INR update: Markets turning towards dollar strength

US10Y has convincingly broken 3.05% (now at 3.1%) with 10-2 spread at 51bps+. This is a dollar positive setup and a weekly closing on the dollar index above 93.43 should clear the way for 95.15.

 

USDINR 1m NDF has cooled off to around 9p right now as compared to 12p right yesterday. EM currencies continue to appreciate since day before yesterday evening led by TRY, MXN, ZAR and RUB. Oil trading at 79+ levels continues to put pressure on India 10Y yields (7.932%). Along with EM currencies, BJP forming the government perhaps is also keep INR stable for the time being. FIIs continue to pull out money from Indian assets (although not in huge sums). Price action seems to suggest intermittent selling by RBI. Medium term view remains of INR weakness. CMP 67.63, Range 67.55-67.80.

INR update: US yields break out as curve steepens

Yesterday was a critical day as far as the dollar story is concerned. US10Y yields sustained above 3.05% while 10-2 spread broadened to 49bps currently from a low of 42bps 2days back. This is something that a structural dollar bear like me did not expect and therefore if I get a weekly close confirming the same, I would bite the bullet and change my view to medium term dollar strength. The reason for this change in market sentiment perhaps is the fact that US growth continues while Europe and Japan have showed continued signs of weakness.

 

If dollar strength starts when USDINR is at ~68 then by the time dollar index reaches 95+ (CMP 93.25) levels, INR could easily hit new lows (but let’s wait for the weekly close). USDINR 1m NDF is trading 13p right while all EM currencies have appreciated since yesterday 7-30PM IST. Equity markets are now showing signs of rising US yields. RBI intervened aggressively with intent for the first time in this up move, bringing down USDINR from 68.13 to 67.80, but one can only wonder if the intent has come a tad late. India 10Y yield show no signs of respite (we can expect more aggressive OMO purchase announcements). USDINR volatility is likely to go up but it should be traded looking at overall dollar strength/weakness plus oil prices. Since RBI has shown conviction today USDINR might find it difficult to go higher than 67.95 today while other factors might keep it higher than 67.75. CMP 67.81, Range 67.75-67.95. I would want to go overnight long looking at US yields.

INR update: BJP emerges with clear majority

US Bond yields are higher at 3.02% which has resulted in mild dollar strength since yesterday. A weekly close in US10Y yields above 3.05% along with 10-2 spread above 50bps (unlikely) could change the lower dollar index view. EU GDP and US retail sales will be the two important pieces of information along with FED speak.

 

BJP’s has won a clear majority in Karnataka against all expectations which has taken Nifty higher by 1%. Rupee and bond markets both ignored the news which started INR appreciation in March 2017, i.e., of continued political stability in India. A daily closing today below 67.45 would indicate some relief to the up move that we have seen. Nationalized banks have been buying USDINR aggressively at dips (67.55) which is surprising while they also sell the pair at higher levels leaving other participants confused regarding their policy objective (perhaps deliberate!). Not that volatility has been contained either. I would still expect the electoral outcome to reflect in Rupee by EOD although the dip needs to be bought given the rising bond yields. CMP 67.53, Range 67.70-67.20.  

INR update: If BJP wins 100 seats in Karnataka INR can head to 66.50 temporarily

One year before the union elections the policy makers would want to ensure that panic does not set in the economy. A possible cause for the panic could be INR depreciating beyond 68.90 or 10 y going above 8%. To avoid this a BJP victory in Karnataka could be the catalyst for the central banks to sell USDINR more aggressively and bring it lower. 

 

How does this fit in the RBI's monetary policy objective? If anything the RBI is worried about inflation going higher in 2018. The BJP would not like to make the mistake of UPA which allowed inflation to go out of control and subsequently got voted out. Therefore it would make sense for the RBI to use such opportunities to sell USDINR (or at least allow INR appreciation) and give the absorbed liquidity back to the system through OMO purchases, thereby controlling yields also.

