INR update: Election results could guide Rupee today

 

A new governor has been placed so the panic that was created by the resignation of Mr. Patel can now be ignored. Therefore the reason for RBI to sell aggressively like yesterday does not perhaps exist today. On the other hand the fact that the ruling party has lost in state elections resulted in almost large FPI outflow yesterday and could be the reason for further weakness in INR. NDF 1 m is 6.5p right while 1 year is almost 50p right which indicates substantial offshore buying pressure. Oil looks weaker as prices are still trading in the 60-61 range in spite of the production cuts last week, but markets are not looking at that currently. We can expect more negative news on US-China trade talks or on Brexit which can in general hurt risk sentiments. CMP 72.12, Range 71.95-72.45. I would wait till end of this week to form a medium term view.

INR update: Like in October 2018, RBI defends Rupee

1m NDF is 4.5p right and 1y NDF is 38p right which is the highest I have noted in the last 2 months. USDINR has ironically moved lower from 72.45 to 720 levels. In October when EM currencies were sliding, RBI was expected to hike rates as the most obvious (but debatable) solution to support INR. RBI did not hike rates and immediately we saw RBI selling big in the USDINR market to back its decision of no rate hikes. I would think that today too after the RBI governor’s resignation, the selling has been done by RBI to alleviate market panic. INR has appreciated in spite of a very INR negative development of the ruling party loosing in 5 state elections. EM currencies have not appreciated either to help the Rupee. US-China friction should also help the view of Rupee weakness otherwise.

 

Therefore sentiment for Rupee should remain negative for some time, although RBI will support the local currency aggressively during the day. With half a day remaining, the downside could be significant for USDINR, but for now looks like 71.75,71.50 could be levels where RBI selling could pause. Overnight longs would make sense from a trading risk reward perspective. CMP 71.85

INR update: Like in October 2018, RBI defends Rupee

1m NDF is 4.5p right and 1y NDF is 38p right which is the highest I have noted in the last 2 months. USDINR has ironically moved lower from 72.45 to 720 levels. In October when EM currencies were sliding, RBI was expected to hike rates as the most obvious (but debatable) solution to support INR. RBI did not hike rates and immediately we saw RBI selling big in the USDINR market to back its decision of no rate hikes. I would think that today too after the RBI governor’s resignation, the selling has been done by RBI to alleviate market panic. INR has appreciated in spite of a very INR negative development of the ruling party loosing in 5 state elections. EM currencies have not appreciated either to help the Rupee. US-China friction should also help the view of Rupee weakness otherwise.

 

Therefore sentiment for Rupee should remain negative for some time, although RBI will support the local currency aggressively during the day. With half a day remaining, the downside could be significant for USDINR, but for now looks like 71.75,71.50 could be levels where RBI selling could pause. Overnight longs would make sense from a trading risk reward perspective. CMP 71.85

INR update: Oil production cuts? Trade Truce?

According to reports, oil production cuts might not be so easy to achieve as Saudi Arabia and Russia want to distribute production cuts across all members while the other members argue that production cuts should be first taken by countries who have increased production in the near past (Saudi and Russia among a few others). Thus like any major economic collaboration event the outcome of the OPEC meeting remains uncertain driving oil prices and with it INR.

 

Like North Korea discussions, it remains unclear as to what really was discussed between China and the US, and whether the meeting was a success. To top it Mr. Trump’s tweet that he is a “tariff man” hinted that the Trade truce might have been a wrong reading, but then no one can be sure either ways. This uncertainty along with the never ending and unpredictable Brexit headlines led to the USD gaining against other currencies and specially EMs.

 

RBI has no reason to raise rates given the benign inflation prints. At the same time the central bank has to anchor to its “calibrated tightening” stance for a few months before it can consider rate cuts making the announcement today a non event from a rate action perspective. Our economist team does expect that from a liquidity perspective it might want to allay tightness concerns and at the same time the inflation forecasts might be revised downwards, helping bond yields come down further.

 

USDINR 1m NDF is 2p right while 1y is 18p right which indicates moderate buying pressure. Brent below 61 is driving INR along with news of some inflow of $ 500 mio. On the other hand EM currency losses overnight will keep the buying pressure on USDINR in the second half. The price action in Rupee since Friday afternoon also hinted that there was a large outflow which seems to be absent today. With opposite forces making different arguments, view is which one you pick. Medium term I would expect USDINR to face stiff resistance at 70.90 and 71.30 as the major trend should remain lower for USDINR. For the day downside could be limited, CMP 70.60, Range 70.50-70.90.

INR update: Trade truce to boost risk sentiments

As Trump had done before with other world leaders, he concluded the meeting with China’s Xi on a high note and both countries have agreed to work on their trade issues resulting in a truce of 90days. The result has been supportive of risk sentiments with higher equities and stronger EM currencies. This is a crucial week for G7 with US and EU PMI and employment data setting direction for further FED speak and growth differential between the US and rest of the world.

 

Oil is 5% higher but the broad trend is still lower. OPEC meeting from Thursday needs to be watched for any large cuts in production. USDINR 1m NDF is trading 1p left while 1y is 17p right indicating reduced offshore selling pressure. EM currencies have appreciated on the back of trade truce including TRY, ZAR and IDR (these were trading in tandem with INR for whole of November). Given the broader current context of lower oil and stronger risk sentiments I would expect USDINR to move lower with the window of 70.15-70.30 acting as a strong resistance. Medium term view on USDINR could be difficult to conceive given the state election results next week while other than that the construct remains positive for INR. RBI policy on Wednesday, could be a non event with the central bank likely to be on hold. For the day CMP 70.00, Range 70.10-69.80.

INR update: Dollar weakness to provide momentum to Rupee

 

The FED had been shifting its stance from overtly hawkish to less hawkish as the US growth seems to be peaking (from its unsustainable 4% levels). Yesterday’s Powell’s comments that current rates are near neutral rates seem to have been influenced by EU growth concerns plus recent crude price fall. The comments have led to a sharp selloff in USD across the board and has helped risk sentiments with the DOW closing 2.5% higher.

 

INR has been closely tracking TRY, ZAR and IDR in November and since yesterday all 3 of these currencies have appreciated by 1-1.5%. INR 1m NDF is trading just 1.5p left as compared to 5p left yesterday indicating reduced selling pressure in offshore market. Technically USDINR looks headed to 69.40 but with Trump-Xi meet and local state election results we can see some volatility. I would expect Trump-Xi meet to have a positive impact on INR therefore until next week we could see 69.40 on the Rupee. Crude is lower by ~2$ since yesterday on the basis of higher inventory in the US. CMP 70.12, Range 70.20-69.80.

INR update: Trump-Xi meet awaited

I would think that Trump-Xi meet should result in positive headlines supporting risk sentiments, this is going by the recent history of Trump claiming victory after all his trade discussions (NK, Canada, Mexico). Dow seems to be factoring a positive outcome as well. Any major revision (although unlikely) to US GDP today could move markets in the US session.

 

USDINR 1m NDF is 5p left consistently indicating stability in sentiments in offshore markets. Today being expiry the price in the first half is driven by fix related unwinding of arbitrage positions between futures/ndf and otc markets. FPI flows and crude price have been supportive of INR gains in November while 10Y yields have moved lower with liquidity conditions easing. In the medium term 70.60-71.20 break (daily close) should result in fresh direction, my thought is that it should break lower. For today, CMP 70.66, Range 70.55-70.85.

INR update: Crude downtrend could take Rupee towards 70

 

Oil has moved surprisingly fast reemphasizing that it is an international politics driven asset class, as neither demand nor supply has changed so much to warrant a 32% drop from its October beginning peak. Euro zone economic activity weakening was confirmed by PMI data while US PMI flash also printed lower than consensus but still reads much better than EUs. Given this backdrop and the surprise fall in oil it is likely that ECB now surprises on the dovish side. Today we have ECB’s Praet speaking again which can verify the assumption. Trump has followed a trend of terming his meeting with other leaders as positive therefore I would expect risk to be supported after Trump and Xi meet during G20.

