INR update: US equities correct as rising yields create concerns

Dow is showing signs of exhaustion and a break below 25970 can create a quick and small correction. USD index remains sideways although the downward momentum has abated for now. US yields have crossed 2.7% and a weekly close above the same can bring in 3%. Trump plans to give details of his USD 1.5tr infrastructure spending plan in mid February which can push the yields higher. Higher yields for now are not helping the dollar or scaring the equities. The dollar can start gaining with a higher yield if it is accompanied by steepening of the 10-2 year spread as well. Meanwhile I expect the USD index to correct towards 90 levels.

 

USDINR 1m NDF is now trading 2p right as against nearly flat yesterday and 2p left the day before. Nifty is trading flat against the overnight losses in US equities. The markets await the budget tomorrow while the global risk environment is not immediately conducive to risk. EM currencies are flat since yesterday. CMP 63.72, Range 63.65-63.85.

INR update: Dollar slide pauses while risk sentiments continue to soar

Trump and Mnuchin did damage control and tried to speak on how they want a stronger dollar but the markets know what they really desire. Even then 88.5 will remain critical for dollar index along with 1.26 on EURUSD. US 10Y yields can continue going higher (as budget spending discussion happen in the US next month) and a weekly close above 2.7% should open the door for 3%. In terms of  CFTC positioning market is long Euros while the dollar weakness story is just building up in GBP and AUD. In JPY the market is still overtly dollar long and after Koruda’s Davos statement about inflation finally reaching target (which was subsequently retreated by BOJ), I would think the potential for substantial JPY appreciation from here makes a better trade.

 

USDINR 1m NDF is trading 2p left while EM currencies have depreciated since Thursday. Equity and debt inflows seems substantial and consistent for now as equity markets trade at all time highs. Bond markets seem to be more assured of fiscal prudence in the upcoming budget on 1st Feb. In this environment 63.70 on USDINR looks much more unlikely than 63.30. I would continue to expect overnight appreciation on INR. CMP 63.52, Range 63.60-63.45.

INR update: Mnuchin wants a weaker dollar while Yuan accelerates

As if protectionism rhetoric was not enough, Mnuchin said that a weaker dollar is good for the US and the dollar broke all crucial resistances. A good support on the dollar index now is 88.5 (CMP 88.96). With the ECB today, I think that 88.5 should hold for the time being as the ECB will not want to jump the gun and indicate tightening of policy sooner. That would be termed as dovish and EURUSD could see a medium term top at current highs. More interesting would be Trump’s speech tomorrow in Davos which can reverse what ECB does today while I would keep an ear out for Mueler’s questioning of Trump in the Russia investigation.

 

Chinese Yuan has gained more than 1% since yesterday’s extremes. If I go by my own EM currency index then USDINR should be at 62.25 basis the last 1 month movement in other currencies. I would expect another 20p movement in INR in January taking the pair to 63.25 levels. USDINR 1m NDF has moved significantly left to 6p today from 3p yesterday. Nationalized banks continue to buy USDINR against global market sentiments and larger inflows. CMP 63.47, Range 63.52-63.30.

INR update: Trade protectionism reinforces dollar weakness

The import tariff put on washing machines and solar panels by Trump, reinforced the soft dollar policy of the US. Plus the fact that Robert Mueler has shown intent to question Trump is not going to do the USD any good either. The trade protectionism stance of the US could get reinforced in the ongoing WEF meet in Davos and consequently reflect in global currencies this week itself. Trump speaks in Davos on Friday 26th Jan at 6-30PM IST.

 

USDINR 1m NDF is trading  3p left while EM currencies have appreciated mildly since yesterday including KRW and CNH. Equity inflows have picked up and there seems to be significant FDI flows in the pipeline as well. Before the budget the bond market is showing increasing signs of confidence in the government’s ability to control the fiscal deficit within a respectable number for FY19. Given the backdrop of dollar weakness, RBI might now allow INR to appreciate before the budget on 1st Feb. A daily close below 63.55 will open the way for 63.25. CMP 63.65, Range 63.55-63.73.

