INR update: Exit polls show BJP victory, INR can head to 63.50 next week

In the US retail sales painted a rosy picture while the tax bill faces some uncertainty. BOE and ECB were as expected. ECB has continued to be slightly dovish indicating that there will be no rate hikes until 2019 perhaps. BOE does indicate that a couple of rate hikes are coming in 2018. For now the setup for GBPUSD looks more bullish than EURUSD.

 

Exit polls suggested that BJP would garner 110-135 seats in Gujarat along with a substantial majority in Himachal. Basis recent exit polls experience in India, I would think that the actual results on Monday would be closer to the polls. On actual results we should see further gains in equities and gains in INR, i.e., on Monday.

 

USDINR 1m NDF is trading 1p left only. EM currencies are flat since yesterday so INR can completely focus on the domestic story. Nifty is up 1.1% while INR appreciation has been limited to 20p by nationalized banks. Nationalized banks would not buy USDINR significantly to depreciate the INR on the back of government’s victory as that sends the wrong message. More participants in the market are convinced that 64.10 would not break, which would make me think that the market is not overtly short here and therefore there is further room for INR to appreciate. 30mins trade bellow 64.10 can show us 63.90 and I would expect. CMP 64.15, Range 63.90-64.20. Next week we can see the familiar 63.55 (if exit polls don’t go wrong) but not much lower from there.

INR update: Higher inflation fails to impact INR

US bond yields were pricing less than 1 rate hike in 2018 in Sep 2017, now they are factoring in more than 2 rate hikes. This shows the change of sentiments for 2018 in the recent past, backed by better US economic performance and policy traction.  Today we have the FOMC where a rate hike is a foregone conclusion, but what the market would look at is the number of hikes projected in 2018 along with inflation forecasts. The comments of Yellen would not matter as much given the fact that from March 2018 it will be the new Trump nominated chairman who will preside over the committee.

 

RBI increased bond limits by Rs. 12k crores from Jan 2018 which was kind of expected and insignificant because only Rs. 1600 crs has been increased in the general category where incremental investments can be expected. USDINR 1m NDF is trading 1p right. The inflation print of 4.88% against expectations of 4.5% was unable to drive USDINR higher significantly and the offshore market topped out at 64.56 yesterday. Since morning we are seeing exporters selling as well. The lack of upward pressure in spite of the inflation data would be make me abandon my view of 64.85 before Gujarat exit polls tomorrow evening. The medium to longer term view remains of further INR appreciation from here. CMP 64.49, Range 64.55-64.40.

INR update: CPI expectations drive India yields higher

European finance ministers have warned the US that the tax cuts are against international treaties and undermines trade. Similar concerns have been expressed from China. Perhaps the US tax cuts would lead to a series of competing fiscal dole outs across the globe pushing yields higher along with growth, with the potential to make 2018 a bullish risk year like we have not seen in the last 11 years. Oil prices (Brent) moved higher than 65 on the back of supply concerns which in the short term will create pressure on oil importing currencies.

 

USDINR 1m NDF is trading flat while EM currencies have mildly depreciated since yesterday. India bond yields have headed to 7.23% in a hurry, led by domestic selling as market expects inflation to go higher than 4.3% in today’s release. There are also expectations of the government announcing extra borrowing in the next fortnight for the March quarter (20-30k crores). Oil prices would maintain the pressure on INR for the day along with moderately negative equities in Asia. CMP 64.51, Range 64.45-64.63.

INR update: Range bound December markets with improving sentiments

Trump’s plan to cut taxes seems to be going through and soon it is likely to become law. On top of it reports suggest that a $1 trillion infrastructure revamp draft would be released before 30th Jan 2018. Brexit phase 1 talks getting through also is a shot in the arm for global risk sentiments. In the larger scheme of things a 0.3% or 0.2% average earnings growth doesn’t make too much of a difference. This week we have the FOMC where rate hike is given but what the market would watch out for are the forecasts on inflation for 2018 and 2019. Some analysts have already started projecting 3 and even 4 rate hikes  next year which looks possible to me given the current sentiments.

 

USDINR 1m NDF is trading flat while EM currencies have also not moved much since Friday. Equity markets locally have registered a sharp turnaround in the last 3 sessions. Indian bond yields continue to inch higher and now is closer to 7.1%. Market chatter suggests that there is an inflow of $500 mio going through today because of which the market seems to be offerish. I would continue to think that nationalised banks would protect INR appreciation beyond 64.25 levels before Gujarat elections. CMP 64.36, Range 64.25-64.45.

INR update: Pair can head to 64.85 next week before Gujarat election results

Reports that Trump will come up with his infrastructure plan in Jan 2018 boosted the dollar unexpectedly while the debt ceiling deadline was postponed till 22nd Dec 2017 which helped the cause as well. Today we have the NFP wherein recent ISM data suggests limited room for disappointment, therefore I would expect dollar index strength going into next week’s FOMC.

