worry for INR seems unwarranted. Given the positive equity impact of the announcement, and an increased rate cut chance, the INR carry trade environment is ripe again.

 

USDINR 1m NDF is trading 1.5p right showing signs of concerns post the announcement. EM currencies have appreciated since yesterday while Asian equities are also in the green. Market participants would wait to see the impact across asset classes and I would expect as the announcement seeps in we could see some INR appreciation. CMP 65.14, Range 65.22-65.00.

INR update: Powell's appointment could weaken the dollar

Markets are giving more than 55% chance to Powell as the next FED chair with the second likely candidate having around 15% chances. This tells us two things that market consensus is Powell and since surprises cannot be predicted, therefore it is likely to be Powell only. Powell’s stance is mostly similar to Yellen except the fact that Powell being a Republican is likely to be less strict with Banking regulations. Therefore Powell announcement could lead to moderate dollar weakness and should be equity market positive.

 

The other major event would be the Trump tax cut bill which could be tabled as early as next week. The move in US 10 Y from 2.2% to 2.37% shows that markets are pricing in some chances of the bill going through. Overall the USD strength has failed to sustain and Powell’s likely announcement might take USD lower. On the other hand markets eagerly await ECB announcement on Thursday wherein Draghi is expected to infuse confidence in Euro area economic outlook as he tapers. Draghi has not been worried about an appreciating Euro and in the recent past post Draghi’s speech Euro has exhibited strength.

 

Given the expectations of Powell coming in plus failure of USD strength in spite of higher US yields one is tempted to think that USDINR might break lower. On the other hand US tax bill can create dollar strength giving upticks in USDINR. Locally more commentary suggests that India would meet its fiscal deficit target this year which should help continue the India positive environment. USDINR 1m NDF is flat while EM currencies have appreciated slightly since yesterday. The Chinese congress ends today post which Yuan might be made to demonstrate the strength of a new global power. CMP 64.94, Range 65.00 - 64.85.

INR update: Trump's tax cuts become more likely leading to USD strength

Comments from Republicans and other developments makes it seem that Trump’s tax cuts are more likely to become law by the end of the year driving yields higher with dollar strength. Senior republicans are now calling the tax cut plan revenue neutral stating increased growth as the justification, this in turn could ensure that Democrat support is not required in finally passing the bill. The bigger picture remains that US fiscal deficit increased to 3.5% from 3.2% last year and is likely to increase further in the coming year. My thoughts would be that till the time tax cuts don’t become a reality we would see USD strength but once the uncertainty is over markets will focus on the higher deficit and would search for impact on growth driving USD lower. This week US durable goods and US GDP will be the key data to watch along with the all important ECB.

 

USDINR 1m NDF is trading 2.5p left while EM currencies have depreciated along with moderate dollar strength. Nifty which was up 0.6% has given up most of its gains. Although the local concerns of slowdown and fiscal slippage is no more on focus, overall USD strength can still keep USDINR well bid. CMP 65.07, Range 65.04-65.20.

US treasury's currency manipulator report - RBI could sell agressively at upticks in 2017

US treasury published its bi-annual currency manipulation report. This takes into account the period Jun2016 to July 2017. Quotes from the report.

 

https://www.treasury.gov/resource-center/international/exchange-rate-policies/Documents/2017-10-17%20(Fall%202017%20FX%20Report)%20FINAL.PDF

 

“India is very close to meeting this criterion for the four quarters ending June 2017, with net purchases of foreign currency slightly below 2 percent of GDP.”

 

“Over the first half of 2017, there has been a notable increase in the scale and persistence of India’s net foreign exchange purchases, which have risen to around $42 billion (1.8 percent of GDP) over the four quarters through June 2017. India has a significant bilateral goods trade surplus with the United States, totalling $23 billion over the four quarters through June 2017. Treasury will be closely monitoring India’s foreign exchange and macroeconomic policies.”

 

Other observation from the report

-        The report says that according to IMF measure of reserve adequacy India’s reserves are USD120 bn more than required. China is higher by 1300 bn and Brazil by 170bn.

-        In the first half of 2017 India added 10% of total FX reserves added globally, whereas India holds only 3.5% of total FX reserves.

-        Korea and Taiwan have reduced their foreign exchange purchase, the same has been acknowledged. Taiwan consequently has been removed from the watch list.

-        China has been praised for preventing undue depreciation of Yuan.

-        Japan and Germany have been acknowledged to have not intervened in FX markets for over multiple years.

-        Switzerland has been, as earlier, acknowledged as a special case of currency intervention given their safe haven demand.

 

Conclusion

The report doesn’t provide for any penalties on countries which are on the watch list and therefore Indian authorities might not be too worried about the same, but getting qualified on the watch list might have implications on any negotiations related to the IT sector or other trade agreements. The next report is due in Apr 2018 which will consider CY107 where India is specifically at risk of getting listed on the monitored list. India’s current intervention for CY 2017 stands at 2.27%.

