INR update: Mild dollar strength and risk off sentiment in Asia

US data continues to show robust growth while the tax bill goes on vote today/tomorrow which is preventing further dollar weakness for the time being. Once the bill is behind us I think markets will start looking at the future, i.e., of a higher fiscal deficit US where the administration itself wants a weaker dollar. Today we have the Euro zone inflation which would be important.

 

USDINR 1m NDF is trading flat to slightly left while EM currencies have depreciated moderately since yesterday. KRW has lost significantly to 1188 from 1174 yesterday on the back of dovish comments from BOK post the rate hike. Asian equities are in the red as Chinese shares continue to inch lower everyday because of regulatory crackdown on speculative activities locally. Although Chinese risk off sentiments for now are confined to their local markets. Since yesterday INR has registered a 20p move up which should be enough given the global changes. CMP 64.51, Range 64.57 – 64.35.

INR update: US stocks rally, N Korea Missile test ignored

J Powell’s comment that banking regulations are already too tough indicate one of the expectations markets had from the Trump administration, i.e., of toning down restrictions on the financial sector, consequent to which US stock markets rallied. More republicans are likely to vote for the tax bill as differences get reconciled which led to a mild dollar strength except against GBP. Reports suggest that UK and EU have in principle agreed to a Brexit deal which led to the cable rallying. North Korea missile test has not resulted in a risk off as Korean equities are flat only.

 

Overall the risk on environment continues with a slight correction in the dollar weakness trend. USDINR 1m NDF is trading 1p left while EM currencies have registered a mild depreciation since yesterday evening. USDINR traded at 64.32 overnight while Nationalised banks bought the pair aggressively yesterday at 64.35 to prevent further appreciation. CMP 64.46, Range 64.55-64.35.

INR update: Medium term view of appreciation subject to event risks

Post the robust print in New Home Sales USD weakness paused and Euro fell from 1.1960 to 1.1900 levels. Powell’s senate testimony showed nothing substantial except for the fact that he is likely to continue the Fed’s trajectory of gradual rate hikes. In an otherwise risk on and dollar weakness environment, the factors to watch are falling Chinese equities, Nov 30th OPEC meeting and the senate vote on the tax bill, which can temporarily change either of the trends.

 

Gujarat election results can play a critical role in developing a medium term USDINR view. I would think that in spite of the headwinds that the incumbent BJP faces, the opposition might not be able to convert the recent gains into votes. In case of a convincing BJP win (120+ seats) we can see a bout of inflows into Indian equities (somewhat like post UP but to a smaller extent). RBI has already bought much more than 2% of GDP in USDINR in CY2017 and in case of large inflows it would have no choice but to allow INR to appreciate supported by dollar weakness. Therefore opening the doors for new lows. Having said this 64.20 levels would continue to be a strong support.

 

USDINR 1m NDF is trading left while USDINR made a low of 64.35 in the offshore markets yesterday before opening at 64.53 again. TRY and ZAR registered sharp appreciation yesterday on the back of dollar weakness while KRW and CNH are trading stable without incremental gains. Equity markets are slightly in the red while I would expect Euro to be well bid in the European session. CMP 64.59, Range 64.65-64.35.

INR update: Dollar weakness and improving local sentiments

As it looks certain that the Senate will pass its version of the tax cuts on Thursday, the market has started looking beyond, i.e., at the strong Euro zone growth and lack of higher inflation in the US which could result in lesser rate hikes in 2018. The interest rate differential theory has not been working between the USD and EURO driving EURUSD higher, at the same time the traditional correlation of stronger Yen with weaker global equities doesn’t seem to hold either. This week we have the senate vote, US ISM and US GDP data that would be critical along with housing releases.

 

India 10Y seems to have stabilised around 7% as the outlook on government finances improved in the last 15 days. USDINR 1m NDF is trading slightly right while EM currencies are mixed. Overnight as EURUSD moved to 1.1944 USDINR traded at 64.55 in the offshore market. Thus the 25p up move seems overdone to me in spite of the fact that Asian equities are moderately in the red. CMP 64.78, Range 64.85-64.60.