INR update: Shutdown behind us; markets more confident than ever!

The lack of impact that the shutdown had, shows how equity markets have gained in confidence over the last few years. It has increasingly become difficult for events to create a significant risk off sentiment across asset classes, as governments and central banks have become risk sentiment managers. Consequently this is the longest winning streak on US equities without a 5% correction. Today we have the BOJ and any hint of a policy normalization would cause Yen strength and add to the ongoing dollar weakness.

 

USDINR 1m NDF is trading 2p left while EM currencies have depreciated mildly since yesterday. Equity markets in Asia continue to rally along with the DMs. Last 1 month EM currency appreciation has been more than INR which has suffered due to increasing concerns about fiscal deficit and current account deficit. With most corporate results showing signs of pickup in the economy, FII inflows into equities seem to be picking up. CMP 63.83, Range 63.96-63.72.

INR update: Rupee depreciates mildly with other EMs as US gov shuts down

The government shutdown in the US would ensure that the risk assets rally pause for a while but any substantial correction is unlikely. There is a possibility of an agreement which allows government funding till February 8th.  Angela Merkel’s government formation got a boost with coalition partner SPD voting in favour of starting talks with the former Chancellor’s party to form a coalition. Dollar index should trade in a range of 90.1-91 while a break either side would be critical. This week we have the BOJ and ECB where we could see some surprise comments. US GDP on Friday would also be important to ascertain direction going forward.

 

USDINR 1m NDF is trading 1p left although USDINR has been well bid since morning today. The government’s announcement last week to reduce the borrowing program has been backed by ONGC’s stake purchase of HPCL. This indicates that the government is focussed on ensuring that confidence in Indian bonds, equities or currencies does not deteriorate in excess of global queues. This should ensure that INR continues to move in tandem with other EM currencies and to a certain extent with the dollar index. 63.95 was a critical level and since that has been broken we can see 64.12 today. CMP 63.96, Range 64.12-63.88.

INR update: Yuan surges but INR gains could be limited before the budget

GS assigns a 35% chance to a government shutdown in the US where the senate votes tonight on the spending bill. Yields might go up and safer currencies might gain against riskier ones but equity markets aren’t likely to give ground in the event of a shutdown. US 10 y surpassed 2.6% and is likely to inch higher as talks of infrastructure bill (spending of USD 1.85 tr) gains momentum. To reiterate the yield differential theme is not working for 6 months in EURUSD and more recently it has stopped working in USDJPY either. Dollar yesterday was not able to break the resistance at 91. Euro should remain capped at 1.23 today ahead of the 21st Jan vote by coalition partner in Germany which would decide whether Merkel is able to form a government sooner or later. In the event the vote goes through the Euro might surge while losses might be limited in the event of an adverse outcome.

 

USDCNH continues to appreciate and has moved from 6.54 to 6.39 in the last 9 days. USDINR 1m NDF is trading 2p left now. Basis last 1 month EM currency movement USDINR should be below 63 levels but before the budget on 1st of February substantial INR appreciation might not happen. The government till now has shown signs of respecting market sentiments about rising fiscal deficit and therefore I would expect the line of 3.5% of GDP to be maintained in the budget. Equity inflows from FIIs seem to have picked up as results season shows a pick up in the economy. CMP 63.64, Range 63.71-63.57.

INR update: Repatriation hopes boosts USD and equities

The news that Apple has provided for repatriation tax of USD 38 bn makes the market infer that Apple is going to repatriate USD 245bn to the US which perhaps bolstered US equities and the dollar. Expectations of other corporate following Apple’s footsteps of increasing investments in the US could keep the Dow rallying and along with it global equities. But a repatriation led equity rally would be accompanied by moderate dollar strength in the short term like yesterday. USD index faces strong resistance at 91 levels, break of which in 4 hourly can take the index 1% higher.

