INR update: Hawkish Powell, markets fearing 4 rate hikes now

Although Powell was hawkish but the 10-2 spread on US treasuries continues to be at 63bps which would make me think that either US10Y yields cross 2.95% in follow through today or 90.55 levels on USD index would continue to hold (CMP 90.38). If it were up to short term interest rate expectations then EURUSD should not have crossed 1.10 therefore the longer end of the curve becomes more important for USD projections, which will only go up if the outlook on economy improves even further. Today’s US GDP could prove crucial in this regard while EU inflation would also be watched.

 

USDINR 1m NDF is trading 7p right now while all EM currencies have depreciated along with the Powell induced dollar strength. Equity markets are in the red. Indian GDP data would come out at 5-30PM only where a print below 6.7% could take USDINR higher towards 65.40. For the day it would follow global trends, CMP 65.12, Range 65.20-64.97.

INR update: Currency Markets await Powell's testimony

Equities gained in the US and a closing on Dow at 25709, technically makes the index looks like heading towards the highs of 26600 again. Currency markets lack direction and continue to trade sideways. If Powell today does not deliver a hawkish surprise then markets might revert to the major theme of dollar weakness, driving dollar index towards 88.5 again (CMP 89.81).

In USDINR we continue to see a lot of bids since yesterday and the fact that NDF 1m is trading 4p right makes be infer that the buying is NDF led. The buying in USDINR seems disconnected from KRW while the correlation with CNH was broken a couple of months back. On the other hand a dollar weakness led daily close below 64.70 could bring in 64.40. For the day CMP 64.85, Range 64.75-64.95

INR update: Flatening yield curve could keep USD soft

The cooling of US 10 y yield to 2.86 and 10-2 spread to 62bps can lead to a softer USD in the short term taking the index towards 88.5 again. Italian elections on the 4th of March don’t seem to be creating a concern in the EU markets as polls do not suggest a risk that the EU separatist Five Star movement might come into power. Powel’s testimony in the congress is likely to be balanced but even then it will give the first look into the thoughts of the new governor. This week has lots of data including US and India GDP, EU inflation and manufacturing PMIs.

 

USDINR 1m NDF is trading 4 p right indicating buying pressure while since morning we have seen some offers in the onshore market. Equity markets are in the green while Asian currencies have mildly appreciated since Friday on the back of dollar weakness. India bond yields have eased to 7.69%. The lack of buyer’s credit availability in the market should continue weighing on INR and consequently I would not expect USDINR to trade below 64.62 today. Although dollar weakness overnight could take the pair lower if 64.60 breaks. CMP 64.67, Range 64.62-64.75.

 

 

Regards

Saket Agarwalla

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INR update: Unavailability of trade credit affecting spot and forwards

USD Index continues to trade in a range of 88.5-90.5 unless either breaks on a weekly basis. US 10-2 spread has eased to 67bps from its peak at 78bps (a week back), generally a higher 10-2 spread leads to dollar strength as a steepening US yield curve attracts money into the US and indicates an ever increasing interest rate expectation.  A weekly close above 25400 (2% higher than yesterday’s close) on the Dow would indicate that risk sentiments are back on track.  

 

The buyer’s credit availability in the Indian trade credit market has noticeably shrunk on the back of the LOU scam. This would lead to partial unwinding of short term external debt for the country as a whole. Thus if we assume that the total short term debt for the entire economy is USD 80 bn with an average maturity of 3months, then on a weekly basis USD 6bn comes in for rollover. Of this USD 6bn if 20% is wound down then it increases the weekly dollar outflow by USD 1.2bn. Meanwhile the need for generating dollar funds would increase receive side pressure on the forwards market which we witnessed yesterday. Anecdotal evidence suggests that this pressure on spot and forwards should last for another week at least.

 

USDINR 1m NDF is trading 3.5p right while EM currencies have eased off overnight on the back of mild dollar weakness. Asian equities are moderately in the green. A weekly close below 64.87 on USDINR would take the upward pressure off the pair. CMP 64.86, Range 64.78-65.00.