INR Update: India rating upgrade and dollar weakness together

US house passed the tax bill and that failed to boost the dollar although yields did move higher moderately. This shows the gathering belief in the resumption of dollar weakness. US data continues to be robust even though yield curve continues to flatten, indicating a market belief that inflation is not going to rise to higher levels. A flatter yield curve could show that a recession is approaching but looking at the US, EU, Japan and a recovering China it looks unlikely and therefore I would think the other alternative is for the longer run US yields to rise on the back of increasing fiscal deficit in the US.

 

Moody’s gave a big boost to India confidence levels by doing a rating upgrade by 1 notch. USDINR closed at 65.30 and opened at 64.75 levels onshore making a low at 64.60. Since then we have seen nationalized banks buying. Participants were not materially short yesterday so I would not think that people would buy to take profit at these levels. General market view yesterday was of a higher USDINR and therefore there would be more longs than short. Yields look attractive for bond inflows (-10bps since yesterday) and there is Rs. 15k cr limits left in corporate and GSECs for further investments. Other EM currencies have appreciated since yesterday as NDF 1W and 1M trade flat as compared to yesterdays 2-3p right levels. After the initial volatility I would think during the day exporters and fresh shorts would enter USDINR. CMP 64.77, Range 64.85 – 64.45.

INR update: Dollar weakness starts again?

Market’s have started focussing on Euro zone economic strength as the rate differentials get ignored. The fact that US is going to hike rates in December is clear and stronger CPI and retails sales data therefore had limited impact. There is still mild uncertainty on the tax bill and passing of the same can push UST yields higher. Overall in the two and a half month uptrend in USD index the momentum build up was weak indicating that the same was not a reversal. Now with the trend broken we might be seeing the major trend of USD weakness starting again.

 

Yesterday KRW appreciated strongly to its highest levels since October 2016 which shows that the North Korean crisis is behind us.  Other EM currencies have also appreciated since yesterday night. USDINR 1w and 1m NDF trades 1-2 p right indicating mild offshore buying pressure, as FIIs continue to pull small amounts out of Indian debt and equities. India 10Y yields has moved higher to 7.06 levels again. Most participants are looking to sell near 65.40 levels after yesterday’s selloff. CMP 65.35, Range 65.42-65.15.

INR Update: German GDP drives dollar weakness as India's trade deficit widens

German GDP data showed the strong and consistent growth that Germany is registering (2.8% pa). This along with EU GDP growth at 2.5% pa took EURO higher towards 1.18 handle and led to dollar longs stopping out across the board. US yields failed to convincingly break 2.4% again even though the progress on the tax bill indicates higher chances of the bill becoming law sooner. USD index has entered a make or break territory and a break today below 93.7 could bring in further weakness (CMP 93.8). We have US retail sales and CPI today which would be critical.

 

India trade deficit increased to $14bn against market expectations of $10.5bn. This was mainly due to lower exports and higher oil imports. Given the rise in oil prices and quick reversion of the increase in Exports in September, the print should lead the markets to worry about current account deficit increasing towards $45bn for this financial year which should keep USDINR bid. This along with increasing bond yields (India 10Y at 7.03%) could ensure limited downside for USDINR.

 

USDINR 1W NDF continues to trade right while 1m is flat indicating actual outflows getting hedged. USDINR opened at 65.43 and got sold off to 65.30 on account of longs cutting their position on the back of dollar weakness. At 65.30 we are seeing bids from importers. Given that the down move has already happened I would expect USDINR to stay in a small range for the rest of the day. CMP 65.31, Range 65.26-65.43.

INR update: US tax bill to be watched for further direction

US 10 Y yields continued to trade higher than 2.4% in a quiet day yesterday. The house of representatives is expected to vote on the tax bill this Thursday as the administration’s target has been to get it through both houses by 23rdNovember. Chinese data today morning was just below expectations with little market impact. Today there is a panel discussion between the biggest central bank governors, Yellen, Draghi, Kuroda and Carney, the topic being central bank communication challenges. ‘

 

India CPI data released yesterday showed that inflation continues to advance at a faster than expected pace which rules out any rate cut expectations for December policy, driving India 10Y yields to 7% (highest since Sep 2016). USDINR 1w and 1M NDF do not show any significant buying pressure today as both are flat as compared to onshore markets. Other EM currencies have mildly appreciated since yesterday. Equity markets show that risk continues to be on the back foot. Brent has retraced below 63 levels. With US and India yields both rising I would continue to think that downside for USDINR is limited and a break of 65.50 can lead to another 0.5% up move in a hurry. For the day, CMP 65.37, Range 65.30-65.50.  

