INR update: Inflow expectations suggest INR gains

The fact that BOJ did not change the target for 10Y yield should ensure that US10Y also keep hovering below 3% which should again support the view that dollar index looks due for a correction towards 92 levels. Mixed to slightly disappointing EU data has been a hindrance for sustained gains on EURUSD, in light of which today’s EU GDP and HICP flash would be important. While a disappointment would have a smaller impact, positioning suggests that a positive surprise can take EURUSD higher than 1.18.

 

USDINR 1m NDF is trading 1p left while CNH and other EM currencies are trading flat as compared to yesterday. The price action in USDINR for today and tomorrow would be focused on a large QIP related inflow (~$2bn) most of which should be absorbed by RBI which has already sold quite a bit of its reserves in the last 3 months. Medium term range for USDINR is 68.30-69.10 with the likelihood of the lower end being tested this week. For the day, CMP 68.61, Range 68.65-68.45.

INR update: CNH increasingly disconnects from INR

US economy did not grow at the higher end of expectations but the truth remains that the economy is growing at its fastest pace in the last 4 years. The theme now is that of trade war and since 12th June 2018 (Trump-Kim Summit post which Trump announced the tariffs on Chinese imports) CNH has depreciated by 7%. But other Asians have lost much lesser with KRW at 3.4% and INR at less than 2%. On the other hand MXN, ZAR and BRL have appreciated in the same period as Trump shifted focus on China. This empirical evidence of 1.5 months show that although directionally Asian currencies are looking at CNH but the quantum of move is much more muted and therefore increasingly CNH depreciation does not seem to be a risk for INR. On the other hand till the time CNH depreciates INR is unlikely to register any significant appreciation. PBOC is on an easing cycle now as it cuts rates and infuses liquidity to support growth on the other hand RBI in India is likely to raise rates to fight off inflation concerns and ensure that the currency remains attractive to foreign investors. This divergence in policy rates should also result in the decoupling of CNH and INR.

 

Given the above inferences, the main variable for INR is oil and as long as Brent continues to trade soft below 75 markets will price in some improvement in India CAD and Fiscal situation for the year. Also the fact that RBI has shown resolve and backed it with intervention of more than $20b in the last 3 months to ensure that INR does not depreciate beyond 69 should ensure for the time being that the pair remains below 69. INR forming a top at 69 view would need to be revisited if Brent goes near 78 levels or dollar index goes near 96 levels. Therefore under the present construct with a rate hike in offing on Wednesday, it is likely that USINR trades in a range of 69.10-68.30 with a possibility of a break on the lower side. Today NDF1m is trading 1p right indicating mild offshore buying pressure. CMP 68.73, Range 68.80-68.60.

INR update: US-EU trade tensions abate, ECB and US GDP ahead

The Trump-Juncker conference has ended with a positive outcome where both the leaders agreed to discuss a path which would effectively lead to free trade between the EU and US. This development should prevent the ECB to talk down the Euro like they did in June 2018 as they would not like to perturb Trump and reignite the transatlantic trade war. Therefore I would now change my view and expect EURUSD to head higher towards 1.18+ after the ECB today evening. Post this the focus shifts to US GDP tomorrow wherein the forecasts already seem to be factoring in all of US economy’s robustness (4.5% to 5%) and therefore from a risk reward perspective the likelihood of a disappointment is far more.

USDINR 1m NDF is trading 2p left now which indicates offshore selling pressure. CNH has strengthened since yesterday morning although in the last couple of hours it has slipped from 6.74 to 6.77. EM currencies have generally strengthened along with overnight dollar weakness and all time high on equities. We are nearing the month end now and general participant action suggests that between today and tomorrow we should see a lot of USDINR longs (who had earlier expected 70+ levels this month) exit their position, which should result in the pair coming lower. Broad range remains 68.30-69.10. For the day CMP 68.63, Range 68.71-68.45.

INR update: Euro moves to drive INR for the rest of the week

Trade tensions have materialized since the last ECB meeting on 14th June 2018. Although EU data negative surprise improved but it continues to be in the negative territory and gradually it is becoming clearer that the EU economic activity is not comparable to the US. Given this backdrop it is likely that the ECB stays dovish in the monetary policy meeting tomorrow driving EURUSD lower. Before shorting EURUSD I would wait for the Juncker-Trump conference outcome today, as that could be a joker in the pack.