INR update: Hawkish Central Banks drive yields and dollar higher

The FED minutes indicated significant chances that there could be more than 3 rate hikes in 2018. This led to higher US yields while the dollar index continues to strengthen on the back of stronger US economic sentiment. BOE was hawkish as well making the broader equity markets shudder with fears of increasing rates globally and spoiling risk sentiments. Dollar index (CMP 90.08) faces resistance at 90.50 levels and a weekly closing above that could trigger another 2% up move. The broader dollar weakness view continues to hold till we get a weekly close above 92.51.

 

The RBI minutes showed concern on inflation and consequently India 10 Y yields are higher at 7.78% against a close of 7.71% yesterday. USDINR 1m NDF is trading 3p right indicating offshore buying pressure. The up move in USDINR has been led by offshore buying as outflows from equity and debt pick up. The higher yields could result in panic buying of the pair even though currently nationalized banks continue to offer. A weekly close below 64.87 (unlikely) can reverse the move while the next target on the higher side is 65.55 and then 65.90. CMP 65.03, Range 64.90-65.30.

INR Update: The writing is on the wall for the dollar

US CPI strengthened the case for 4 rate hikes this year as yields pushed higher. The markets which were buying the dollar as the yields rose and curve steepened, looked through the noise and beyond, and let’s say for the sake of rationalizing, focussed on the rising fiscal deficit in the US and sold the greenback. The u turn in sentiments yesterday makes it clear where the dollar is heading, CPI was the last piece of information to which the USD could have held on but now that it’s not helped, I would say we are headed for a convincing break of 88.5 on the dollar index which opens the door for another 2% kind of move lower.

 

USDINR 1m NDF is trading 2p left as EM currencies appreciated on the back of dollar weakness. Equities in Asia are in the green as markets moved contrary to rising yields and with the broader theme of dollar weakness and higher equities. Flows into equities and debt have largely been in the negative. CMP 63.95, Range 64.01-63.82.

INR Update: Increasing belief that the FED will be able to shrink its balance sheet

The US treasury yield curve steepened further with 10-2Y spread now widening to 78bps (from a low of 50bps at the start of 2018). This shows increasing belief in the US interest rates moving and sustaining higher plus it indicates market confidence that the US growth will allow the FED to shrink its balance sheet which in turn is affecting the longer end of the curve. If the market increasingly believes in sustained balance sheet reduction then this would lead to a sell off in risk assets which means that an increasing spread of 10-2Y US treasuries for now, will lead to negative equities and USD strength against EM currencies. The US CPI print (due this Wednesday) can significantly affect this spread and therefore global asset prices.

 

USD Index 90.15: Short term trend has changed to up. Weekly close at 90.4 opens the door for 91 as the US 10-2 year treasury spreads widen.

 

EURUSD 1.2280: Short term trend is lower although the larger uptrend is still in place. Buy at 1.2155 for the larger up move. Intraday sell 1.2295/1.2320 stop 1.22346 and tp at 1.2230.

 

GBPUSD 1.387: Larger up trend is still in place. But in the near term Brexit related comments can take the pair lower. Intraday range 1.39/1.3752

 

ÚSDJPY 108.7: Daily close below 108.50 will open the door for 106.50. 109.20/108.25 intraday range. Sell at 109 with stop at 109.36 and tp at 108.30.

 

AUDUSD 0.7830: The pair bounced from 200 DMA at 0.7756. Sell at 0.7855, stop at 0.7886 tp at 7790.

 

USDINR 64.30: USDINR 1m NDF is trading flat while EM currencies have appreciated mildly since Friday. Equity markets trade in green during the Asian session. A break of 64.48 and 64.09 to provide direction to the pair. Range for the day 64.23-64.41.

INR update: Volatility squeeze over? RBI policy coming up

The selloff in equities was perhaps caused by a volatility squeeze. As VIX fell to multi-year lows, the inverse vol funds made a lot of money and grew in size, little did we know that there growth can cause this kind of volatility without underlying fundamental reasons. The trigger for a volatility squeeze could have been the rising yields but that was not really the reason, as we know now. With some of the large inverse vol funds almost wiped out or shrinking in AUM to a level where they stop being consequential, the markets should soon return to normal or perhaps already have.

