Thursday, March 15, 2018

INR update: US starts focussing on India's bilateral trade surplus

US10-2Y spread is back at 55bps from almost 80 bps a month back and 65bps a week back. This indicates the increasing lack of confidence on sustainable US growth given the trade rhetoric plus the lower revised GDP forecasts after yesterday’s retail sales disappointment. The decreasing spread is dollar negative. On the other hand Larry Kudlow (the new Economic advisor to Trump) believes that a strong country needs a strong currency and he asserted that Trump also believes in the same. With this and the confusion that Mnuchin created in Davos we have no clue what the Trump administration really wants and therefore the price action is what we should focus on which for now seems to be headed towards 89.25 and then 88.5 for the USD index, CMP 89.65.

The US has apparently moved against India’s export subsidy in the WTO. This along with the recent comments on motorcycle import duties suggests that in April when the US treasury comes out with the watch list for countries indulging in currency manipulation (which is likely to include India given that RBI bought more than $56bn of FX to prevent INR appreciation in CY 2017); the bilateral trade surplus that India has with the US is going to come under pressure, which could increase India’s trade deficit further. Although this will unfold in several months but it’s important to keep an eye on these developments.

USDINR 1m NDF is trading flat while EM currencies have depreciated slightly since yesterday given the negative equities. Several IPO flows could prevent USDINR from crossing 65.05 for now while we saw strong bids at 64.85 levels yesterday also. The increasing hard stance on free trade in the US is likely to keep risk off the table in the near term. With this the range for USDINR for March should be 64.64-65.20. For the day CMP 64.93, Range 64.85-65.05.

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