 

USDINR has clearly not being allowed to sustain above 69. USDINR 1m NDF is trading 1p left. The risk of USDCNH moving towards 6.85 remains but with each failed impact on INR, the rupee’s resistance to CNH depreciation increases. But in case Euro depreciates to 1.1550 levels again then the risk of 69+ levels (although temporarily only) increases. Brent trades near 74 levels while India 10Y is stable t 7.8%. Medium term range is 69.10-68.30 with a possibility of a blip to 69.25 levels this week in case Euro moves lower. CMP 68.86, Range 68.80-69.00.

INR update: Trump intervenes, PBOC eases further

 

Trump directly commented on a stronger dollar, the FED raising rates and other countries manipulating interest rates and their currencies. The Fed’s interest rate policy would be not affected by what Trump says and rather it would make it more difficult for the Fed to retreat from its gradual rate hike path in case the economy actually warrants that. Going forward any trade war related news would have a muted dollar positive move. On the other hand PBOC today made the biggest single injection of medium term lending facility funds to its major banks. This is in continuation to the various measures China has taken to lower its lending rates and inject the system with more and more liquidity.  Easier monetary conditions results in depreciating local currency. Therefore with two forces acting against each other , only thing certain is uncertainty, in times of which, safe haven assets and currencies gain. Namely JPY, CHF and the USD.

 

Overnight we have seen across the board dollar weakness which has driven USDAsia lower as well. USDINR 1m NDF is trading flat while USDCNH is trading stronger today at 6.7722 from Friday’s 6.8+ levels. Brent on the other hand is trading stable in the 72-73 range which makes it a not so important factor for short term movements. Given the PBOC’s action I would continue to expect a depreciating Yuan which should keep USDINR well bid. In the times of uncertainty I have not seen INR appreciating. Medium term range 68.30-69.10. For the day CMP 68.71, Range 68.65-68.85.

INR update: Oil gains as CNH losses drive dollar strength

US 10 Y yield went higher to 2.89% with the 10-2 spread widening to 27bps. This was perhaps on the back of Powell’s reassurance that gradual rate hikes are the best way forward. A weekly closing in the dollar index above 95.25 tomorrow should boost the greenback again and bring other G7 currencies under pressure.

 

Oil moved higher to 72.8 levels (Brent) from 71.5- yesterday taking the positivity out of Indian bonds and INR partially. My expectation that USDCNH would remain well supported at 6.70-6.72 has gone wrong as the Yuan depreciated to 6.77 today. This would ensure that INR appreciation is stalled till the time Yuan reverses. On the other hand the vulnerability of INR on the back of CNH depreciation has seemed significantly less in the last 1 week. Oil would therefore remain the primary driver for INR followed by overall dollar strength weakness which would be reflected in CNH as well. Another interested correlation is that between CNH and EUR which seem to be moving in tandem with a lower beta on the Euro. USDINR 1m NDF is trading flat today as compared to 2p left for the most of this week indicating that offshore selling pressure on the pair has faded. Broad range for USDINR continues to be 68.85-68.25. For today, CMP 68.74, Range 68.85-68.70.

INR update: Dollar gains as CNH shows depreciations risks again

Powell’s speech showed a mild doubt in continuing to raise rates by saying that “for now” gradual rate hikes seem appropriate. But overall post Powell’s speech we saw shorter end US yields rising as markets became more confident of further rate hikes and the 10-2 spread narrowed again to 25bps. The dollar gained on the back of rising shorter term yields and continued strength in US economy.

 

Oil is trading lower while USDCNH continues to show risks of trade war. USDCNH has moved from 6.68 yesterday afternoon to 6.74 now. This has only caused mild selloff in other EM currencies but at the same time it will prevent incremental appreciation of EMs. USDINR 1m NDF is trading 2p left like yesterday. Equities continue their stellar run (at the headline index level at least). Runaway depreciation in INR for now looks unlikely. Broad range is 68.25-68.85. For today CMP 68.51, Range 68.45-68.70.