 

USDINR 1m NDF remains 4p left like it has been in the last 4 rupees INR appreciation, which shows that the down move has been led by exporter selling or importers not buying. Typically capital account inflows result in large selling in NDF leading 1m NDF to 15p left which has not been the case till now. Crude is in a downtrend and the next important levels are 57 and 50 (CMP 59.70), a monthly close below 60 should result in further down move which is positive for the Rupee. Crude fall related risk off (in India at least) is sometime away and can be ignored at the moment. EM currencies are not moving in tandem with Rupee except ZAR, TRY and IDR. The fact that RBI has not bought aggressively suggests that INR appreciation is the preferred trajectory for the authorities currently. During the day USDINR should track small moves in Brent while the larger move is still lower. Medium term USDINR should now trade between 70.18-70.70 while for the day CMP 70.52, Range 70.60-70.25.

INR update: Limited Rupee gains likely

The US economy is showing very early and non conclusive signs of peaking out (Retail sales revision and housing data yesterday while for a couple of months the ISM data is coming off from the unsustainable 60 levels), this perhaps has led the Fed to review its overtly hawkish outlook which was visible in Powell’s comments on Friday. Nevertheless the Fed is on track for the Dec rate hike. On the other hand EU and Japan have conclusively shown data which suggests a marked slowdown in the respective economies, therefore if broad dollar weakness against DM currencies, has to gather steam, then I would think it is still some time away. On the other hand talk of US-China trade deal has ensured that USDCNH stays well below 6.95 and going by Trump’s administration’s record of ultimately solving the problems it creates (NK, Mexico, Turkey and Canada), they are likely to announce that they have struck a “magnificent and beautiful” deal with China, helping risk in EM countries.

The balance of power in the oil triad has shifted away from Saudi Arabia since the killing of the Saudi journalist in Turkey, ensuring that oil moves in the direction of US’s desire, i.e., lower. Having said that it is unlikely that oil would be allowed to sustain below 60 levels which create risks for leveraged commodity companies plus puts US alliances with oil producing countries at risk (like it happened under Obama after 2014).

On 14^th November I had expected INR to head towards 71.50 when it was at 72.14, the target has been achieved. Market seems to be taking the Dec 11^th election risk in its stride and focusing on the positives created by the fall in oil prices. FPI inflows have marginally picked up ensuring support to the Rupee. Market participants are now talking about levels of 70-71 by end of this calendar year which is resulting in exporter selling. For another fortnight Rupee should trade strong albeit for RBI buying to boost up its reserves again. USDINR 1m NDF is 5p left (4p left yesterday). The more fragile EM currencies (TRY, ZAR, BRL, RUB) have significantly appreciated  (10-15%) in the last 2 months which indicates that there could be more downside for USDINR as well. In the near term RBI buying would check the pace of Rupee appreciation while in the medium term state election results will remain a question mark. Medium term range for the Rupee now should be 71.75-70.70. For the day, CMP 71.38, Range 71.45-71.10.

INR update: Oil fall accelerates amid global growth concerns

Global growth concerns are weighing on equities making today’s EU GDP and IIP data very critical for risk sentiments and the Euro. A negative surprise in this can decisively break the 200 WMA in EURUSD at 1.1310 taking the pair towards 1.10 while a positive surprise can make the 200 WMA a medium term bottom. Given Praet’s dovish comments yesterday the chances of a negative surprise looks more likely.

The pace of fall in oil prices is increasing which shows that the bottom can still be some distance away. USDINR 1m NDF is trading 4.5p left while other EM currencies have not appreciated as much (except CNH). Fall in EURUSD should on an intraday basis affect the Rupee (and vice versa). Looking at the price action since morning it seems that USDINR might head towards 72.20 again before it gets sold off. Last time when Brent was at 65 levels (March 2018) USDINR was at 65.5 levels, although it is not a one to one comparison but most of the negativity in Rupee this year was on account of higher trade deficit, and therefore if other factors support the downside for USDINR pair could be significant. Medium term range now shifts to 72.40-71.50; CMP 72.14, Range 72.20-71.90.

INR update: Rupee likely to follow crude and high real rate

The markets seem to be focusing on country specific concerns like US trade tensions with China, lack of a Brexit deal and US earnings topping out. This has resulted in dollar strength across other DM currencies while equities have got sold off. Crude trades below 70  on demand related concerns plus the fact that the earlier supply cut threats from Saudi Arabia have been taken back.

INR is likely to follow crude oil plus the fact that the CPI print is much below the target of 4%. The result is a sustained high real rate for the Indian economy with reasonable fiscal hygiene which should attract debt investments with the caveat of approaching political risks (state election results on 11^th Dec). USDINR 1m NDF is trading marginally left while other EM currencies have mildly appreciated today morning. CMP 72.57, Range 72.65-72.45. Medium term range for USDINR should be 72.25-73.

INR update: US-China trade deal surprise results in risk on

Two days back Trump threatened to place more tariffs on China in December while headlines now indicate that a trade deal between the US and China is likely. Likewise risk swings like a pendulum with CNH leading the way from 6.98 to 6.90 now. While it’s easy to follow the trend in a fundamental driven market, in the current scenario the next headline could be very different.

The market has totally ignored the RBI-Gov spat and it is likely that there will be no action till the RBI board meeting on 19^th November. With the global risk on move USDINR 1m NDF is trading 3p left while EM currencies are trading strong. I would still think that the RBI will behave conservatively and would want to rebuild its reserves (it has spent ~$50 bn of reserves since February18) therefore I would expect limited downside. Having said that the momentum is lower and therefore it is not advisable to buy USDINR immediately. If the pair closes below 72.70 today than there could be room for further down move and a close above 73 should reaffirm my assumptions. CMP 72.91.

INR update: RBI-Gov spat reports could take USDINR higher

If Section7 has been invoked to overrule the RBI then perhaps it will be safe to infer, that morally the RBI governor will find it difficult to continue. This would not be taken kindly by foreign investors and USDINR could move towards 75. Also comments have shown that the government was more worried about the Rupee fall than the RBI which believed the Rupee fall to be moderate till the beginning of October. Therefore till the issue is resolved RBI might not aggressively defend the Rupee either. This coupled with dollar strength and Indian political uncertainty should result in higher capital outflows from India. The risk is intermittent intervention by RBI and the issue between the government and RBI getting resolved, which would take some time.

USDINR 1m NDF was trading 3p left yesterday and today it is 1p right. Other EMs would not matter much in the current situation and would only affect the pace of move. CMP 74.05, Range 73.95-74.30.

INR update: Dollar breaks higher; Rupee trades resilient

In spite of the fact that Draghi made the right noises for the Euro, EURUSD broke 1.14 convincingly with the next major support at 1.1316 and 1.1297 (200 wma and last low). Similarly the dollar index has convincingly broken 200WMA and looks headed to 97 where it will face the last high resistance (CMP 96.6). Equity markets continue to register large intraday fluctuations although the weekly trend still points towards further losses. Today the most critical piece of information will be the US GDP for 3^rd quarter and a surprise above 3.3% can result in further dollar gains.

CNH and other EM currencies have weakened overnight as dollar strengthened. Crude oil continues to trade lower around 76 levels. USDINR 1m NDF is trading flat in spite of the weakness in other Asian currencies. Price action since morning is similar to what has happened this week which is showing more offers than bids in USDINR. Over the last 2 days FPIs seem to have invested significantly in Indian debt while outflows continue from equities. Medium term range for USDINR should remain 73.25-73.75 with dollar strength likely to prevent more INR gains. CMP 73.36, Range 73.32-73.50.

INR update: Oil breaks lower helping Rupee gains

Equities trade weak and US yields came off. Oil also slipped along with equities plus the fact that Saudi Arabia assured the market of adequate supply. Today morning Asian equities are in the positive on the back of US stock recovery towards the end. EM currencies have appreciated since yesterday night. USDINR 1m NDF is trading at 2.5p right as compared to 4p right yesterday. Weakness in oil prices will give more confidence to RBI only if the price sustains here, so currently I would think that RBI would want to rebuild reserves at 73.20 levels, medium term range should be 73.25-73.75. CMP 73.27, Range 73.10-73.35.