 

USDINR 1m NDF is trading flat while KRW and CNH are trading mildly weaker than yesterday. Of late, equities and INR do not correlate intraday as currencies seem to track global dollar moves irrespective of equity direction. USD index resistance at 91 become important to ascertain the direction for INR for the day. Although sentiments for INR don’t seem to be strong currently but a couple of days of failure to close above 64 can lead to a sharp reversal also. CMP 63.93, Range 63.82-64.10.

INR update: Rising yields scare currency markets domestically as additional borrowing reduced

The next major event for Euro is the coalition partners vote to join Merkel’s camp or not on the 21st Jan. Till then Euro should trade in a range of 1.22-1.23 and next week we can see an upside run if the government gets formed while the downside could be lesser in case of a failure (given the prevailing dollar weakness). On the other hand the pressure on Yuan to appreciate further is increasing as the German Central bank announced that its going to start investing its reserves in Yuan. Yuan has a share of 11% in the SDR basket and a similar allocation gradually from various central banks, as dollar weakens can bolster the Renminbi. Trump reiterate to Xi that US’s trade deficit with China is not sustainable.

 

INR yesterday reacted to the slide in local bond yields for the first time, as RBI indicated that it’s not going to take care of yields to comfort investing institutions. The positioning in the market where participants were all short USDINR did not help either. Technically the pair can get resisted at 64.13 and then 64.40. With global dollar weakness INR would not stand out and weaken continuously unless the macros weaken surprisingly from here, therefore the top should be between 64 and 64.40. On the other hand in the current environment if USD index registers a sharp correction then USDINR can also surprise us on the higher side, therefore stops for shorts should be tight and disciplined.

 

Just now the economic secretary tweeted that the additional borrowing program will be reduced from Rs. 50k crs to Rs. 20k crs. This can be seen as a measure to calm market sentiments. Immediately USDINR moved lower from 64 to 63.80 levels. Apart from government bond yields there was no other reason for USDINR to move higher. The growing trade deficit was mostly anticipated and is priced in. I would think the top for USDINR is behind us as we start following global dollar weakness again while mirroring moves of other EM currencies. KRW and CNH are mostly flat since yesterday. CMP 63.89, Range 63.98-63.68.

INR update: USD weakness and Yuan gains

In spite of a higher US core CPI the greenback weakened reinforcing the theme that the weakness is structural (i.e., fiscal deficit related) and not to do with data per say. To top it the ECB has indicated that it will look to move away from its ultra accommodative stance sooner than previously thought. The market has not allowed JPY to appreciate looking at US yields, as the market realizes that interest rates are not playing out like they did in the recent few years, Yen might give a sharp appreciation from here (Positioning for short Yen continues to be near all time highs) .  This is a data light week except from China which releases IIP, Retail sales and GDP data on Thursday.

 

CNH has appreciated to sub 6.44 levels and INR has been majorly following CNH in the recent few weeks. USDINR 1m NDF is trading 3p left only (same as Friday). Basis the last 1 month EM currency appreciation, USDINR should be near 63 levels. Indian and global equities continue to break highs while the yield pressure is evident across the board as well. FII flows are small while talk suggests substantial amount of bond flows along with possible QIP flows as well. One can expect INR to touch 63.25 again this week with a possibility of a break lower while 63.55 should provide strong resistance. CMP 63.42, Range 63.50-63.25.

INR update: Chinese investments news might have some merit!

If Chinese government officials are asked about halting investments in US treasuries they could not have agreed to it and expectedly today morning they denied of such a move. On the other hand the information was leaked to Bloomberg which would have checked its sources before broadcasting the news. Therefore the news yesterday has merit. One theory suggests that Chinese might be mounting its attacks as investors on the US, before the various trade reports being tabled in the US congress in Jan 2018. Reports on Steel, Aluminium, Solar equipment imports from China along with an investigation on intellectual property rights on China is expected to be tabled this month. Generally any comments out of China is bad for risk sentiments and the sequence of events remind me of August 2015 when Chinese devalued their currency in order to make US cognizant of the impact a hurried rate hike would have on Chinese recovery.