INR update: Robust US data fails to bring in USD gains

With US retail sales coming in line with expectations, US Atlanta FED increased its current quarter GDP growth expectations to 4.5% from 3.9%. This led to US2Y yield breaking 2.6% and taking it to its highest level since 2008. Now either market has to believe that the current growth in the US is going to sustain in the longer run, which then takes 10Y yield higher. Or the lack of reason to not hike rates in the near term, would lead to further narrowing of the 10-2Y yield spread. The former looks difficult in an environment where the US is going into a cocoon of its own with the trade war and therefore good US data looks likely to result in further narrowing of 10-2Y spread. With EU data bottoming out in June the chances are that the recovery will help EURUSD move towards 1.19 levels. Today Powell speaks at 7-30 PM IST in front of the Senate committee of banking, which could be significant and interesting given the robust US data, trade war and falling 10Y yield.

 

USDINR 1m NDF is trading 2p left indicating mild offshore selling pressure. Oil fell on news that Trump is seriously considering releasing SPR stocks while US is considering giving minor exceptions to Iran for its oil sale. Technically Brent can move lower to 68.9 levels (61.8% retracement of 80.49 and 61.77) from the current 72.2 levels. CNH looks stable today and has been well supported above 6.70 levels. India bond yields have moved lower on the back of oil at 7.74% which should help INR gains. 68.30 is a strong support and convincing break of the same can bring in another 1%+ kind of appreciation. I would expect a lower break overnight only as during the day RBI continues to buy USDINR to refurbish its reserves. CMP 68.42, Range 68.30-68.50.

INR update: Lower oil prices and softer USD outlook

Reports of Trump considering selling emergency oil reserves to tame oil prices plus positive developments in Libya (the recent stoppage in its largest oil field seems temporary) has kept oil prices below 75 levels. Dollar index reversed from 95.25 (200WMA) and is trading lower now at 94.63. US 10-2Y spread is trading at a 11 year low of 24.6 bps. This narrowing of spread should keep dollar index capped at 95.25 for the time being. Today we have the US retail sales where robust data would have little impact while a disappointment could lead to sharp fall in shorter term yields and therefore the dollar.

USDCNH looks relatively stable today and is nearing its resistance zone of 6.72. USDINR 1m NDF is trading 2p left indicating lack of offshore buying pressure. Most EM currencies have appreciated since Friday evening. India’s trade deficit of $16.6bn on the back of higher oil imports affected INR appreciation sentiments adversely. But I would think this was expected plus is a lagging indicator. With oil prices appearing to be capped near 80 levels and the worst season for INR behind us along with an outlook of a softer dollar in the near term, I would think that USIDNR can still head towards 68.30. Medium term range 68.30-68.85. CMP 68.55, Range 68.60-68.40.

INR update: Trade tensions abate, could lead to short term INR gains

US core and headline CPI came in line with expectations leaving the yield curve where it was and with it the dollar. News reports suggests that China and US have shown intent for engaging in talks again to resolve their trade tensions. Fed speakers in general seem to be mildly concerned about trade war but at the same time do not want the market to unwind two more rate hikes from the curve. A weekly close in USDJPY below 112 would signal a reversal or else the target remains 113.26 (200wma). Similarly on the dollar index 95.19 (200 wma) looks like a good resistance now (CMP 94.87).

 

USDINR moved towards the lower end of the range of 68.30-69.10 with declining oil prices and higher equities. USDCNH looks toppish near 6.7 (CMP 6.685) and a move lower in USDCNH would make INR appreciate sharply as well. The news of US and China engaging in talks again along with Trump’s longer deadline of 30th August on next round of tariffs makes me think that 6.60 to USDCNH is more likely than 6.75, therefore now 68 could come sooner than 68.50 on USDINR. A daily close below 68.30 on USDINR can create a sharp down move towards 67.50 levels. A daily closing today above 68.40 would put the pair back in the broader range. With oil coming lower, India 10Y gsec yield below 6.8%, USDINR 1m NDF trading flat the likelihood for 69+ levels in the near term looks low. Important weekly close for USDINR today, CMP 68.34, Range 68.20-68.40.

INR update: Lower Oil; stronger dollar and higher equities

Brent oil fell from ~79 to 74.75  levels on the back of Libya production coming back into the market (at 350k bpd). This plus trade war hit commodities across the board driving US equities lower. I would think the recent escalation in trade sanctions (US-China, US-EU) led to the CNH weakness and dollar strength across DM and EM currencies. What is not explainable is the bounce in equities that we have witnessed across Asia today morning, which just reiterates the fact that it doesn’t pay to be an equity bear. Today US CPI would be critical for currency and bond markets. A YOY number of 2.8% and higher should ensure continuity of current market levels, while a lower print could result in markets driving shorter term yields lower and along with it the dollar index.