INR update: Saudi journalist's murder unlikely to snowball, USDINR to stay ranged for now

A bit of political background on USA and Saudi Arabia. Historically US has been responsible for supporting the Saudi family and creating a state under them which makes the two regimes close allies. The alliance became even deeper once Iran distanced itself from the US in the 1970s and since then, US has benefitted from the Saudi ambition of becoming the only super power in the middle east. More recently the Obama administration tried to take a more neutral approach to its middle east policy by striking a deal with Iran and slowly distancing itself from the Saudi family. The result was that when Obama visited the Saudi family’s country last time as President, the Saudi king did not even come to the Airport which is generally a protocol. But it seems that President Trump has gone back to square one with clear allegiance to the Saudi family. He has revoked the Iran deal, allowed Saudi Arabia to again determine international oil prices (and this time with Russia) and consequently this has resulted in warmer relations between the two powers. With the history and the current administration’s preference for the Saudi family it is highly unlikely that the Saudi journalists murder in Turkey will snowball into anything that can affect economic stability in the middle east.

Dollar index continues to hover around its 200 week moving average and to reiterate, I believe that a convincing break higher before the midterm elections is unlikely. Similarly I would expect EURUSD to trade in the broad range of 1.1450 and 1.1750. The confidence in the Euro range increases given the fact that latest comments and rating downgrade indicate that the Italian fiscal deficit related uncertainty might be coming to an end now. USDINR 1m NDF is trading 7p right as compared to 4 p yesterday, this is on the back of mild depreciation in CNH and KRW along with other EM currencies. Equity markets lack upward momentum while selling pressure has abated for now. In the absence of convincing dollar strength and sub 80 oil price, policy makers might not be comfortable with USDINR trading near 74 levels, therefore the broad range of 73.75-73.25 should continue to hold with bulk of price action happening in that corridor. CMP 73.81, Range 73.86-73.60.

INR update: RBI intervention could result in tighter range

The bounce in EURUSD on Friday ensured a closing above 1.15 and USD index closing below 200 week moving average  again, indicates that Euro stays in the range of 1.1450 and 1.1750 for now. The dollar index could break higher only when it is clearer that the incumbent Republicans retain both the houses in the November mid terms. Till then the dollar index could stay in established price ranges even though the US 10Y is at 3.2% on the back of the latest tax cuts for middle income groups in the US.

The RBI sold $5.1bn in the week following its monetary policy where it surprised the markets by retaining benchmark rates. This shows that action resulted in commitment to ensure that Rupee doesn’t depreciate further on the back of the monetary policy decision. The move has helped drive away reckless USDINR longs from the market. On the other hand the sharp sell side intervention will also ensure that RBI would buy aggressively at lower levels like 73 to 73.25 as the erosion in Reserves for this year has already been significant above $40bn. This should result in USDINR trading in a narrow and well defined range of 73.25-73.75 until global dollar or oil cues provide new insights.

USDINR 1m NDF is trading 4p left like Friday while FPI outflows have abated. Oil trades below 80 levels while other EM currencies have mildly appreciated since Friday. Indian equities continue to exhibit selling pressure as they pared early gains. CMP 73.25, Range 73.20-73.40.

Buyers credit scam started the slide in Rupee; Merchant buying is coming off now

• -        The above chart shows the net purchases of FX by Indian merchants from banks on a daily basis in USD mn, 20 day moving average (source RBI website).
• -        The long run average for this is USD 256 mn (since 2010). Since the exports and imports in 2011 were virtually at the current levels, there is no need to adjust this level to current date for comparison purposes.
• -        This doesn’t include interbank purchase or sale.
• -        The data clearly shows that net purchase of merchants increased as soon as the buyers credit scam broke out (Feb 2018) and buyers credit availability became scares. Subsequently RBI disallowed buyers credit altogether.
• -        This move up in USDINR further accentuated the increasing trade deficit fears. The trade deficit fears gained momentum because of increasing oil prices.
• -        The buying by merchants seems to have peaked in May 2017 but has far from normalized even now. Although the per day average is coming down but it is resulting in incremental buying of $150 mn per day above the long run average of $256 bn per day.
• -        Therefore even a decreasing average is leading to higher USDINR as it continues to put demand pressure on the pair.
• -        The below data suggests that merchants have net bought ~$35 bn extra in the last 7 months.
• -        This data is till Aug 2018 and it indicates that the average per day of buying is moving lower. September data when available should corroborate the same
• -        Going by this decreasing trend, if external factors (like dollar weakness) supports then USDINR might move lower towards 73 before pre election uncertainty kicks in.

INR update: Moderate INR gains expected in October

Medium term view

INR started its current slide in Feb 2018. If we compare the period of Feb-Sep for 2017 and 2018, then we observe that $27 bn of additional demand has come from the deterioration in trade deficit. As per RBI, investment flows have resulted in lesser inflows of $35bn in the same period. While in 2017 RBI net bought $52 bn this time they were net sellers of ~$46 bn. Assuming little changes in other components of BOP, this results in a net additional supply of $30 bn from the RBI which would be the net change in hedge positions of importers and exporters.

With a monthly trade and services volume of $70 bn a $30bn change in positioning over a period of 8 months would have resulted in complete internalizing of the weak INR view. On the other hand INR seems to be fairly valued at 73 levels as per 2012 base REER (36 currencies). Plus currently the government and RBI seem to be very vary of further INR depreciation.  Given the fact that in the last 6 months INR has depreciated higher than other EM currencies we can see a period of consolidation in INR which can take the pair towards 73-73.25 by October end, provided dollar remains soft ahead of the midterm elections in the US. Having said that any appreciation of the Rupee will be bought into as the country steps into a period of political uncertainty with state elections in December and central elections in May 2019.  

For the day

Today 1m NDF is trading 6.5p right as compared to 9p right yesterday while EM currencies have moderately appreciated since yesterday. Equity markets are in the positive territory as Saudi stocks closed 4% higher yesterday as Trump sent his secretary of state to discuss the brewing crisis between the two allies. Crude is trading softer at 81 levels while yesterday the FPI outflows seem to have abated. Given the medium term view and the factors today INR can appreciate by 30p today. CMP 73.86, Range 73.95-73.65.

INR update: US midterm election risks drive equities lower

US political risks ahead of the midterm elections on 6thNovember,  seem to be getting priced into US equity markets. US10Y yields and dollar index also cooled off as risk aversion reflected on the equity markets first. There doesn’t seem to be any US data that would have triggered the 3% selloff in Dow while the IMF cuts to growth forecast day before yesterday could be a catalyst. US CPI and ECB minutes today could be significant for the dollar index but having been rejected at 95.7 the dollar index can register 2-3% down move over the next fortnight.

 

EM currencies depreciated along with equity selloff. One might argue that INR was depreciating when equity was making new highs and therefore INR should not depreciate now. The move up in equities was led by domestic investors while FIIs are the major sellers in the last 15 days therefore the selloff in equities is likely to adversely affect INR. The positives for Rupee in this risk aversion move, is the correction in oil prices accompanied by a possible cool off in the dollar index which should ensure that pace of Rupee depreciation slows down in spite of equity outflows. Nifty looks like headed to 9950 now. The medium term outlook for USDINR remains clouded by confusion over policy. CMP 74.41, Range 74.25-74.75. 

INR update: FII outflows pickup as RBI aggressively defends 74

US10Y-2Y yield spread has widened to 36 bps which is the highest in the last 4 months indicating improved market confidence in long term inflation outlook for the US. Ongoing Italian budget concerns has resulted in Italy 10y yields touching 3.62% (up 90 bps in the last 1 month). US10 Y yields have broken the multiyear crucial level of 3.11% and is currently at 3.24%. In spite of all this USD index is unable to sustain above 200WMA at 95.7 currently. As we go near the US midterm elections on 6th November there is a possibility that political risks start getting priced in the greenback resulting in a 2-3% pullback. Consensus estimates currently indicate that Trump’s Republicans will retain the Senate while the House of Representative will have a democratic majority. The view of USD getting sold on the back of these political risks fails if we get a weekly closing above 96 on the dollar index.

USDINR 1m NDF is trading 15p right and oil continues to trade above 84 levels. EM currencies have been stable since the week opened yesterday morning except for a mild depreciation in CNH on the back of PBOC rate cut on Sunday. RBI on Friday indicated that interest rates would not be raised to protect the currency and since then RBI has more aggressively defended 74 levels. FII outflows have picked up substantially, October MTD outflows is $2.3bn as compared to $2.9bn for the whole of September 2018. RBI is likely to defend 74.20 aggressively during the day but overnight USDINR could see higher levels as oil remains at elevated levels along with an overhang of dollar strength across. RBI’s monetary policy stance gives more reason for speculators to bet against the Rupee. Even if we see dollar weakness ahead of the US midterm elections we will see limited INR appreciation as buyers would line up at lower levels. CMP 74.05, Range 73.85-74.20.