 

It could mean that for rest of 2017 the highs of 65.50 would be aggressively sold by RBI in order to unnecessarily avoid getting highlighted in the next report.

 

Current Intervention figures for CY2017.

 

Details

USD bn

sign

Total Addition to headline reserves from 1st Jan 2017

39.64

+

Revaluation impact due to  Currency

13.57

-

Revaluation impact due to movement in yields

-1.72

-

Forward intervention in CY 2017

32.2

+

Expected intervention from the last record date (spot and forward)

-2

+

Total Intervention by RBI till now

57.99

 

India GDP FY18 at USDINR 64.5

2,590.00

 

2% of GDP

51.80

 

Room left for intervention

-6.19

 

 

INR update: Receding local concerns and positive global environment

The improvement in Trump’s presidential career has come on the back of him listening to his team. Basis this I would think, that if Mnuchin backs Powell then Powell should be the next FED chair which is fairly dovish or a continuation of existing FED policies. US data (Empire state manufacturing survey) continues to show signs of robust economic activity which should help the FED to continue normalizing policy (rates and balance sheet) irrespective of sub target inflation. Therefore I would continue to think that US yields have further scope of moving higher as they price more of the FED projected rate hikes in the curve itself.

 

The next major global event is the ECB on the 26th October. The recent fall in Retail sales would make the ECB circumspect about giving an end date to the asset purchase program. On the other hand they would use the positive global and EU economic environment to ensure that they take an incremental step towards tapering. Thus the approach should be similar to the other successful DM central bank, i.e., FED, which is to keep taking incremental steps towards policy normalization without scaring the markets with a hawkish overtone.

 

In India the fear of fiscal deficit increase and higher current account deficit has somewhat receded though not conclusively. Basis the recent trade data along with CPI and less reliable IIP it seems that immediately a case for immediate weakening of Indian macros is not warranted. On the other hand comments from the government showed that there is caution and fiscal purses would not be loosened immediately.

 

USDINR 1m NDF is trading 1p left which is in line with improvement in Indian macro expectations improving. Nifty which a week back was looking like heading towards 9600 is now trading at highs although majorly due to domestic buying. EM currencies have mildly depreciated since yesterday which is reflected in the price of 64.90 up from yesterday’s 64.75. Exporters who have recently seen sub 64 levels, are now more likely to sell at upticks while importers continue to gain in confidence. CMP 64.90, Range 64.95-64.80.

INR update: FED chair race changes in favour of a more dovish Powell

Trump’s tax plans have been criticised saying that it might actually raise taxes for the middle class plus the fact that it reduces inheritance tax is also been sighted as a sop to the wealthy. This along with Trump’s spat with a fellow senior Republican has taken the steam out of UST yields reducing expectations of the tax cuts going through effectively. On the other hand markets assumed Warsh to be the front runner for the FED chair given Trump’s friendly relations with his family but a hawkish FED chair might be counterproductive to Trump’s growth plans. Mnuchin apparently wants Powell to lead the FED and this news has also helped to ensure that the dollar index does not go up further. Catalonia separation has provided a breather to the mild Euro concerns.

 

EM currencies have mildly appreciated since yesterday along with broad dollar weakness. IPO inflow (or expectations) is keeping USDINR offered. The fact that USDINR 1m NDF is continuously trading right by 1-2p prevents me from making a lower USDINR view as seldom have I seen INR appreciation with offshore buying (only happens on days of sudden large inflows). Today we have the CPI at 5-30 PM where a higher print would reduce chances of monetary stimulus and make the economy tend towards higher inflation with lower growth. Therefore a higher print should be INR and equity negative. For Oct I would continue to see a range of 65 to 65.70. For the day, CMP 65.12, Range 65.05-65.20.

INR update: Offshore buying USDINR even though other EMs appreciate

Trump was severely criticised by another senior republican, Corker. The altercation brings forth concerns about Trump’s support and therefore the ability of his tax cuts to go through without revenue neutrality. Which in turn puts into question a substantial run up in yields and USD. Therefore while we expect a mildly stronger dollar over the next 2-3 months, the reversal could be surprisingly fast. Meanwhile today Catalonia can announce independence which would create some political uncertainty for Euro driving it lower.

 

USDINR 1m NDF is trading 4p right which should prevent accelerated INR appreciation despite CNH and KRW appreciating overnight. IN10Y yield is at 6.77 while the high has been  6.78 therefore there doesn’t seem to be any abatement in India fiscal concerns and therefore a reversal is not in sight. Oct Range 65 – 65.70 or higher. Day, CMP 65.26, Range 65.17-65.33.

INR update: Wage growth to help USD strength

Wage growth in the US has picked up (September and previous revisions) taking YOY levels to 2.9%. This was the one big concern against the rationale of raising interest rates and now with 1%+ real wage growth, the market would expect the FED to normalize policy without much hesitation. This should keep the dollar bid along with the noises of tax reforms in the medium term. The impact could be magnified in USDJPY as Japan heads into election on the 22nd Oct 2017. I would buy USDJPY at current levels for the next 2 weeks for a target of 115. This week we will have the FED minutes on Wednesday and US Retail sales and US CPI on Friday as the most important pieces of information.