 

INR is the only currency which has not been hit with the overnight dollar strength, a true decoupling (temporary for sure!). On one hand there is the positive of a lower oil price while dollar strength against all EM currencies should have driven USDINR higher. USDINR 1m NDF is trading flat to slightly left. I would think that oil prices sentimentally would only affect USDINR for a shorter period of time while overall dollar strength/ weakness should remain the primary driver for USDINR. Medium term range 68.30-69.10. My view for short USDINR for a target of 68.40 would be under scrutiny today because of dollar strength. CMP 68.65, Range 68.55-68.85.  

INR update: Equities and Yield curve suggests an approaching risk on

Longer term yields had started running up since August 2016 and perhaps they made a peak in April 2018 when markets started expecting ECB to delay rate hikes on the back of weaker data. Now for the shorter term, where overnight rates become more important, the FED might be the next DM (and last one) to delay rate hikes. US2Y yields have not been able to break 2.59 for 3 months and the flattening of 10-2 spread, could push the FED to push shorter term yields lower.  With this change in the yield curves, monetary conditions could start looking accommodative again resulting in US and EM equities making new highs. The concoction of lower short term yields and higher equities in turn should keep the dollar subdued, Euro stronger with ample support to EM currencies. Meanwhile German Zew today could provide direction to Euro.

 

Looking at CNH it seems that the US-China trade story is on the backburner now. The same indicator (CNH) prevents me from buying USDINR now. USDINR 1m NDF is trading flat now as compared to onshore 1 month. EM currencies since yesterday night are mixed while since today morning they have appreciated mildly. Reiterating, medium term range for USDINR 68.30-69.10, with a break resulting in sharp moves. Currently my bias for the pair is lower, i.e., USDINR can head towards 68.40 this week. CMP 68.79, Range 68.85-68.65.   

INR update: Dollar fatigues as US wage increase disappoints

 

The lack of upward momentum in dollar index played out as expected driving it lower than 94 (CMP 93.88). Technically the next target could be 93.17 and 92.89. This has been accompanied by a mild risk on as the trade sanctions kicked in (as it was already well priced in). The other reason for equity markets to celebrate could be the flattening yield curve (sounds absurd!), as markets would now expect the FED to slowdown and therefore monetary conditions would become more accommodative. The first seeds of this FED rate hike slowdown has been sown by Atlanta FED President by starting a debate around the flattening yield curve. Strong job creation in the US accompanied by lack luster wage increase perhaps also helps the argument that the Fed need not be so worried about inflation.  A decline in short term yield curve should have a negative impact on the dollar, i.e., as and when the market prices a step back from the Fed. Today we have Draghi speaking while this week we will get the inflation number from the US which will be the most important.

USDCNH has cooled off post the event date of trade tariffs. USDINR 1m NDF points have come lower to 27p as compared to most of last two weeks 35p and current onshore’s 26p. The dollar index and mild risk on climate is the driver for the half a percentage overnight INR appreciation, which in line with most EM currencies globally. During the day we expect aggressive buying from importers as markets still see INR weakening over the medium term. Broadly USDINR should trade in a range of 68.25-69.10. A daily close outside this range will call for a sharp move in the respective directions. FII outflows continue on a regular basis but dollar weakness currently could outweigh the buying. Since morning we have seen aggressive bids which can reverse during the European session. CMP 68.67, Range 68.75-68.45.

INR update: Flattening yield curve could indicate reversal in DXY

 

The FOMC minutes showed worries over trade sanctions and inverting yield curve. The trade tariffs kicked in earlier today while Trump tweeted that US can finally put duty on Chinese goods worth $500bn. I would think if trade war tensions escalate then the FED will be forced to retreat and markets would take off medium term rate hikes out of the pricing which can result in dollar heading lower again. The narrowing 10-2 spread (now at 29bps) and the failure of dollar index to reclaim 95.50 levels (in spite of splendid US data), makes me think that the dollar index might have made a high for September quarter.  A weekly close in dollar index below 94 would confirm a downward view in the dollar index.

