Since the US economy is at full employment it would not have surplus labour to create jobs in steel and aluminium manufacturing at sustainable costs and therefore the impact of the tariffs on the US economy would be negative. Thus it should be a non starter, even though Trump’s proposal would give him enough mileage with his voters for at least trying. The rhetoric of trade protectionism will ensure that other currencies maintain strength against the USD. The levels to watch for the USD index is 88.5-90.50 (CMP 89.95). Mnuchin testifies in front of the appropriations committee (8-30PM IST) today which can move the greenback.
In an environment where global PMIs are rising, India’s service PMI came in at 47.8 indicating contraction. This lower growth indicator along with below expectation GST collection numbers with rising inflation and current account deficit does not auger well for INR. It also creates doubt whether the political stability that Indian has witnessed will continue after the 2019 elections. Thus, in an environment where dollar weakens INR will appreciate moderately, but when we see corrections in USD fall then I would expect USDINR to make new recent highs.
USDINR 1m NDF is trading 3p right which should bring in bids in the on shore market. EM currencies have mildly appreciated with equity markets rising. India bond yields continue to rise. CMP 64.99, Range 64.88-65.05.
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