 

USDINR 1m NDF is trading 3p left only while USDINR failed to sustain yesterday’s gains. KRW and CNH are also trading slightly weaker than yesterday. Asian equities are marginally in the red as well. Yesterday Indian bond yields weakened after the Chinese investment news. Basis the above I would expect risk sentiments to be subdued today. We will have to wait for USD index to convincingly break 92-92.6 range before deciding on the direction of INR. CMP 63.75, Range 63.65-63.85 with a possibility of a break higher.

INR update: USD Index and CNH to decide INR's direction for the day

USD index was not able to break 92.57 (61.8% retracement of 91-95.15) in spite of US 10Y yield going higher to 2.55% (+5bps). This indicates lack of inherent strength in the USD and the reinstates the fact that interest rate differential is not the theme that is playing out  in the market. Brent is trading higher than 69 with equities globally at life highs reinforcing the risk on environment globally that is underway.

 

A risk on environment is generally good for risk currencies like INR unlike the last 2 days. INR has been tracking CNH and KRW which are both flat to marginally left. 1mNDF is trading 4p left (same as yesterday) while debt flows was at a healthy Rs.1200 crs yesterday. Debt flows are likely to continue for the next 10 odd days and can be anywhere between 1-2 bn USD. A large QIP flow is also expected later next week. Risk is that continued dollar strength with a convincing break of 92.58 can take the index 1 figure higher. USDINR has a risk of going higher till 63.90 but it remains a good level to sell as I don’t see breaking 64 in the near term. CMP 63.67, Range 63.76-63.48.

INR update: FII flows into equity picks up while debt inflows could be in pipeline

Italian yields have risen by 30bps in the last 1 month indicating a build up of Italian election risks which perhaps weighed down on the Euro yesterday and provided the dollar with some strength. A decrease in BOJ's purchase of Japanese bonds led to JPY appreciation in the morning today although Nikkei continues to trade near all time highs of 24k.

 

FII flows into Indian equities have picked up in 2018 (Rs. 2500 cr in 2018 till date). While GovDebt auction of Rs.6600 crs yesterday went strong and should result in further inflows in the near term. Corporate bond limits of Rs. 13k crores is also available and should attract inflows. Therefore during the validity of these limits for the next 2 weeks we should see well over 1 bn USD of inwards into Indian debt considering that yields are also attractive.

 

USDINR 1m NDF is trading 4p left as compared to 6p left yesterday morning. EM currencies are flat to slightly right since yesterday. Asian equities are trading flat to mildly positive only. For today USDINR could be well bid but overall the flows look supportive of INR. CMP 63.51, Range 63.60-63.45. I would remain a seller on upticks. 

INR update: Risk on environment to help INR gains

In spite of the weaker headline NFP, US 10 Y closed near the weeks highs therefore making the print a non event. Equity markets globally continue to rally while the dollar got strong support at 91.75 levels (CMP 92.03). This week we have US retail sales and CPI on Friday would be the key data to watch along with ECB minutes on Thursday.

 

USDINR 1m NDF continues to trade 5p left. KRW depreciated sharply today morning (0.5%) because of verbal intervention. Otherwise EM currencies continue on the appreciation trajectory. The upcoming results season and new highs on Nifty can usher in fresh FII inflows in January. In the first hour of morning trade USDINR has traded comfortable below 63.30 and therefore I would expect 63.15 today. CMP 63.27, Range 63.15-63.36.

INR update: USD weakness to take INR towards 63

Globally the theme of USD weakness and positive equities continued. All eyes are on NFP today where wage growth is the most important piece of information and a print of 0.3% and higher can lead to further pricing of FED rates hikes in 2018 pushing near end yields higher. But unless the longer end of the curve also goes up, USD is unlikely to gain. The longer end would go up only on confirmation that US inflation is reaching its 2% target.

 

USDINR 1m NDF is trading 6p left. Nationalized banks are buying but the price is trending lower which is the summary of all price action. KRW and CNH have moderately appreciated since yesterday on the back of USD weakness and risk on environment. Counter intuitive but oil prices going up is good for risk and therefore good for INR at this stage of the economic cycle (see history). INR has moved in tandem with other EM currencies globally and therefore we will see a EM currency correlated move only specially since FII flows are limited. CMP 63.34, Range 63.40-63.20.

