INR Update: Relief rally in risk could be short lived

The move in Yuan suggests that China is weaponising it’s currency in the trade war. In case of Yuan depreciation, all EMs will follow therefore any relief rally in EMs should be short lived in the absence of a sharp reversal in USDCNH (weekly close below 6.60 will be critical). In the EU summit, member states reached a deal on migration which was being looked as a threat to Merkel’s government and to the EU itself in the longer run. This news drove EURUSD higher in the Asian session.

 

USDINR 1m NDF has come lower to 29p indicating reduced buying pressure since yesterday. Yuan and KRW have appreciated since yesterday along with other EM currencies. Oil continues to trade above 77 with FII outflows remaining at elevated levels. The down move in USDINR today could extend to 68.25 levels which should be short lived and a quarter end related move only. Equities in Asia are in the green supporting risk. I would expect to see 70 on USDINR in July unless CNH stops depreciating. For today CMP 68.56, Range 68.70-68.25.

INR update: Dollar strength takes INR to 69; Further depreciation likely

Trump administration blew hot and cold moving the markets both ways yesterday evening. Point is that the trade concerns continue while investment sanctions would have abated for the time being. US with its differential growth and foot stepping approach seems like the clear winner with US dollar appreciating against all currencies including JPY. I would expect to see 96 on the DXY now (CMP 95.22).

 

The fact that INR has depreciated along with other EM currencies would make RBI less worried and therefore gradual and coordinated depreciation of the currency will be allowed. REER arguments would now kick in with experts arguing that this correction of INR overvaluation was long due.  Daily close above 69.25 plus continued dollar strength would lead to markets expecting 72 and new levels, giving them courage to build new longs. Therefore such a close could bring in 70 pretty fast.

 

USDINR 1m NDF is 36p right indicating increased buying pressure since yesterday. EM currencies specifically CNH has depreciated considerably over the last 2 weeks. CNH has been well correlated to EURUSD and at the same time it will give RBI the comfort to allow INR depreciation. We can see mild selloff in Indian equities and bonds because of INR depreciation. CMP 69.05, Range 68.86-69.25.

INR update: Yuan continues its losses driving other EMs

Markets are in a mild risk off mode till now, if the Dow breaks 24000 (200 DMA) and gives a weekly close lower then we can be in for a large down move. Over the last few years any market participant would have learned that it does not pay to be equity bear, therefore the 200DMA is more of an opportunity to buy Risk for now, unless a breakout is confirmed. Potentially the reason could be a U turn by US on the trade/investment sanctions on China and Europe. Trump could easily do this and shift focus to Iran as his new punching bag. FED speakers and data would not be consequential for now as trade news is at the forefront.

 

USDCNH continues to drive Asian EM currency losses while the fragile EMs (TRY, ZAR, MXN, BRL) are relatively more stable. USDINR 1m NDF is trading at 34p which shows increased offshore buying since yesterdays 28p. India 10Y yield has increased again to 7.87 as FIIs continue to pull out consistently from debt and equities. A break of 68.90 and daily close could lead to panic buying in the pair and therefore I would expect RBI to prevent the move. The move is unlikely to happen without dollar index crossing 96 levels. Today also we are seeing intervention like price action although other factors continue to work against INR. CNH needs to be watched closely for further direction in INR. A daily close above 68.45 should quickly show 68.90 the next day. During the day RBI would ensure that runaway depreciation doesn’t happen. CMP 68.55, Range 68.60-68.40.

INR update: Yuan continues to depreciate amid trade/investment sactions chatter

The fact that major economies don’t bomb each other anymore like 1940s has a lot to do with trade and investment linkages. And if these dependencies are removed then we would go a full circle but that is perhaps decades away, and hopefully never.

 

The question in currency markets is whether increasing trade sanctions are going to benefit the dollar or otherwise. For other asset classes the answer is much simpler even though gold has not been showing its safe haven properties off late. Purely from trade/investment sanctions play I would think given the fact the equities will lose their attractiveness we will see a run to safe havens in currencies leading to gains in USD against most DM and all EM currencies. In this environment why I would not favor the Euro is because of the uncertainty in French and German politics along with Brexit related concerns, all of which would keep the attractiveness of Euro as a reserve currency, to low. Only once the markets are clear about the trajectory of these sanctions (whether they are for real or just posturing for negotiations) will they look at other factors like a potentially inverted US yield curve or a slowdown/recovery in EU.