RBI policy expectations - 50bps hike

RBI last CPI projection for end FY19 was 4.8% and the last core CPI reading was 5.9% for the month of Aug 2018. Now with Rupee and Crude under pressure the case for CPI to edge higher than 5% by FY19 end and core inflation to remain or rise even higher becomes stronger. This perhaps gives RBI inflationary arguments to hike by 25-50 bps today, although the real reason would be to increase real rates further in this environment to prevent a currency stress.

A hike of 50 bps should result in temporary and moderate (30p) Rupee appreciation while a hike of 25bps might result in 73.80 being seen again. A no hike would result in 74 levels. I expect a 50 bps hike given that currency has been an area of concern for the RBI / government and raising rates in the current context is the minimum RBI could do.

Other measures like NRI bonds are unlikely to be announced immediately and the RBI will take time (and higher USDINR levels)  to reverse its aversion to oil window. Increasing rates, depreciating rupee and higher crude should result in lower growth forecast which should negatively impact equities and government bonds. Therefore the hike would not sustainably  alter the higher trajectory for USDINR.

INR update: Break out in US yields; global dollar strength

US 10 y yields broke the multiyear resistance at 3.11% and is currently trading at 3.21%. This was on the back of continued strong US economic data (both manufacturing and services ISM now hovering around the 60 level). Consequently the dollar index which has been attempting to break the 200 week moving average at 95.69 is now trading at 96.1. A weekly close above 96 should result in further up move. This dollar up move has been supported by the ongoing uncertainty of Italian budget which has resulted in Italy 10Y yields going to 3.32% from 2.7% in mid September.

Till yesterday morning 73.35 looked like a good support for INR as the expectations for an oil window was ripe before a news flash on Bloomberg indicated that RBI might be averse to the idea. This was the only hope the markets had for the rupee and that seems to have been busted for now. Subsequently in the evening the RBI announced relaxed ECB norm for oil companies working capital requirement. The problem with these is that companies will need to be sure that they can take the currency risk plus raising an ECB for PSUs is a time taking process (7-15 days) and therefore we have seen no impact on INR.

Tomorrow we have the RBI policy where market is pricing in a 25 bps rate hike. Given the increase in MSPs for Rabi crop the chances of a 50 bps rate hike increases. The fact that RBI has turned down governments proposal for a oil window also increases the chance of a 50 bps rate hike which can support the currency. The problem here is that the government would not want rates to increase by more than 25 bps given the negative impact on growth.

Since mid August the dollar index fell from 96.4 to 93.8 and in that period INR depreciated sharply. Now that the dollar index is trading above 96 again with US 10 Y at 7 year highs in terms of yield, USDINR can accelerate higher. The road ahead will be bumpy with the RBI policy tomorrow but increasingly 74.5 looks likely. CMP 73.75, Range 73.95-73.60.

INR update: Immediate break of 73 looks unlikely

FOMC expectedly raised rates and removed the word accommodative from its description of current monetary stance. FOMC expects the US economy to peak at 3.1% growth in 2018 and subsequently grow at 2.5% next year. This suggests that sometime in the next 3 months or so we will start getting negative surprise from US economic data release. Although the market impact of the FOMC was limited but as we close 2018 the FOMC’s expectation become significantly negative for the dollar in the medium term. Add to this the uncertainty of the US midterm elections in November 2018 and we can see the dollar peaking out near 96 levels before falling towards the end of the current year.

The government has shown concern plus intent to ensure that INR doesn’t depreciate beyond 73 levels. The measures announced till now have not been significant from a BOP perspective but indicate a willingness to do more if required which should keep USDINR longs cautious. Meanwhile the EM currency pressure we witnessed since end August has dissipated with TRY, CNH, and ZAR stabilizing. US 10Y yields have got rejected at 3.1% again and the FOMC statement should ensure that a breakout doesn’t happen. Add to this the developing dollar negative view (as above) and we can say that it’s likely that USDINR has peaked near 73 levels. I would sell USDINR at current levels of 72.55 and 72.95 with stop above 73.35 (daily close) or 73.55 (price) for a move to 71 levels in the next 2 months. For now Brent at 82 is the a risk to the view.

USDINR 1m NDF was trading 11p right yesterday while today it is 6p only. EM currencies have registered substantial appreciation since yesterday. Brent continues to trade above 82 on the back of US tensions with Iran. Equity markets locally seem to have stabilized and the liquidity measures announced by RBI should ensure limited stress in the BFSI sector. CMP 72.55, Range 72.62-72.31.

INR update: Eco affairs secretary thinks Rupee should be between 68-70

US10-2Y spreads widened to 27bps, the highest in a month indicating a pickup in risk appetite while the 10Y yields have started edging towards the resistance of 3.1%. With trade threats becoming real, the chances are that import tariffs and strong US growth are likely to keep US prices elevated ensuring that the FED stays on a rate hike path for the visible future. This week FOMC is likely to hike by 25bps but the most important aspect of the meeting would be the dot plots and fine prints on yields and neutral rate.

The economic affairs secretary for India believes that the fair value of Rupee is near 68-70 with an outer limit of 72. This is very different from what the same person believed a month ago, which goes to show how difficult it is to value a currency. But what the comments do indicate is that the government now aims to keep INR depreciation under control. With the selloff in EM currencies having cooled off globally the task might not be as difficult as it could have been 3 weeks back. The likely measure could be an oil swap window.

USDINR 1m NDF is trading 6.5p right as compared to 4p right on Friday. Most EM currencies have depreciated moderately since last week’s close as dollar regained some ground. Oil prices are touching $80  while Indian equities don’t show the nervousness seen last Friday. In the medium term it seems that USDINR will trade in the range of 72.85-71.50 with a possibility of a break lower. CMP 72.56, Range 72.69-72.30.

INR update: Weekend announcement awaited

The yoyo of trade tension related headlines kept swinging and currently it is slightly less worrying that Tuesday. On top of this US CPI mildly disappointed with positive comments from Draghi on EU inflation. Turkey central bank surprised by hiking rates by 625bps against expectations of 300 bps. All this resulted in USD index falling sharply from 95.60 (200WMA) to 94.50 currently. I would continue to hold the view that US economy outperformance and Trump’s pre election trade war campaign will keep USD well bid till some time before November 6^th. A weekly closing in EURUSD below 1.1650 would reassert the above view.

On Tuesday I expected the gov/RBI to announce some policy measure between then and Friday and coincidentally it was confirmed that over the weekend PM Modi will review the economic situation and come out with measures on USDINR. One of the measures could be reinstating buyers credit through LOUs which was the trigger for the change in sentiment for USDINR 6 months back. The impact for this has been significant in terms of short term trade credit unwinding plus reduction of trade credit cycle in number of months, resulting in increased demand for USDINR in the last 6 months. Rate hikes could also be announced given that it is a low hanging fruit. Somehow I believe that the government will not use its ultimate measure of raising FCNRB deposits as yet. Oil window could be another scheme that could result in reduced buying pressure.

USDINR 1m NDF is trading 6p right as compared to 16p on Tuesday morning. Today morning we saw some bids which would be overnight shorts cutting positions plus some importer buying. Over the approaching weekend there is an unpredictable event and therefore participants will lighten position during the day today. Most of strategic positions would be USDINR longs which therefore should result in the pair going towards 71.50 today. USDINR can for sometime consolidate in the range of 71.50-72.50. CMP 71.81, Range 71.92-71.45.

INR update: Oil price gain drives Rupee towards 73

US job openings data continued to surge indicating the positive surprise in US data release since mid August. As a result further narrowing of 10-2Y yields have stopped which bodes well to the USD. Positive developments in the EU-UK negotiations for a Brexit deal might keep the dollar index from breaking the 200WMA at 95.60 this week, but at the same time trade tensions and US macro performance should prevent the index from breaking 95 convincingly either.

USDINR 1m NDF is trading 16p right as compared to 12p yesterday. This is on the back of a surge in oil prices (Brent at 79.31) and continued lack of action from Indian policy makers emboldening the USDINR long positions. Yesterday I expected that there is room for 73 on USDINR but if we do not see any significant measures which bring down USDINR by 1 rupee or so, then next week markets will put Rupee through an even tougher test. I would think that RBI and the government realize this and therefore we should see some major announcement between today and Friday. Other EM currencies have depreciated only mildly since yesterday while equity markets seem to be reacting moderately now to losses on the Rupee. CMP 72.80, Range 72.95-72.60.

