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.
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