 

Yuan seems to be factoring in a major impact from the trade sanctions chatter which should keep other EM currencies and INR under pressure. USDINR 1m NDF is trading at 28p indicating higher offshore buying pressure since yesterday. Oil, most EM currencies and FII flows do not help INR’s cause either. Nationalized banks have been seen selling USDINR at 68.20 levels. Medium term range for USDINR is 67.80-68.50. CMP 68.20, Range 68.14-68.45.

INR update: Trade Sanctions on EU and Losses on Yuan

The oil deal of increasing production by 1m bpd was priced in and consequently we saw oil and other assets moving against expectations post the announcement. Trump has targeted the EU with new trade sanctions which shows that the US President is going to the take the trade war to its conclusion with most of its major trading partners. . This would mean that equity markets would continue to remain sideways while the dollar could remain well bid except against JPY and other safe haven currencies. This week  major new could be the political developments in Europe related to Merkel’s efforts to maintain her coalition or the EU summit on Thursday and Friday where we could hear about Brexit and the political developments in France. These could continue to weight on EURO which has found it difficult to edge higher than 1.1650 levels.

 

Offshore buying pressure in USDINR is muted as per 1m NDF. Other EM currencies have depreciated since Friday night (except TRY which gained because of Erdogan coming back to power).  CNH has depreciated sharply to 6.54 (0.5%) along with KRW. Oil trading above 74 with equities trading flat does not bode well for INR. While the international factors remain INR negative the quarter end seasonality and some expected inflows could support the local currency. I would expect USDINR to trade in the range of 67.80-68.50 in the medium term. This week my bias would be for INR depreciation. CMP 68.10, Range 68.00-68.25.

INR update: All eyes on Vienna

Murmurs that the US is considering restarting talks with China has put trade sanction concerns on the back burner even though equities still seem to be factoring in the long term impact of such measures. Italy appointed two anti EU politicians into key finance roles which led to increase in Italian yields and should continue to weigh on the Euro. US 10-2Y spread is at 35 bps and at the same time German 10Y yields have fallen to 34bps from 62bps a month back. This makes it confusing whether currencies will look at the interest rate differential or the steepness of the curve for US and Germany. In the short term I think the yield difference favours the USD over EURO while in the medium term the flattening US yield curve will prevent dollar from appreciating further. Gains on the USD therefore should be capped at 96 (CMP 94.80).

 

Oil prices suggest that markets are pricing in a significant increase in oil production at the OPEC meeting today (~ 1 mio bpd). Consequently USDINR has come down to 67.82 levels. Considering Iran’s souring relationship with the US, it is unlikely to cooperate with Saudi Arabia, so the base case could be of a disappointment. USDINR NDF 1m has come down to 26p from 32p yesterday morning while other EM currencies have appreciated from yesterday, even though CNH and KRW are at similar levels. I would expect USDINR to take support at 67.80 for most of the day. Oil prices can move in the second half as we start hearing from Vienna leaving the range wide for the pair for the day. CMP 67.83, Range 67.63-68.20.  

INR update: FED and ECB comments confirm divergence

The markets are assuming that all hurdles to risk will somehow and eventually be averted. Basis this assumption a couple of days of silence on trade sanctions has led the market back to a pro risk mode. The only constant is that dollar strength continues. ECB’s Nowotny reasserted that they want a weaker Euro giving the reason of rate divergence. While Villaroy (ECB governing council member) seemed to suggest that the first rate hike might come well after 2019 summers. In the short term I would expect EURUSD to head to 1.1451. Powell continued with the FED’s gradual rate hike comments suggesting that the neutral rate would be around 3%. This rate hike rhetoric can lead to a inverted yield curve, which can be a hurdle for a strengthening dollar from here. DXY is at 95.23 and the target could be 95.89/96.01. For dollar index to go higher than 96 there has to be further development on trade sanctions or rate divergence. GBP failed to rally in spite of May winning the vote in the parliament which indicates the strong dollar view from here in the short term.

 

USDINR 1m NDF is trading at 32p as against onshore’s 23p indicating offshore buying pressure on the pair. Yuan trades near 6.5 while KRW is facing resistance at 1110 levels. Other EM currencies have mildly appreciated over the last couple of days with improvement in risk but CNH and KRW have an overriding effect on USDINR for intraday movements. Price action suggests that nationalized banks sold aggressively at 68.20 levels. FII outflows from debt and equities continue. A break of 68.27 could bring in 68.40 otherwise it could be a quiet day with a narrow range. CMP 68.21, Range 68.10-68.25.