 

Dollar strength or weakness always plays a pivotal role in deciding where INR goes. Dollar index has failed to give a close above 92.57 levels in the last 2 weeks perhaps indicating that the correction up is over. Complimenting this EURUSD failed to close below 1.1936 in spite of making a low of 1.1820. Therefore the current dollar weakness will also support INR appreciation in the short term if the election results fall in place for the incumbent central government. Other EM currencies have also appreciated more that INR in the last couple of days and my comparable index shows INR at 66.75 according to current EM currency levels. For the day CMP 67.25, Range 67.31-67.11.

 

Caveat: this view is tactical only as the current account pressure on INR does not change because of the election results neither would FIIs start putting money into India. At most the FII outflows might decrease for the time being.

INR update: US CPI to be watched for today

Today Carney is expected to be dovish given his recent comments. GBPUSD if it closes the week above 1.3550, then the pair could be in for a sharp up move and vice versa. US CPI today could surprise on the higher side (consensus 0.3% mom) given the increasing pressure on the labour market which could take the dollar index higher with Euro expected to be the primary loser in G10 in case of further dollar strength.

 

USDINR 1m NDF is trading 7p right as compared to 8p yesterday. EM currencies have mildly appreciated since yesterday along with dollar index’s mild cool off. Equity market have registered gains (against what I expected) overnight. FPI flows continue to be substantially in the negative while India 10y is back at 7.75%. Medium term outlook of INR remains that of depreciation towards 68 but today  might not be the day it breaches 67.50. CMP 67.39, Range 67.50-67.25.

INR update: Expecting further but temporary dollar strength

The move in dollar index is largely related to one sided positioning of dollar shorts as the yield curve largely remains where it was with 10-2 spread staying below 50 bps. In this case, EURO longs continue to be large at $18b (4th May) and with 1.1936 breaking convincingly, a further break of 1.18 and could open the door for  1.1554. Meanwhile the positioning for other majors (GBP, JPY and AUD) are near neutral and therefore I would expect bulk of dollar strength against Euro. Similarly the dollar index can now move to 93.6 a break of which can show 94.20. I would not abandon the view of a structurally weaker dollar as yet as the rising US fiscal deficit story seems stronger than the unexplained short term moves meanwhile in the larger picture the move till 94.20 should seem like a correction of the move from 103.82 to 88.25. Meanwhile as expected Trump continues to deliver on his promises without much reaction from the markets.

 

USDINR 1m NDF is trading 8 p right while debt outflows continue at a more than comfortable pace. Oil trades above 76.5 which would ensure that INR remains under pressure. The reversal in INR will come along with dollar index which could itself move higher by another 1% before moving lower. Therefore in the medium term USDINR looks like it is headed to 68. Recent RBI intervention and policy measures indicate that the policy makers do not want INR to depreciate beyond the other EM currencies spectrum while rupee weakness in tandem with dollar strength has been accepted. Equity markets will find it difficult to rise from here (in the near term) given the scrapping of Iran deal. CMP 67.35, Range 67.27-67.53.

INR update: RBI uncomfortable above 67 for now

The excessive EURO long positioning of the market has resulted in a sharp decline in EURUSD before today’s FOMC. A break of 1.1936 could bring in 1.1550 (although unlikely). US10Y has failed to comprehensively break 3% while 10-2 spread is still hovering below 50 bps only. Both these would suggest that dollar strength could have limited momentum after today’s FOMC. I would look at 92.56 on dollar index and 1.1936 on EURUSD on weekly close basis, as crucial levels to ascertain further direction for the dollar. Fresh EU data in the new month will also be critical to ascertain if the negative data surprise of the last 2 months has come to an end or is continues.

 

RBI measures to attract more short term investments in government/corporate bonds plus to allow higher cost ECBs, is likely to affect yields (if at all) rather than rupee. One year before next year elections short term debt investments would come in only on a currency hedged basis (for arbitrage purposes). Therefore the impact of these measures is unlikely to result in major inflows on spot. Since I am looking at 92.56 as a strong resistance on dollar index I would expect 67 to hold on USDINR. On the other hand RBI’s Friday announcement shows concern on depreciating INR in the policy circles, therefore RBI should increase intervention if INR depreciates further. The move up would only happen if dollar index breaks this level and moves to 93.5/95.15, in which case RBI would also stand aside. For the day CMP 66.77, Range 66.70-66.95.