 

If the view on dollar index is on the verge of changing then the view on INR has to follow. In spite of CNH depreciation INR has been well protected at 69 levels. The last 15 days was a period when NDF 1 month was trading 10 p right as compared to onshore and in spite of that we did not see runaway depreciation in INR (yes I would have expected more). Also once the trade sanctions have kicked in today CNH could stabilize taking volatility in USD Asia lower. A daily close above 69.10 would open the door for 69.73 while a daily close below 68.25 could indicate a sharp move down towards 67 figure levels. CMP 68.86, Range 68.70-69.05.    

INR update: India-US inflation differential set to widen; could keep INR under pressure

ECB comments to ensure that market prices a rate hike in September 2019 rather than Dec 2019 is a guidance before time and therefore would have limited impact. Trump’s asking for lower oil prices should ensure that Brent remains capped at 80 levels. The first act of Trade war ends tomorrow with US and Chinese sanctions kicking in. Unless the Dow closes below 24k on a weekly basis, we cannot say that a global risk off environment has kicked in. Although the 10-2 curve continues to flatten and projects an approaching slowdown in the US economy. US services ISM and FED minutes will be crucial today.

 

The increase in MSP by government is likely to take inflation in India towards 5.6% by March 2019. Over the medium term one of the driving factors for USDINR has been the inflation differential between India and US. Generally when Indian inflation as compared to US goes lower we see INR appreciation. Basis one year inflation projections by the FED and economist’s revised projections after yesterday’s MSP increase, the inflation differential between India and US is likely to head towards 3.5% from the current ~2% levels. This could mean that over the next 6-12 months USDINR stays on an upward trajectory.

 

USDINR has reflected the movement in USDCNH over the last week with lesser beta. The uptrend in USDCNH is still intact although the sharp down move from 6.73 to 6.61 creates uncertainty for short term trades. I would think that USDCNH would restart its upward move towards 6.7 again.  USDINR 1m NDF is trading at 29p which shows only mild offshore buying pressure while Nifty continues to trade in a small range. I would continue to expect INR depreciation in the short term with high chances of 70 levels in July. CMP 68.82, Range 68.74-68.95.

INR update: Data shows robust US growth as Trade War Looms

News of political concerns in Germany abating drove Euro higher and Tech stocks in the US helped risk sentiments in the NY session. Equity markets seem to be holding on (except in China) in spite of the trade concerns. Rumors suggested that Trump is preparing to pull out of WTO. This US administration seems to be delivering on all its promises so that might be the next step in the ongoing trade war and an announcement to that effect can happen as early as 4th July. US growth continues to be robust as reflected by the manufacturing ISM while Euro zone PMI continues to fall (although still at a healthy level of 55). Today EU retail sales will be important to ascertain if the slowness in economic activity in EU has extended into the summer as well.

CNH continues to be focus and with Hang Seng and Shanghai stock exchanges falling, it will be prudent to expect a fall in risk assets all across as we approach the trade tariff deadline of 6th July. A weekly close in CNH above 6.7 would perhaps open the door for a round 7. USDINR 1m NDF is trading at 35p as compared to 27p on shore, this indicates similar buying pressure like yesterday. EM currencies continue to gradually depreciate. Asian equities are flat except for Chinese equities which continue to register big losses. India 10Y bonds are stable at 7.89% and INR does not seem to creating a panic in bond or equities. This would mean that RBI would not be too worried with 69 plus levels. Specially after Mr. Goyal asserted that depreciation in INR is because of exogenous factors. The view remains of 70 in July. CMP 68.89, Range 68.80-69.20.

INR update: Trade War rhetoric to drive markets this week

As we approach 6th July the trade sanctions related concerns in the market would increase. The most likely scenario is a last minute deal with Trump announcing victory although he would be retreating, having said that there is no news of any current negotiations between US and China. On the other hand German political tensions between Merkel and her interior minister on the issue of migration would keep Euro on the back foot for the time being. Meanwhile the 10-2y yield spread in the US continues to narrow indicating a possible inversion in the medium term.  So the base case for the week is of weakness in risk assets with dollar strength across except JPY.

 

USDINR 1m NDF is trading at 30p while CNH continues to depreciate (6.648). Other EM currencies have mildly depreciated since Friday. Equities in Asia seem to be pricing in a moderate to major concern over trade sanctions. At 9 AM we saw aggressive offers but since then USDINR has been bought by nationalized banks. Looking at CNH and trade sanctions deadline on 6th July, USDINR should continue to depreciate during the week towards 69 again. CMP 68.45, Range 68.40-68.60.