 

USDINR 1m NDF is trading 1p right. EM currencies have appreciated since Friday with CNH appreciating 0.4%. UDSINR traded at 65.60 post NFP in the NY session but then retraced as USD gave up its gains. Equities today are in the positive. GIC being a PSU, market does not expect oversubscription from FPIs and therefore inflows should be limited on account of this IPO. The political certainty related equity market gains post BJP’s (ruling party’s) victory in India’s largest state election in March 2017, is at risk as market now looks at Gujarat elections in Nov-Dec 2017. I would expect USDINR to trade in a range of 65 – 65.70 for the rest of October with a chance of breaking higher. CMP 65.30, Range 65.25-65.40. 

INR update: Dollar strength but local factors to help INR

The passing of the budget resolution in the US along with hawkish comments from FED speakers drove US yield higher along with USD index. Expectations of Warsh being nominated as the new FED chair is taken as a hawkish development. The political capital of Teresa May deteriorated driving GBPUSD lower.

 

Today we have the NFP wherein expectations have already been lowered to 50k-100k because of the hurricanes. Other US data suggests that there could be positive surprise as against consensus levels. On the other hand the consensus for wage growth print is at 0.3% mainly on account of base effect. Given the lower forecast for headline number, market has already positioned for dollar strength and post the number we could see some amount of retracement.

 

Asian equities are trading in the green on account of all time highs on the Dow. USDINR 1m NDF is trading 1p right like yesterday. Non Asia EM currencies depreciated yesterday night on account of dollar strength while Asians are more stable today. Positive announcements are expected from the Central government which could take USIDNR lower. Corporate bond investments of an average Rs.1k crores is seen every day and another Rs.9k crores of limits are left in this category. FPIs continue to pull out money from equities which are more than matched by DIIs. In the next 1 week there are a couple of IPOs which should result in inflows. The upside for USDINR looks limited for the next 1 week and therefore I would expect a range of 65.35-64.90 for this period, in spite of dollar strength. CMP 65.28, Range 65.33-65.10.

INR update: Stronger US data points to dollar strength

US manufacturing and service ISM are both touching 60 and that for now should put to rest any doubt about the robustness of the US economy. While price pressure has eluded the US economy, basis these 2 pieces of information I would bet on a stronger NFP and inflation data in October first half. On the other hand EU retail sales saw a second month of decline from the August peak. Improving US data vs peaking EU data, plus fresh worries on Euro zone politics plus ECB confusion, lends further credibility to expectations of  a stronger dollar for the next 1 month.

 

USDINR 1m NDF is trading 1.5p right. Corporate bond inflows along with IPO flows have led to longs stopping out and USDINR moving to 65 from 65.30 levels. The RBI policy was prudent and independent but it contained nothing to boost the INR or Indian equity markets. India 10Y bond yields are at 6.73% from 6.62% since yesterday pre policy. Since ISM services data yesterday USD has gained mildly against other EM currencies. Risk remains supported in the Asian session today. USDINR upside view remains intact till a daily closing below 64.70 is obtained. CMP 65.15, Range 65.25-65.08.

INR update: Trump trade is back? RBI policy a non event? Intervention continues in USDINR.

In the US comments from corporate bigwigs about the need and effectiveness of tax cuts brought US yields marginally lower along with USD index. US equities on the other hand continue to price in the valuation gains from the proposed tax cuts. Commentary suggests that Trump’s political effectiveness has increased substantially over the last 1 month and consequently we can expect significant positive surprises on the budget resolution which is to be passed this week and then the tax reforms which might have to wait till December 2017. Overall to a certain extent, let me admit that the Trump trade is back (higher US yields, stronger dollar and higher DM equities).

 

RBI cannot argue for a rate cut any more with inflation picking up (although expected) and fiscal slippages accelerating (unexpected). What RBI would do is revise growth forecasts lower and sound dovish. An actual rate cut today might not be as useful as compared to a dovish RBI which can help in keeping rates lower across the curve. Broadly these are market expectations also and therefore RBI policy should be a non event, except for the chance of RBI raising a few red flags on growth or fiscal which could become India risk negative.

 

Latest forward data shows RBI has bought more than USD 61 bn in spot and forward reserves put together in CY 2017. This shows that RBI does not pay heed to the US currency manipulator parameters, or it could also show that RBI would sell USDINR aggressively if there is upside volatility. CY 2017 data would be used for the Apr 2018 report while the report due shortly in  Oct 2017 will be basis the data July 2016  to June 2017, where there is no risk of India breaching the limit.

 

USDINR 1m NDF is trading 7p left which indicates offshore selling. This is surprising given the overall environment for INR and therefore one can assume that this is flow driven. EM currencies have all appreciated since yesterday while Asian equities are in the green. Yesterday Nationalized banks bought the pair aggressively and we can expect the same to continue. CMP 65.35, Range 65.25-65.50.