INR update: US bonds selloff drives EM currency weakness

On Friday US bond markets got sold off driving US10Y yields from 2.31 to 2.4%. In spite of this we saw mild dollar weakness against G7 while the greenback strengthened against most EM currencies. The US tax bill is expected to become law by the end of the year or early next year in a diluted form although that didn’t deter markets to shift money out of US treasuries. I would think a weekly close above 2.43 in US 10 Year can now take the yields towards 2.6% which can result in dollar strength across the board. Fresh political trouble for PM May in the UK can keep the news driven GBP subdued.  This week has fresh retail sales and CPI data from across the globe hopefully making it an eventful one.

 

USDINR 1W NDF trading right by 2p shows outflows getting covered in the offshore market which could be the IPO application money flowing back. On the other hand markets are also chatting about a $1.5bn real estate inflow coming in this week. The pair is making higher highs and higher lows showing signs that markets are positioning for a move towards 65.65 levels. India 10Y yields show increasing signs of fiscal worries which can be alleviated or compounded by the CPI print due to be released at 5-30PM. For the day, CMP 65.27, Range 65.38-65.20.

INR update: Risk on environment could help Rupee appreciate

In spite of news of delay in implementation of corporate tax rate cut US yields did not fall and neither did USD implying the current USD strength over Euro and GBP. Republicans want to vote on the tax bill by 23rd November and therefore I would expect that gradually over the next 2 weeks USD index could head to 96.5 from the current 94.9 levels. Volatility is expected to remain low today as there is no significant data or speakers lined up.

 

USDINR 1m NDF is trading 1p right while EM currencies have mildly appreciated since yesterday. Historically INR has benefitted from a rally in oil prices which is counter intuitive. Oil price rally indicates a risk on environment which boosts capital inflows into the country more than the pressure on trade deficit. Equities are in the green and post the push in USDINR due to a one off buying I would expect USDINR to test 64.50 levels again over the next week. For the day CMP 64.90, Range 64.95-64.80.

INR update: Flows drive price as volatility sinks globally

In the US the setup is of higher equities and lower volatility with a flatter yield curve, indicating a comfortable environment with most good news priced in. This is helping commodities edge higher even though geopolitical risks in Middles east continues to rise gradually. Yesterday Euro zone retail sales surprised on the higher side along with news of 3 ECB members wanting more hawkish taper on the 26th Oct meeting, this failed to push EURO higher substantially, indicating that USD bulls are in control of the pair currently and therefore I would target 1.1510/1.1475.

 

Looking at the price action yesterday it seems that the outflow of the telecom stake sale is behind us. USDINR 1m NDF is trading 2 p right while EM currencies have mildly appreciated since yesterday evening. There are a few large inflows that might hit the markets now which include a real estate company selling stake worth Rs. 9600 cr, a private bank raising capital to the tune of $1bn and IPO inflows. All this would make me think that we can see INR appreciation when most people were expecting USDINR to break higher today. CMP 65.10, Range 65.20-64.90.

INR update: Oil price rise could limit INR appreciation

Globally the noteworthy move is in commodities which have gained across the board led by oil prices. This indicates the global growth momentum and should reflect in higher inflation expectations going forward resulting in higher yields. Today Yellen speaks as the US congress continues to deliberate on the tax bill.

 

Brent trading above 64 would ring some bells for India’s fiscal targets as the government now faces political pressure against raising fuel prices, thereby increasing the pressure on India’s fiscal deficit. Plus a higher oil would increase the pressure on the country’s current account thereby making me think that downside for USDINR is limited. 64.50 has a congestion of supports (200 DMA, retracement and recent price bottom) and therefore I would expect the level to hold. Meanwhile markets also have one eye on IPO flows plus a major real estate stake sale of Rs 9600 crs. USDINR 1m NDF is trading 2p left while KRW is trading strong at 1111 levels. For the day, CMP 64.68, Range 64.74-64.58.