INR update: Policy expectation to only slow down Rupee losses for now

 

Trade tensions abated with news of US talking with China, Canada and EU. Brexit deal related optimism prevented dollar index from breaking 200WMA at 95.56 yet again. A  weekly closing above 95.56 should ensure that the dollar index heads to 97 levels.

 

Indian policy makers all this while attempted to play down concerns on depreciating Rupee by suggesting that the same is because of external factors and therefore is  not too much of a worry. This was interpreted by the markets as a free hand to go long in USDINR. Yesterday the policy makers realized the duality of the argument and expressed worry on depreciating Rupee. It is unlikely that the government would be able to come out with some measure immediately as brainstorming and execution would take some time. On the other hand the government would want to see the effect of its verbal intervention yesterday and perhaps would look to implement new policy only at the break of 73. In other words there seems to be room for 73 albeit with policy risk.

 

USDINR 1m NDF is 12.5 p right as compared to 10p yesterday. EM currencies have not registered moderate appreciation since yesterday. FII flows continue to be negative as debt outflows have picked up in September. Oil is at elevated levels of 77.52. CMP 72.36, Range 72.20-72.55.

INR update: Rupee depreciation not much of a worry till now

Trump clearly wants to beat the trade war drums louder and louder before the midterm elections. To reiterate, every time we have seen a new piece of information which negatively affects global trade, the greenback gains. On Friday Trump said that the US would put tariffs on additional $267 bn of Chinese imports raising the total target to ~$500 bn now. To add to this average hourly wages increased by 0.4% mom which was the highest since 2009. Average hourly earnings was the one component in NFP report which was not justifying the rate hike path taken by the FED, now with this parameter also showing robust US growth the case for rate hikes, FED balance sheet reduction and therefore USD gains becomes stronger. This might be the week when USD index breaks the 200 WMA AT 95.56 (cmp 95.45) convincingly and move higher than 96.

Google trends show that the public interest in USDINR in Aug 2013 was at 85 which peaked at 100 in September 2013 (perhaps due to the FCNRB announcement). This parameter currently stands at 42 only indicating that public interest and therefore the effect of the move in USDINR, is not as much till now to warrant any major policy action by the government/RBI. Also in 2013 USDINR had moved higher by 30% (53 to 69) visavis 12% (64to72) currently, which is also an indication that the move higher from here also can be substantial.

USDINR 1m NDF is trading at 11.5p right which is similar to Friday levels. Other EM currencies have depreciated on the back of a fresh assault by the US on trade with China, but USDINR seems to have been the worst hit today morning. Equity markets and government bonds seem to be starting to react only. In 2013 Nifty had fallen by 9 percent before FCNRB policy was announced. The range for this week should now be 72.20-73.20. CMP 72.40, Range for the day 72.25-72.55.

INR update: Trade war advances along with strong US data

Trump is perhaps  opening a new front in his trade war campaign and now facing the heat would be Japan. Although it is known that the US is likely to announce duty on $200 bn of Chinese imports, but the announcement could still lead to a risk off as the focus would shift to Chinese retaliation.  Given the continuation of the trade war rhetoric and strong US data it is likely that we should see USD index breaking above 96 (CMP 95). Oil has gradually come lower because of higher inventories plus mildly deteriorating risk sentiments.

USDINR 1m NDF is trading 11p right while 1y is trading 31p right only, this shows that there is no incremental offshore buying pressure on USDINR. Oil has gradually drifted lower from 79 to 76.3 now while other EM currencies have been stable over the last couple of days. India 10Y bonds are at 8.04%, off from the yield highs of 8.1% on Wednesday. All this would suggest that a break of 72.11 would need a fresh trigger and doesn’t seem likely today. RBI would want to create sharp two way movements so the correction could take USDINR to 71.45 levels which gives me a broad range of 71.45-72.20 with likely break higher. CMP 71.91, Range for the day 71.70-72.10.

INR update: Higher US growth continues as EM selloff spreads

US Manufacturing ISM printed at a robust 61+ levels much higher than the highest of expectations. This is in contrast to EU manufacturing PMI which came in weaker than its prior print of 55.1 at 54.6. China PMI was also weaker than its prior print whereas global manufacturing PMI also printed lower. The point is that this indicates that the higher US growth differential continues and in this environment the FED is unlikely to stop raising rates or slow its tapering. Thus the growing strain of dollar liquidity is going to continue which in turn will make market participants dig for reasons to sell other currencies and specially EMs. On the price action front, dollar index is making its 12^th weekly attempt since June 2018,  to cross the 200WMA at 95.56 (CMP 95.35) and a healthy print on the US Services ISM tomorrow might be the trigger for the level to be decisively taken out.

USDINR 1m NDF is trading 10p right as compared to 9p yesterday while 1y NDF is trading 42p right as compared to 36p yesterday. EM currencies are flat while KRW has moderately appreciated since yesterday night. Brent has come lower from 79.2 to 78 levels. FII flows continue to be negative for INR. The Indonesian Rupiah seems to be the latest EM currency which has joined the selloff bandwagon. Yesterday it is likely that RBI sold aggressively in the morning but that proved to be ineffective by second half. Broader range now is 71.20-72.20 while for the day CMP 71.52, Range 71.40-71.60.

INR update: US-India talks on Thursday; India Yields rise with Brent

On Thursday Mike Pompeo is in New Delhi to discuss greater cooperation in defense. But in an environment where the US is launching trade strikes on countries a meeting with the secretary of state would not come with its own risks which can hurt market sentiments in India. On the other hand US has warned India to not buy the Russian anit aircraft defense system, while Indian officials confirmed that they are going ahead with the deal. This can result in US imposing economic sanctions on India. On the back of this I would think that today and tomorrow might be days when USDINR would be bought in anticipation of a negative US comments on Trade with India.

 

Equity markets in India look stable after yesterday’s hiccup on a certain FPI regulations which came out in April 2018. USDINR 1m NDF is trading 9p right as compared to 8p right yesterday. EM currencies have registered mild depreciation since today morning. FII flows are not very encouraging for the Rupee while Brent above 78 levels will give confidence to USDINR longs. India 10y Yields are at 8% indicating spreading effects of INR depreciation. All this along with Mike Pompeo’s New Delhi visit on Thursday should keep the pair well bid. RBI allowed INR to depreciate yesterday during the Indian session which shows comfort with a gradually depreciating Rupee. Medium term range now shifts to 71.20-72 provided we don’t close below 71.15 today.  CMP 71.26, Range 71.20-71.55.

INR update: Fundamentally dollar unlikely to weaken; Policy looks comfortable with a lower rupee

So in the last 48 hours Trump said he wants to go ahead with further tariffs on China, threatened to leave WTO, accused China of stopping NK denuclearization and rejected EU’s offer to remove auto tariffs. On the other hand US data continues to print better than the EU. All this would ensure that a sharp dollar selloff against G7 is some time away even though the dollar index on the weekly charts showed a false higher break of 200 WMA at 95.5 and then reversed to 94.7 (CMP). EU inflation print will be the most important piece of data today along with India GDP.

According to 2012 REER, INR is fairly valued at 72 (Aug end 2018 along with some REER assumptions). One can argue that RBI would not be bothered till 72. Then another argument could be that being a developing country attracting capital, a x% overvaluation (per year from 2012) should be maintained (Raghuram Rajan’s argument from March 2014), this clearly has been ignore by the current regime. Then another argument could be that for so long INR has been overvalued so for a substantial period it has to be undervalued as a compensation. Therefore the answer to where INR is headed doesn’t lie in theory but where RBI decides to intervene and change its policy, which looks some time (at least a month) away.

USDINR 1m NDF is trading 11p right which would indicate offshore buying pressure. RBI yesterday likely sold USDINR aggressively at 70.80 levels (perhaps to control volatility) but overall the policy makers seem comfortable with a depreciating INR. Today price action suggests that the central bank is uncomfortable allowing USDINR going higher for the time being even though in the offshore market overnight, it touched 71.20. Bond markets seem to be mildly reacting to a depreciating INR as the 10Y inches towards 8% while equity markets have stopped running higher for a change. During the day all EM currencies should move in tandem as INR movements have been clubbed with TRY, ZAR, ARS (yes Argentinean Peso). Today being a Friday the light longs could book profits. CMP 70.98, Range 70.80-71.20.