 

USD Index was unable to break the crucial resistance of 89.9 while US10 Y yields are up at 2.78% again. The US10y-2y spread is at 70 bps which shows that an increase in spread is not causing USD to appreciate by much. The safe haven appeal of the dollar therefore withers down if the volatility play is over. Although equity markets would take more time to scale the new peaks as at every gains now longs would look to take profits who earlier were adding longs at new highs. Therefore the recent slide in equity markets will not change direction of the higher equity, higher yield and lower USD view, but perhaps takes the momentum away for some time.

 

Today we have the RBI policy wherein the tone cannot be dovish given the higher CPI readings and increasing Brent prices. A hawkish tone will push bond yields higher and increase the problems for the government. I would assume that the RBI would therefore pay heed to government concerns and for the time being speak less hawkishly than what the market expects or the macros warrant. There could be some measures to alleviate bond market supply fears. These could be a roadmap to increase the FII investment limits into government and corporate bonds which can result in lower yields and appreciating INR post the policy today at 2-30PM.

 

USDINR 1m NDF is trading 1p right while USDKRW has moved higher to 1085 from yesterdays evening lows of 1077 (when INR was at 64.10). USD index could now head towards 88.5 again. While CNH has appreciated to 6.26 although it is less correlated to EM currencies in the recent past. CMP 64.17, Range 64.25-64.00.

INR update: Rising yields and steepening curve stops the party

US 10y-2y spread has steepened to 71bps from 55 bps 7 days back, because of which I would abandon the dollar weakness view for now, although against JPY it should lose because of the growing risk off sentiment. The reason why the fears of increasing rate hikes gripped the market harder on Friday is the average hourly earnings growth number which was revised higher and the print was higher than expectations. This is concerning the equity markets which adjust to higher borrowing costs and lower present values. Last few times when equity markets fell, the FED delayed rate hikes and cajoled the markets. But that time fiscal purses were tight and inflation was less of a concern. But still if equity markets continue to fall then March rate hike might soon be off the table, the FED would not normalise at the expense of its main benchmark, i.e., (in my view) equity markets. Today Draghi’s speech will be important where he describes the outlook for Euro area economy along with the US services ISM print.

 

USDINR 1m NDF is 5p right while KRW is trading at 1090 (2% higher than Friday’s open). CNH perhaps is trading differently as it shifts its stature from the EM basket to something like a Euro (remember CNH getting into SDR then Germany announcing more reserves to Yuan assets). Even during the recent CNH appreciation KRW and INR were not impacted as much. Equity markets should continue to fall as people are still long and in the money, and profit taking is an easy decision. The global concern should continue till the time the yields cool off, which I think can happen only if the FED verbally intervenes and says that there would be lesser number of hikes. USDINR can head towards 64.50 levels this week wherein the majority of the move will come overnight as Nationalised banks should continue to sell the pair during the day. CMP 64.16, Range 64.10-64.30.  

INR update: Budget spoils bond market sentiments but not a gamechanger

USD index (CMP 88.7) is close to crucial support of 88.5 and a weekly close below that can open flood gates. US 10 Y yields at 2.79 is technically headed to 3% now. Higher US yields is accompanied by relatively lesser rising yields in other DMs and is not resulting in USD strength, therefore this is more of a concern on US borrowing than the yield differential theme. Equity prices globally lost the upward melt up momentum this week and a 1% loss on Dow today can cause another 4% kind of correction. I guess a weaker NFP print will be more consequential for further dollar weakness while most likely stronger numbers would be ignored by the markets.

The budget was taken as a bit of a disappointment by the bond markets as 3.3% deficit for FY19 was towards the higher end of expectations. On the other hand the markets have the usual doubts about the assumptions for tax collection and expenses and specially so as this is the pre election budget. The 10% LTCG will not result in immediate outflows but will reduce India’s comparative advantage in attracting further inflows. The markets would soon forget about the 10% LTCG in my view and start tracking global equity queues.

USDINR 1m NDF started trading significantly right post the budget as India 10 Y yields jumped. Yields have now increased by 25bps since yesterday pre budget trade. Such a selloff in bonds is bound to impact currency and equity markets, therefore any reversal in INR or Nifty has to be preceded by a drop in bond yields. Overall the budget is not a game changer and the medium term view of INR appreciation should not be forgotten. USDINR above 64.40 looks difficult for now although we might see those levels next week. At some point of time markets would start tracking the broad dollar weakness. CMP 64.1, Range 64.00-64.25.