INR update: Dollar more correlated with fiscal deficit than with US growth and interest rates

What the FED minutes indicated is that the committee is more confident about growth and gradual rate hike can be expected like 2017. The US Manufacturing ISM at 59.7 shows that US economy is on a healthy expansion path. One could argue that with growth and rate hikes in the pipeline, USD is more likely to gain in 2018 than otherwise. But looking at longer period charts, USD seems to move in tandem with US fiscal deficit. For example during the period 1990-2000 when US fiscal deficit improved, the USD gained. The same relationship can be observed in the periods 2000-2009 and then from 2009-2016. Therefore I would think that the fiscal story and the US desire for a weaker dollar would take precedence over US growth and interest rates as far as currencies are concerned. The other way to look at it is the ongoing pricing of ECB and BOJ policy normalization while market already expects the FED to accelerate normalization.

 

USDINR 1m NDF is trading 6p left like yesterday. EM currencies have mildly depreciated since yesterday on the back of moderate gains on the dollar. Asian equities are mixed while Nifty is trading flat. India bond yields registered significant down move of 10 bps yesterday. The more time USDINR takes to break 63.50 the more convinced markets will become that this is the bottom leading to profit taking on shorts. CMP 63.51, Range 63.45-63.64.

INR Update: Appreciation could continue as dollar weakens and RBI allows INR gains

Wishing all of you a Happy and Prosperous 2018!

 

Most of the market expects 2018 to be a higher growth year for the global economy. Fiscal deficits in the US are likely to go up and therefore yields are expected to gradually edge higher. On the back of the increasing US fiscal deficit and the US desire for a weaker currency, dollar is expected to trend lower during the year. In longer periods USD shows a strong correlation to US fiscal deficit. Interest rate differential theme is unlikely to work as it has not been for the last 6 months. On the other hand the pricing of an unwind of central bank balance sheet in EU and Japan is ongoing while US monetary policy normalization is already priced in, therefore in spite of increasing interest rate differential we might not see USD gains.

 

In USDINR, the USD part is more important than INR. Therefore in a global USD weakness move, unless there is a panic situation in India, the domestic issues are unlikely to override what is happening with other EM currencies as a basket. The increase in fiscal deficit in India (expected @3.5% from earlier budgeted 3.2% for FY18) has been cautiously executed. The government till now has shown prudence and therefore I would not expect the higher fiscal story to affect any other asset classes except bonds. Inflation is expected to hover at a healthy rate of 4-5% and therefore is unlikely to make INR an outlier in the EM basket in a pro growth environment.

 

India is likely to get highlighted in the US currency manipulator report in Apr 2018 and would be put on the watch list for potential countries indulging in currency manipulation. Perhaps as a counter to this the Indian authorities would now want to match INR appreciation to other EM currencies and ensure that INR does not continue to be an outlier. Therefore given the kind of appreciation we have seen in KRW and CNH I would expect INR to continue its appreciation in January 2018. January is typically also a month when we see fresh equity portfolio allocation flows and this year (FY18) equity inflows into India is only at USD 2 bn till date, therefore there is room for fresh flows to hit in.

 

USDINR 1m NDF is trading 5p left as compared to 7p left yesterday, showing slight decrease in offshore selling pressure. KRW and CNH have depreciated 0.4% and 0.1% respectively since yesterday. USDINR traded at 63.37 overnight in the offshore market. Therefore KRW and CNH explain the higher opening in USDINR today. Asian equities continue to be moderately in the green today. Yesterday in the second half we did not see substantial bids from Nationalised banks indicating that there is intent to allow INR appreciation. CMP 63.56, Range 63.60-63.40.

 

I would expect 62.75 to be seen in January 2018, while February 2018 could price in some risk on account of local budget and Italy elections globally, while in March we can see INR appreciation again.