INR update: Policy takes time to change, INR losses to continue

The government and RBI have changed their stance on USDINR frequently. From a bias towards weak INR pre March 2017 to allowing appreciation after UP elections. Then again RBI built reserves aggressively at 64 levels and then intervened aggressively at 69 to prevent further slide in INR. Then 69 was allowed to pass and someone said that even 80 is not bad if other currencies also move in tandem. In all of the above RBI/government has taken at least 3 months before it changes its stance. Given that allowing INR depreciation beyond 69 is not even 2 weeks old, it will be some time before aggressive intervention or policy stance would be taken to prevent further INR losses. Currently the argument of REER adjustment is back at the forefront and therefore USDINR has more room to go higher. Other asset classes (Bonds or equities) have to panic before policy prevent INR slide.

Pre election year of 2008 and 2013 have seen sharp INR depreciation on account of rising inflation and fiscal concerns. Although inflation is not a problem this time (till now) but expectations of fiscal slippages can take USDINR substantially higher. The fact that in the last 2 days even EURO, KRW and CNH gains has not affected INR, it seems that USDINR is just gaining momentum. USDINR 1m NDF is trading 11p right as compared to 4p on Friday. Oil at 77.25 (+1.5$) will ignite further trade deficit concerns. INR should not have been bothered about Argentinean Peso and Turkish Lira but because of our own choices we should watch them now.  Medium term range is 70.40 and 71.20+. CMP 70.67, Range 70.50-70.85.

INR update: Reversal signs in DXY, EUR and CNH

EUR, DXY and CNH weekly charts are showing a 3 candle pattern of a strong reversal. The last time we saw a reversal like this in EURUSD was in Nov 2017 which led the single currency gain from 1.16 to 1.25 levels. This is on the back of Trump going slightly soft on trade (Mexico deal), the FED becoming more cognizant of further rate hikes (Powell’s comments) and marginal data disappointment in the US (PMI). China on the other hand has shown that it does not want Yuan to depreciate beyond 6.9 at this juncture which also adds to the overall dollar weakness.

USDINR 1m NDF is trading 6p right today as EM currencies are trading slightly weaker than yesterday night when USDINR traded at 69.85 in offshore markets. Brent above 76 levels will put doubts into the minds of people who would want to sell USDINR on the back of dollar weakness. Equity markets and USDINR have shown little correlation as FII flows remain muted. For the week USDINR could trade in a range of 70.30-69.60. CMP 70.11, Range 70.20-69.90.

INR update: Did the FED shift to a less hawkish tone?

Powell and Bullard seem to have started a new communication theme for the FED which is not as hawkish and could be in sync with what their President wants, i.e., slower rate hikes. The FED generally persists with a particular line of communication for months and therefore further FED speakers must be closely heard now, incidentally there are no FED speakers scheduled this week.

The other interesting development was PBOCs announcement of using counter cyclical factor again for CNY fixing. Last time PBOC used it in 2017, it led to a 8% appreciation in Yuan. Technically, on the weekly charts USDCNH is showing signs of a strong reversal which could take it to 6.76-6.71 levels (CMP 6.80).

USDINR 1m NDF has cooled off to only 4.5p right from 8p right last week. On the other hand an appreciating USDCNH should be the overriding factor in the short term for INR even though Brent at 76 levels is a bigger worry from a CAD perspective. MXN can register further appreciation if the NAFTA deal is announced which can positively affect all EM currencies. The range for the week could be 69.50-70.10. CMP 69.88, Range for the day 69.95-69.70.

INR update: Expect more aggression from Trump as his risks increase

With Trump’s associates confirming felony charges against themselves they have put the President in the dock, i.e., if he loses the midterm elections in November 2018. The elections are being held for all the 435 seats of the house of representatives and 34 seats of the senate. Thus Trump would now be more desperate than ever to ensure that Republicans do not lose the elections which was visible in his comments yesterday about the markets crashing if he is impeached. Basis this I would think that Trump would step up his aggression against immigration and trade in the next 2 months. That would mean increased volatility in the currency markets with dollar gaining against the EUR, GBP, AUD and other EM currencies. US data disappointed yesterday but then politicians have become more important for markets now.

USDINR 1m NDF is trading exactly the same as yesterday, i.e., 5.5p right while the more fragile EM currencies have depreciated since yesterday evening. FII flows have picked up in August but do not seem to be enough to counter the demand arising out of the trade deficit and the pressure on other EM currencies. Oil is back at 75 levels which should continue to put pressure on INR. A close above 70.15 today would be further rupee negative. CMP 70.14, Range 70.11-70.40.

INR update: Trump intervenes and contradicts the FED and his own government

With US core CPI at 2.4% and healthy growth it is unlikely that the Fed can pay heed to Trump’s comments yesterday where the president wanted the central bank to not raise rates. Powell would most likely refrain from making a direct comment on the President’s view on the monetary policy in his 24^th of August speech at the Jackson Hole. On the other hand Trump’s mention of CNH and EUR being manipulated is in direct contrast to the treasury report (equivalent to a finance ministry report in India) which said that China has intervened heavily to prevent sharper depreciation in CNH and EU has not intervened in the currency markets as per international agreements. Basis this, I would think that yesterdays move in dollar index from 96 to 95.5 would be reversed by the end of this week.

USDINR 1m NDF is trading 7p right which is less that the 9p yesterday indicating reduced offshore buying pressure. EM currencies have appreciated in tandem with the overnight dollar weakness. From the price action since open it seems that today also INR should remain on a mild and temporary appreciation trajectory. The movement in USDINR should closely track EURUSD during the day. CMP 69.57, Range 69.40-69.70.

INR update: Increasing Italy uncertainty and hiatus in US-EM tensions

The weekly close in EURUSD was encouraging given the bounce from 200 WMA at 1.1360. On the other hand Italy 10Y yield at 3.14% (up 65bps in 1 month) indicates that for Euro zone the visible future would contain higher political risks. The next event in Italy is on the 27th September when Italy will give details of its next year’s fiscal deficit target. On the other hand Trump seems to benefit from continued noise around his foreign policy which therefore should result in continued headline risks on the trade tensions front. This could be his focus till the midterm elections in November at least. We have seen till now that trade tensions headlines results in a stronger dollar although equities don’t get affected as much. US data continues to show positive surprises although to a lesser degree while the EU data still shows more negative surprises. This data divergence along with uncertain political outlook does not give much confidence in EURUSD as a pair for the next month or so.

 

USDINR 1m NDF is trading 9p right which should prevent any sharp selloff in the pair. EM currencies have cooled off on the back of chatter of US-China talks and no incremental news from Turkey. Headlines should continue to dominate market sentiments and the immediate bias lies towards more negative headlines on Turkey and trade tensions. I would also expect some amount of panic in INR due to the recent depreciation. For the week I  would expect USDINR to trade in the range of 69.41-70.40. For the day, CMP 69.83, Range 69.70-70.13.  

INR update: USDINR breaks the psychological 70 barrier

The last thing preventing further dollar strength is perhaps the 200WMA on EURUSD at 1.1360. Looking at Italian yields at 3.10 (29bps higher in the last 1 week) and Turkish impact on European banks (although limited), it looks that it is a matter of time before EURUSD break lower than 1.1360 and provides momentum to dollar strength. On the other hand a quick resolution to the Turkish standoff might provide a relief rally but expect that to be short lived as markets will continue to focus on the vulnerabilities of various EM economies once it has got a taste of it.

 

India inflation cooled off but it doesn’t matter given the EM basket sell off where India seems to be in focus all of a sudden. USDINR 1m NDF is trading 7p right as compared to a higher 8p yesterday. The pressure on INR seems to be more offshore driven and therefore I would continue to expect INR to be under pressure during European and NY session. Other EM currencies are relatively stable today but it has not prevented USDINR from testing 70 levels. Anecdotal evidence suggest that RBI sold aggressively from 70.05 levels to 69.90. USDINR should continue to move with overall dollar index. For the medium term, volatility seems here to stay while the trend for USDINR is higher. CMP 69.87, Range 69.70-70.25.

