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.
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