INR update: Trade Tariff a Euro Positive while EM currencies could weaken

Historically the US push for free trade was based on the premise that the world needed dollars to trade goods, which in turn gave dollar the reserve currency status. This in turn ensured that in spite of high current account deficit the dollar remained strong during crisis situations and otherwise because the world needed to hold its savings in the USD. Now if the US is retreating on its free trade agenda then the world will go back from holding dollars. This is more relevant in case of China which has more muscle as compared to other countries. One and a potent form of retaliation from China could be to shift reserves from USD to most probably Euro. This should manifest in higher US yields and higher EURUSD as this trade standoff extends (contrary to the initial market reaction). I would think that EURUSD could be bought for 1.2550+ levels with a failure below 1.2250. Meanwhile USDJPY continues to move lower and has the potential to move to 103.30.

This is not exactly a dollar weakness story for EM currencies (perhaps Yuan is no more an EM currency). Trade standoff should drive equities lower and countries with inflexible imports like ours could see their currencies depreciating. 1m NDF onshore spread indicates mild buying pressure on USDINR while EM currencies have depreciated over night. Losses on Nifty can extend further than the current 1.38% during the day as the external negatives will only add to the adverse domestic sentiments. The March end INR appreciation yesterday stopped at 65.05 and for now the pair is likely to test 65.30 again. CMP 65.17, Range 65.12-65.30.