INR Update: Rupee loses driven by EM basket effect

Turkish Lira and USDRUB depreciation spillover to other assets seems to be the reason for the overnight dollar strength and moderate risk selloff. Both are country specific scenarios with limited fundamental impact across the globe, nevertheless basket effect on EMs drove the all lower against the greenback. Today we have the US CPI where a higher number is factored in so a surprise could only be a lower than consensus print.

 

In spite of the overnight buying in USDINR, NDF 1 month continues to trade left by 1.5p like the entire week. Brent trading near 72.2 is positive for INR while CNH and KRW have also depreciated in the EM sell off overnight. PBOC has shown discomfort with Yuan at 6.85+ levels.  August FII flows seem to have turned a corner as small amount are consistently flowing back in. Dollar index still has the major hurdle of 95.4 (200WMA) to cross which it has failed since May (we have not got a weekly close). Similarly on the Euro 1.15 has held since May, in spite of the ECB talking down the single currency in its June and July policy meetings, which would make me think that a close below 1.15 on a weekly basis is unlikely. With these factors into play I think 69.10-68.30 range should continue to hold with a possibility of a break lower only. CMP 68.86, Range 68.95-68.65.

INR update: IRAN sanctions means stronger US-Saudi coordination

Contrary to disruption of supply theory, reinstatement of sanctions on Iran should keep the oil prices lower because US wants it. The primary reason for Iran to be continuously under US scanner is the fact that Saudi Arabia is a key US ally and Iran’s foe. Reinstatement of sanctions on Iran by the Republican government would have been a key demand of the Saudis, who had become quite distanced from the Obama administration who had struck a deal with the middle eastern Shea state. Thus now with the demand met oil prices should stay where Trump wants it, i.e., in check.

 

TRY continued to depreciate yesterday on account of concerns that the central bank’s independence might have been compromised and capital controls might be on their way. Although not related to INR, EM basket effect will ensure that INR appreciation would not happen when TRY depreciates sharply during intraday movements. On the other hand USDCNH continues to move higher after the Friday PBOC measure and further depreciation looks likely towards 6.9. USDINR 1m NDF is slightly left (1p) which shows no significant offshore buying pressure on USDINR. FII outflow pressure has significantly reduced on INR. Medium term range of 69.10-68.30 should continue to hold even if other EM currencies depreciate or dollar strengthen further towards 96 levels. For the day 68.85, Range 68.96-68.70.

INR update: Italy Budget concerns and Chinese data to be watched

 

The reason for the Euro selloff seems to be worries surrounding Italy’s next year budget which can lead the country to a fresh standoff with the EU, which wants the country to reduce debt. Italy 10Y yield have jumped by 20bps in the last 2 days and a meeting on 8th August would be the next event in this emerging theme for the single currency. The NFP report (U6 unemployment specifically) seems to suggest that US economic growth is picking up further creating an increasing divergence with other DMs like EU and Japan. A convincing break (weekly close or 1% higher) of 95.37 (200 WMA) on the dollar index (cmp 95.3) should indicate further up move and would lead to an all round dollar strength.

 

On Friday evening PBOC impost a 20% reserve requirement on forwards (from the earlier 0%). This was a signal that PBOC is not willing to allow a further selloff in Yuan. The first such signal to have come since June mid when the slide started. This week Chinese trade and CPI data would be critical to market expectations of further liquidity easing thereby driving the currency. USDINR 1m NDF is trading 3p left which should prevent large up move in the pair. FII outflow pressure has alleviated from the rupee. A break of 96 on the dollar index could take USDINR higher than 69. Medium term range 68.30-69.10. For the day CMP 68.61, Range 68.55-68.75.

 

INR update: Currency war could create sharp two way moves

The great things about our time is that we (most of us at least) don’t have to hide in bomb shelters when two powers fight. If this is a currency (depreciation) war then China cannot keep on winning, it is a matter of time before the US talks down the dollar. One way moves in most of the currency pairs would be difficult as the rhetoric battles swing sentiments like a pendulum. This should go on till November midterm elections in the US post which there will be a North Korea like resolution, i.e., without any conclusion.

 

Today EU retail sales would be a good indicator of EU economic activity pick up (or lack of it) in the current summer. Markets will also look at NFP and US services ISM wherein a weaker data might be of larger impact than otherwise, but the focus remains on news headlines.

 

USDINR 1m NDF is trading 3p left now while KRW has depreciated along with CNH since yesterday evening. Dollar strength should continue to push USDINR higher. Indian equities are in the green while oil levels are 140 cents higher than yesterday. Medium term USDINR range should continue to be 69.10-68.30. For the day, CMP 68.71, Range 68.65-68.85.

INR update: Trade tensions dominate; INR on track for gradual appreciation

 

A month back the flattening yield curve showed risks of the FED backing out on further rate hikes. These risks have totally abated with the FED looking all set for 2 more hikes this year as the yield curve starts steepening again. EU data has not improved as much as markets expected and therefore we continue to see EURUSD trade in the 1.16-1.750 range. Trade tariff related worries continue to dominate overall sentiments. Today the most volatile DM central bank, BOE meets. It is expected to hike which is factored in expectations.

 

RBI rate hike of 25bps has been seen as proactive and coupled with its inflation forecast, market seems to have believed that yesterday’s rate hike was the last in the foreseeable future. Given this India 10Y yield has moved lower and the cool off in yields could lead to some amount of medium term focused debt inflows.  

 

Trade worries seems to be dragging Chinese equities lower with Nifty down by 0.7% now. USDINR 1m NDF is trading 1p left only. EM currencies have mildly depreciated since morning today while in the last fortnight INR seems to have been less affected by trade related CNH selloff. FII outflows seem to have abated/reversed. Oil at 72.65 is positive for the rupee. Today does not seem to be the kind of day when INR can appreciate beyond 68.25 although my medium term bias is shifting to 68 and lower. CMP 68.37, Range 68.25-68.43.

INR update: Inflow expectations suggest INR gains

The fact that BOJ did not change the target for 10Y yield should ensure that US10Y also keep hovering below 3% which should again support the view that dollar index looks due for a correction towards 92 levels. Mixed to slightly disappointing EU data has been a hindrance for sustained gains on EURUSD, in light of which today’s EU GDP and HICP flash would be important. While a disappointment would have a smaller impact, positioning suggests that a positive surprise can take EURUSD higher than 1.18.

 

USDINR 1m NDF is trading 1p left while CNH and other EM currencies are trading flat as compared to yesterday. The price action in USDINR for today and tomorrow would be focused on a large QIP related inflow (~$2bn) most of which should be absorbed by RBI which has already sold quite a bit of its reserves in the last 3 months. Medium term range for USDINR is 68.30-69.10 with the likelihood of the lower end being tested this week. For the day, CMP 68.61, Range 68.65-68.45.

INR update: CNH increasingly disconnects from INR

US economy did not grow at the higher end of expectations but the truth remains that the economy is growing at its fastest pace in the last 4 years. The theme now is that of trade war and since 12th June 2018 (Trump-Kim Summit post which Trump announced the tariffs on Chinese imports) CNH has depreciated by 7%. But other Asians have lost much lesser with KRW at 3.4% and INR at less than 2%. On the other hand MXN, ZAR and BRL have appreciated in the same period as Trump shifted focus on China. This empirical evidence of 1.5 months show that although directionally Asian currencies are looking at CNH but the quantum of move is much more muted and therefore increasingly CNH depreciation does not seem to be a risk for INR. On the other hand till the time CNH depreciates INR is unlikely to register any significant appreciation. PBOC is on an easing cycle now as it cuts rates and infuses liquidity to support growth on the other hand RBI in India is likely to raise rates to fight off inflation concerns and ensure that the currency remains attractive to foreign investors. This divergence in policy rates should also result in the decoupling of CNH and INR.

 

Given the above inferences, the main variable for INR is oil and as long as Brent continues to trade soft below 75 markets will price in some improvement in India CAD and Fiscal situation for the year. Also the fact that RBI has shown resolve and backed it with intervention of more than $20b in the last 3 months to ensure that INR does not depreciate beyond 69 should ensure for the time being that the pair remains below 69. INR forming a top at 69 view would need to be revisited if Brent goes near 78 levels or dollar index goes near 96 levels. Therefore under the present construct with a rate hike in offing on Wednesday, it is likely that USINR trades in a range of 69.10-68.30 with a possibility of a break on the lower side. Today NDF1m is trading 1p right indicating mild offshore buying pressure. CMP 68.73, Range 68.80-68.60.