INR update: Trade tensions could keep risk assets under pressure

The world now realizes that Trump intends to deliver on his trade sanction promises and we can soon see China also rattling its sabre with more than just counter tariffs. In this environment risk assets are unlikely to continue their dream run. Euro should have limited upside for now and tomorrow after Sintra conference (where Draghi, Powell and Koruda speak) we can see EURUSD breaking 1.1550 and heading lower. First target remains 1.1451. USDJPY should also remain capped around 110.20-110.50 levels with yields falling and risk not supporting. A good dollar neutral trade could be short EURJPY at 128 levels.

 

USDINR 1m NDF is trading at 35p from yesterdays 30p which is 11p right as compared to onshore. EM currencies are largely flat except for ZAR, since yesterday. Equities in Asia look under moderate selling pressure given the trade tensions. FIIs have now withdrawn more than $5b this year from Indian debt and this can accelerate because of INR depreciation. Since morning foreign banks have been on bids along with commodity importers. Medium term range remains 67.80-68.50. CMP 68.10, Range 68.00-68.25

INR update: Trade sanctions reflecting on currencies

The ensuing trade war between the US and China could result in a weaker Yuan and negative equities for the time being. Similarly it seems the decline in Euro could continue as the rate divergence increases and perhaps this also is related to the trade war. On Wednesday Powell, Draghi and Kuroda speak in a panel discussion in Sintra, which would be crucial specially to ascertain what Draghi’s stance is, in an international forum. Opec meeting over the coming weekend could result in an increase in oil production (although opposed by Iran and perhaps 2 others) which in turn is driving oil prices lower.

 

USDINR 1m NDF is trading at 30p pr 7p right. Other EM currencies and specially CNH and KRW have depreciated since Friday on the back of the trade sanctions. Oil prices and inward flow expectations are helping INR for the day as it opened at 68.15 and got sold off to 68 levels. The government and RBI seem to be concerned about depreciating INR as is evident from the revised FII guidelines released on Friday and aggressive intervention in the market. On Friday evening USDINR went higher than 68.40 in the offshore market. Between supportive CAD and inflows on one side and weakening EMs on the other, global currency trends should prevail. The medium term range has now shifted to 67.80-68.46. CMP 68, Range 67.87-68.20.

INR update: ECB surprisingly becomes overtly dovish

Back in August 2016 Jackson Hole, the central bankers decided that it was time to push yields higher by exiting monetary policy stimulus gradually. From there on yields rose as the major central bankers changed their tone supported by growth, inflation and US fiscal stimulus. Yesterday’s ECB seems to have broken that coordination between FED, BOJ and ECB. As the FED turned hawkish the ECB has been overtly dovish creating a divergence which cannot immediately narrow.

 

Seems like recent EU data and the new Italian government has spooked the ECB or perhaps in another interesting theory the trade war between the US and EU is manifesting into a currency war. ECB took out all rate hike expectations in the next 1 year as it asserted that interest rates would remain same till the summer of 2019. Then the way Draghi spoke was very similar to 2015 when the entire purpose of the monetary policy press conference was to hammer the Euro. Yesterday’s price action will make a lot of strategic Euro bulls change their stance and I would think that we could see Euro heading towards 1.1451 and perhaps even lower before it finds a bottom. On the other hand the 10-2 year spread in the US bond market has slipped to its lowest since 2007 at 37 bps. This indicates waning confidence in sustainability of inflation and sustained rate hikes. This for now should indicate limited upside for USDJPY.

 

Euro has in the recent past shown a strong correlation with CNH and therefore a selloff in Euro would at the least prevent any INR appreciation. USDINR 1m NDF has shifted to 10p right from around 6p yesterday while TRY, ZAR, MXN, KRW continue to depreciate. FIIs continue to pull out significant but not huge sums every day. With the break of 67.80 the new range shifts to 67.80-68.50 as we would continue to see Euro weakness and EMs losing out. CMP 67.90, Range 67.80-68.10.  