 

Next weekend (18th Dec) we have the Gujarat election results while on the 14th Dec evening we will have the exit polls. Basis reports, I would think that a BJP tally of 120+ will be pro risk and 100- will be adverse for sentiments. In case of 120+, USDINR trends lower but RBI would continue to intervene unless fresh FDI and FII flows also flow in, therefore from a trading perspective the risk reward lies in higher USDINR. I would think that the market is not positioned for the same and that positioning should happen between today and Wednesday, which can take USDINR to 64.85 levels. Caveat is there is a PSU inflow of USD 500 mio between today and Tuesday (not certain) and the positive equity markets can also keep USDINR offered.

 

USDINR 1m NDF is trading 1p left as compared to 2p right yesterday. EM currencies have depreciated yesterday on the back of dollar strength and local factors in a few countries. Asian equities seem to have broken their losing streak and are substantially in the green today. FII flows into Indian equities are substantially in the red while debt flows are positive but not huge. India 10 Y yields are at 7.08% again showing lack of positive sentiments. Since morning we are seeing selling pressure in USDINR from various banks. CMP 64.48, Range 64.44-64.60.

INR update: Moderate global risk off

Moderate risk off environment continues globally with US bombers flying over Korean peninsula yesterday morning and then Trump recognizing Jerusalem as Israel’s  capital. On the other hand commodities have registered mild losses this week as Chinese shares continuously and gradually edge lower. On the charts the price action is similar to profit taking and does not show any panic though.

 

USDINR 1m NDF is trading 2p right similar to yesterday. EM currencies have mildly appreciated since yesterday night. Asian equities are mixed while Nifty is positive 0.45%. Market chatter suggest inflow of USD 500 mio over the next 2 days which can keep INR strong. CMP 64.53, Range 64.60-64.40.

INR update: RBI could be less dovish driving USDINR higher

With US tax reforms passed and digested by markets, risk sentiments need a fresh impetus to continue soaring. Till then we are witnessing December profit taking in equity markets globally. Global PMIs hover around 54 which would suggest substantial scope of improvement going forward. In the US the focus might gradually shift to the Mueller’s Russia investigation where Trump’s position is weakening gradually. The view remains of a weaker dollar which has been corroborated by the fact that the actual passing of the bill last week, was not able to boost the greenback either.

 

Today we have the RBI monetary policy where higher inflation reading since the last policy would prevent the RBI from cutting or sounding dovish. The RBI could actually sound hawkish with higher inflation projections for 2018. USDINR had moved lower in the last couple of occasions before and immediately after the policy. But with the central bank likely to be less dovish in a relatively lower growth environment, I would think this policy could bring in a mild risk off immediately after driving USDINR higher.

 

 

USDINR 1m NDF is trading 2.5p right while other EM currencies have depreciated since yesterday. Asian equities are deep in the red with Nifty slipping gradually for the last 1 week. I would expect USDINR to head higher before the Gujarat election results next weekend. For the day, CMP 64.42, Range 64.34-64.65.

INR appreciation beyond 64.20 unlikely before Gujarat Elections

The first USDINR lower breakout happened on 14th March 2017 on the back of UP elections along with a 2% downward move in dollar. After a week the dollar selloff reversed while INR strength continued. Importantly, this was allowed by RBI because of landscape change resulting in higher FII/FDI flows structurally. RBI had bought $11.5bn in Mar2017 post which it allowed INR appreciation and bought only $3.3bn in Apr 2017 followed by $5bn in Apr 2017. I would think RBI reduced its buying after the first half of March 2017 and reconciled with INR strength.

 

The second break (which was false) happened after RBI allowed appreciation post 2ndAug 2017 monetary policy which was short lived, in spite of the continued dollar weakness in the month. This was allowed temporarily by the RBI and then RBI bought USD 10bn in Aug 2017 to reverse the move.

 

Now, there is no local reason (comparable to UP election results) for RBI to allow further appreciation. Having crossed the 2% GDP mark substantially for intervention for the current calendar year, RBI would want to wait for Gujarat election outcome before taking a call to allow further lower move in USDINR. The government has received a lot of criticism for a stronger INR and GST implementation which has hurt domestic business, therefore government would not want incremental INR appreciation immediately. Therefore the next decision point for RBI is Gujarat elections only. 6th Dec 2017 RBI monetary policy would be a non event for currency, as rate action is unlikely.

 

Last 1 month move in other EM currencies show that INR should be around current levels while a last 6 month comparison would warrant another 0.5% INR appreciation but given India’s weaker export growth performance I don’t think RBI would take this as a reason for further appreciation immediately.

 

Therefore I would not want to incrementally sell at the current levels in spite of the momentum that the current price action shows. I would go long at 64.20 for 64.85 before 18thDec 2017, with a stop below 63.95 (weekly close). On the other hand post Gujarat elections we can witness fresh round of INR appreciation taking it towards 63.50, but that’s subjected to the outcome.