INR update: US-EU trade tensions abate, ECB and US GDP ahead

The Trump-Juncker conference has ended with a positive outcome where both the leaders agreed to discuss a path which would effectively lead to free trade between the EU and US. This development should prevent the ECB to talk down the Euro like they did in June 2018 as they would not like to perturb Trump and reignite the transatlantic trade war. Therefore I would now change my view and expect EURUSD to head higher towards 1.18+ after the ECB today evening. Post this the focus shifts to US GDP tomorrow wherein the forecasts already seem to be factoring in all of US economy’s robustness (4.5% to 5%) and therefore from a risk reward perspective the likelihood of a disappointment is far more.

USDINR 1m NDF is trading 2p left now which indicates offshore selling pressure. CNH has strengthened since yesterday morning although in the last couple of hours it has slipped from 6.74 to 6.77. EM currencies have generally strengthened along with overnight dollar weakness and all time high on equities. We are nearing the month end now and general participant action suggests that between today and tomorrow we should see a lot of USDINR longs (who had earlier expected 70+ levels this month) exit their position, which should result in the pair coming lower. Broad range remains 68.30-69.10. For the day CMP 68.63, Range 68.71-68.45.

INR update: Euro moves to drive INR for the rest of the week

Trade tensions have materialized since the last ECB meeting on 14th June 2018. Although EU data negative surprise improved but it continues to be in the negative territory and gradually it is becoming clearer that the EU economic activity is not comparable to the US. Given this backdrop it is likely that the ECB stays dovish in the monetary policy meeting tomorrow driving EURUSD lower. Before shorting EURUSD I would wait for the Juncker-Trump conference outcome today, as that could be a joker in the pack.

 

USDINR has clearly not being allowed to sustain above 69. USDINR 1m NDF is trading 1p left. The risk of USDCNH moving towards 6.85 remains but with each failed impact on INR, the rupee’s resistance to CNH depreciation increases. But in case Euro depreciates to 1.1550 levels again then the risk of 69+ levels (although temporarily only) increases. Brent trades near 74 levels while India 10Y is stable t 7.8%. Medium term range is 69.10-68.30 with a possibility of a blip to 69.25 levels this week in case Euro moves lower. CMP 68.86, Range 68.80-69.00.

INR update: Trump intervenes, PBOC eases further

 

Trump directly commented on a stronger dollar, the FED raising rates and other countries manipulating interest rates and their currencies. The Fed’s interest rate policy would be not affected by what Trump says and rather it would make it more difficult for the Fed to retreat from its gradual rate hike path in case the economy actually warrants that. Going forward any trade war related news would have a muted dollar positive move. On the other hand PBOC today made the biggest single injection of medium term lending facility funds to its major banks. This is in continuation to the various measures China has taken to lower its lending rates and inject the system with more and more liquidity.  Easier monetary conditions results in depreciating local currency. Therefore with two forces acting against each other , only thing certain is uncertainty, in times of which, safe haven assets and currencies gain. Namely JPY, CHF and the USD.

 

Overnight we have seen across the board dollar weakness which has driven USDAsia lower as well. USDINR 1m NDF is trading flat while USDCNH is trading stronger today at 6.7722 from Friday’s 6.8+ levels. Brent on the other hand is trading stable in the 72-73 range which makes it a not so important factor for short term movements. Given the PBOC’s action I would continue to expect a depreciating Yuan which should keep USDINR well bid. In the times of uncertainty I have not seen INR appreciating. Medium term range 68.30-69.10. For the day CMP 68.71, Range 68.65-68.85.

INR update: Oil gains as CNH losses drive dollar strength

US 10 Y yield went higher to 2.89% with the 10-2 spread widening to 27bps. This was perhaps on the back of Powell’s reassurance that gradual rate hikes are the best way forward. A weekly closing in the dollar index above 95.25 tomorrow should boost the greenback again and bring other G7 currencies under pressure.

 

Oil moved higher to 72.8 levels (Brent) from 71.5- yesterday taking the positivity out of Indian bonds and INR partially. My expectation that USDCNH would remain well supported at 6.70-6.72 has gone wrong as the Yuan depreciated to 6.77 today. This would ensure that INR appreciation is stalled till the time Yuan reverses. On the other hand the vulnerability of INR on the back of CNH depreciation has seemed significantly less in the last 1 week. Oil would therefore remain the primary driver for INR followed by overall dollar strength weakness which would be reflected in CNH as well. Another interested correlation is that between CNH and EUR which seem to be moving in tandem with a lower beta on the Euro. USDINR 1m NDF is trading flat today as compared to 2p left for the most of this week indicating that offshore selling pressure on the pair has faded. Broad range for USDINR continues to be 68.85-68.25. For today, CMP 68.74, Range 68.85-68.70.

INR update: Dollar gains as CNH shows depreciations risks again

Powell’s speech showed a mild doubt in continuing to raise rates by saying that “for now” gradual rate hikes seem appropriate. But overall post Powell’s speech we saw shorter end US yields rising as markets became more confident of further rate hikes and the 10-2 spread narrowed again to 25bps. The dollar gained on the back of rising shorter term yields and continued strength in US economy.

 

Oil is trading lower while USDCNH continues to show risks of trade war. USDCNH has moved from 6.68 yesterday afternoon to 6.74 now. This has only caused mild selloff in other EM currencies but at the same time it will prevent incremental appreciation of EMs. USDINR 1m NDF is trading 2p left like yesterday. Equities continue their stellar run (at the headline index level at least). Runaway depreciation in INR for now looks unlikely. Broad range is 68.25-68.85. For today CMP 68.51, Range 68.45-68.70.

INR update: Robust US data fails to bring in USD gains

With US retail sales coming in line with expectations, US Atlanta FED increased its current quarter GDP growth expectations to 4.5% from 3.9%. This led to US2Y yield breaking 2.6% and taking it to its highest level since 2008. Now either market has to believe that the current growth in the US is going to sustain in the longer run, which then takes 10Y yield higher. Or the lack of reason to not hike rates in the near term, would lead to further narrowing of the 10-2Y yield spread. The former looks difficult in an environment where the US is going into a cocoon of its own with the trade war and therefore good US data looks likely to result in further narrowing of 10-2Y spread. With EU data bottoming out in June the chances are that the recovery will help EURUSD move towards 1.19 levels. Today Powell speaks at 7-30 PM IST in front of the Senate committee of banking, which could be significant and interesting given the robust US data, trade war and falling 10Y yield.

 

USDINR 1m NDF is trading 2p left indicating mild offshore selling pressure. Oil fell on news that Trump is seriously considering releasing SPR stocks while US is considering giving minor exceptions to Iran for its oil sale. Technically Brent can move lower to 68.9 levels (61.8% retracement of 80.49 and 61.77) from the current 72.2 levels. CNH looks stable today and has been well supported above 6.70 levels. India bond yields have moved lower on the back of oil at 7.74% which should help INR gains. 68.30 is a strong support and convincing break of the same can bring in another 1%+ kind of appreciation. I would expect a lower break overnight only as during the day RBI continues to buy USDINR to refurbish its reserves. CMP 68.42, Range 68.30-68.50.

INR update: Lower oil prices and softer USD outlook

Reports of Trump considering selling emergency oil reserves to tame oil prices plus positive developments in Libya (the recent stoppage in its largest oil field seems temporary) has kept oil prices below 75 levels. Dollar index reversed from 95.25 (200WMA) and is trading lower now at 94.63. US 10-2Y spread is trading at a 11 year low of 24.6 bps. This narrowing of spread should keep dollar index capped at 95.25 for the time being. Today we have the US retail sales where robust data would have little impact while a disappointment could lead to sharp fall in shorter term yields and therefore the dollar.

USDCNH looks relatively stable today and is nearing its resistance zone of 6.72. USDINR 1m NDF is trading 2p left indicating lack of offshore buying pressure. Most EM currencies have appreciated since Friday evening. India’s trade deficit of $16.6bn on the back of higher oil imports affected INR appreciation sentiments adversely. But I would think this was expected plus is a lagging indicator. With oil prices appearing to be capped near 80 levels and the worst season for INR behind us along with an outlook of a softer dollar in the near term, I would think that USIDNR can still head towards 68.30. Medium term range 68.30-68.85. CMP 68.55, Range 68.60-68.40.