INR update: Hawkish FOMC but yields fail to rise

Mostly a hawkish FOMC but the 10Y yield failed to rise above 3% while the 10-2 spread narrowed, and as a result the dollar perhaps lost its second last chance (in the current up move) to register further gains. The last opportunity comes today, if the ECB turns out to be dovish and does not talk about APP then we could see Euro heading lower. On the other hand Euro gains post the ECB would suggest that we can see a sharp move lower in the dollar index.

 

USDINR 1m NDF has moved lower to 27p from 30p yesterday. EM currencies have been trading flat since post the FOMC yesterday. Equity markets seem moderately concerned with the FED dot plot of 2 more rate hikes in 2018. Market chatter is about a large investment into an Indian Bank to the tune of USD 2.5 bn dollars but the timing of the inflow remains uncertain. CMP 67.58, Range 67.65-67.45.

INR update: Will the FED step up the heat? Probably not

Market reports suggesting the FED will hold a press conference after every FOMC indicated that the FED might be turning more hawkish, which in turn gave a mild boost to the dollar. Yesterday US CPI was as per expectations with YOY core at 2.2% while the headline read at 2.8%. Consequently a hawkish FED is priced in already with a 25bps hike. It is only if the FED surprises with incremental steps (like higher dot plots) that we would see a further boost to yields and DXY, otherwise we could see a moderate selloff in USD post the meeting, as the long dollar positions get cut. I would think given the cool off in EU and Japanese growth, the FED would want to wait before it decides to (if at all) increase its tightening pace (either in terms of forward guidance, hikes and balance sheet reduction).

 

USDINR 1m NDF is trading 5p right while EM currencies (specially the new fragile ones) got sold off since yesterday night. Equity markets continue to look resilient even though FIIs continue to pull out money from India. Oil prices have cooled off since yesterday and international news suggests that talks of production hikes should keep the price below 80 for now. The selloff in Indian bonds and INR seems to have lost momentum for the time being. The broad range I see is 67.85-66.85 which could continue for a few weeks considering that we have seen a trending market in April and May. CMP 67.60, Range 67.65-67.45.

INR update: Trump-Kim meeting continues; Presscon at 1-30PM IST

There are speculations that Trump-Kim meeting is fixed, i.e., the terms are pre agreed. On the other hand the fact that the meeting has lasted without Trump walking out indicates that Kim is compliant. Trump would want to showcase this as his biggest achievement as a world leader and therefore the announcement should be more prolific than actual agreement, perhaps therefore leading to a risk positive environment post the press conference at 1-30PM IST. We have the US CPI today at 6PM which would be significant.

USDINR 1m NDF is trading 5p right while EM currencies have mildly depreciated since yesterday. KRW is trading stronger than yesterday which should be the key indicator for the day. Equity markets continue to register mild gains indicating the global pro risk environment. Today the Indian CPI would be critical for bond yields and therefore INR going forward. Liquidity is thin because of a unavailability of reuters D2 platform for USDINR trading. CMP 67.44, 67.50-68.28.

INR update: Eventful week ahead with US-NK summit, FOMC, ECB and BOJ

It’s an eventful week with US-NK talks, FOMC, ECB and BOJ. Although it’s very difficult for anyone to say what will come out from the US-NK summit but I would think that the fact that both are talking perhaps means that the terms are broadly agreed and the result could be pro risk. FOMC would raise rates while what needs to be seen is if the committee would end up indicating 4 rate hikes in 2018 (I would expect that it would, given the continued strong data print in the US). For the ECB meeting, it seems last week’s hawkish comments from Praet were not in sync with recent EU data or the uncertainty arising from a new anti-establishment government in Italy. Both these factors could ensure that the ECB doesn’t announce any reduction in its asset purchases and perhaps would fail to give any concrete guidance also as to when it would do the same. Therefore, I expect a dovish ECB for now and they would want to wait till July before taking the first step towards changing their stance. BOJ should also continue with its purchase programs and yield curve control without any noticeable change in its tone. The resultant impact could be incremental dollar strength against G7 currencies and positive equities. US CPI on Tuesday needs to be watched as well.

USDINR 1m NDF is trading 4-5p right while other EM currencies have appreciated since Friday morning. The upward momentum in USDINR has faded since the beginning of June. A close above 67.80 would indicate further up move towards 68.5 while a close below 66.85 could put further INR appreciation pressure. Till then we can expect the range of 66.85-67.80 to continue. CMP 67.36, Range 67.30-67.50.