INR update: Fundamentally dollar unlikely to weaken; Policy looks comfortable with a lower rupee

So in the last 48 hours Trump said he wants to go ahead with further tariffs on China, threatened to leave WTO, accused China of stopping NK denuclearization and rejected EU’s offer to remove auto tariffs. On the other hand US data continues to print better than the EU. All this would ensure that a sharp dollar selloff against G7 is some time away even though the dollar index on the weekly charts showed a false higher break of 200 WMA at 95.5 and then reversed to 94.7 (CMP). EU inflation print will be the most important piece of data today along with India GDP.

According to 2012 REER, INR is fairly valued at 72 (Aug end 2018 along with some REER assumptions). One can argue that RBI would not be bothered till 72. Then another argument could be that being a developing country attracting capital, a x% overvaluation (per year from 2012) should be maintained (Raghuram Rajan’s argument from March 2014), this clearly has been ignore by the current regime. Then another argument could be that for so long INR has been overvalued so for a substantial period it has to be undervalued as a compensation. Therefore the answer to where INR is headed doesn’t lie in theory but where RBI decides to intervene and change its policy, which looks some time (at least a month) away.

USDINR 1m NDF is trading 11p right which would indicate offshore buying pressure. RBI yesterday likely sold USDINR aggressively at 70.80 levels (perhaps to control volatility) but overall the policy makers seem comfortable with a depreciating INR. Today price action suggests that the central bank is uncomfortable allowing USDINR going higher for the time being even though in the offshore market overnight, it touched 71.20. Bond markets seem to be mildly reacting to a depreciating INR as the 10Y inches towards 8% while equity markets have stopped running higher for a change. During the day all EM currencies should move in tandem as INR movements have been clubbed with TRY, ZAR, ARS (yes Argentinean Peso). Today being a Friday the light longs could book profits. CMP 70.98, Range 70.80-71.20.

INR update: Policy takes time to change, INR losses to continue

The government and RBI have changed their stance on USDINR frequently. From a bias towards weak INR pre March 2017 to allowing appreciation after UP elections. Then again RBI built reserves aggressively at 64 levels and then intervened aggressively at 69 to prevent further slide in INR. Then 69 was allowed to pass and someone said that even 80 is not bad if other currencies also move in tandem. In all of the above RBI/government has taken at least 3 months before it changes its stance. Given that allowing INR depreciation beyond 69 is not even 2 weeks old, it will be some time before aggressive intervention or policy stance would be taken to prevent further INR losses. Currently the argument of REER adjustment is back at the forefront and therefore USDINR has more room to go higher. Other asset classes (Bonds or equities) have to panic before policy prevent INR slide.

Pre election year of 2008 and 2013 have seen sharp INR depreciation on account of rising inflation and fiscal concerns. Although inflation is not a problem this time (till now) but expectations of fiscal slippages can take USDINR substantially higher. The fact that in the last 2 days even EURO, KRW and CNH gains has not affected INR, it seems that USDINR is just gaining momentum. USDINR 1m NDF is trading 11p right as compared to 4p on Friday. Oil at 77.25 (+1.5$) will ignite further trade deficit concerns. INR should not have been bothered about Argentinean Peso and Turkish Lira but because of our own choices we should watch them now.  Medium term range is 70.40 and 71.20+. CMP 70.67, Range 70.50-70.85.

INR update: Reversal signs in DXY, EUR and CNH

EUR, DXY and CNH weekly charts are showing a 3 candle pattern of a strong reversal. The last time we saw a reversal like this in EURUSD was in Nov 2017 which led the single currency gain from 1.16 to 1.25 levels. This is on the back of Trump going slightly soft on trade (Mexico deal), the FED becoming more cognizant of further rate hikes (Powell’s comments) and marginal data disappointment in the US (PMI). China on the other hand has shown that it does not want Yuan to depreciate beyond 6.9 at this juncture which also adds to the overall dollar weakness.

USDINR 1m NDF is trading 6p right today as EM currencies are trading slightly weaker than yesterday night when USDINR traded at 69.85 in offshore markets. Brent above 76 levels will put doubts into the minds of people who would want to sell USDINR on the back of dollar weakness. Equity markets and USDINR have shown little correlation as FII flows remain muted. For the week USDINR could trade in a range of 70.30-69.60. CMP 70.11, Range 70.20-69.90.

INR update: Did the FED shift to a less hawkish tone?

Powell and Bullard seem to have started a new communication theme for the FED which is not as hawkish and could be in sync with what their President wants, i.e., slower rate hikes. The FED generally persists with a particular line of communication for months and therefore further FED speakers must be closely heard now, incidentally there are no FED speakers scheduled this week.

The other interesting development was PBOCs announcement of using counter cyclical factor again for CNY fixing. Last time PBOC used it in 2017, it led to a 8% appreciation in Yuan. Technically, on the weekly charts USDCNH is showing signs of a strong reversal which could take it to 6.76-6.71 levels (CMP 6.80).

USDINR 1m NDF has cooled off to only 4.5p right from 8p right last week. On the other hand an appreciating USDCNH should be the overriding factor in the short term for INR even though Brent at 76 levels is a bigger worry from a CAD perspective. MXN can register further appreciation if the NAFTA deal is announced which can positively affect all EM currencies. The range for the week could be 69.50-70.10. CMP 69.88, Range for the day 69.95-69.70.

INR update: Expect more aggression from Trump as his risks increase

With Trump’s associates confirming felony charges against themselves they have put the President in the dock, i.e., if he loses the midterm elections in November 2018. The elections are being held for all the 435 seats of the house of representatives and 34 seats of the senate. Thus Trump would now be more desperate than ever to ensure that Republicans do not lose the elections which was visible in his comments yesterday about the markets crashing if he is impeached. Basis this I would think that Trump would step up his aggression against immigration and trade in the next 2 months. That would mean increased volatility in the currency markets with dollar gaining against the EUR, GBP, AUD and other EM currencies. US data disappointed yesterday but then politicians have become more important for markets now.

USDINR 1m NDF is trading exactly the same as yesterday, i.e., 5.5p right while the more fragile EM currencies have depreciated since yesterday evening. FII flows have picked up in August but do not seem to be enough to counter the demand arising out of the trade deficit and the pressure on other EM currencies. Oil is back at 75 levels which should continue to put pressure on INR. A close above 70.15 today would be further rupee negative. CMP 70.14, Range 70.11-70.40.

INR update: Trump intervenes and contradicts the FED and his own government

With US core CPI at 2.4% and healthy growth it is unlikely that the Fed can pay heed to Trump’s comments yesterday where the president wanted the central bank to not raise rates. Powell would most likely refrain from making a direct comment on the President’s view on the monetary policy in his 24^th of August speech at the Jackson Hole. On the other hand Trump’s mention of CNH and EUR being manipulated is in direct contrast to the treasury report (equivalent to a finance ministry report in India) which said that China has intervened heavily to prevent sharper depreciation in CNH and EU has not intervened in the currency markets as per international agreements. Basis this, I would think that yesterdays move in dollar index from 96 to 95.5 would be reversed by the end of this week.

USDINR 1m NDF is trading 7p right which is less that the 9p yesterday indicating reduced offshore buying pressure. EM currencies have appreciated in tandem with the overnight dollar weakness. From the price action since open it seems that today also INR should remain on a mild and temporary appreciation trajectory. The movement in USDINR should closely track EURUSD during the day. CMP 69.57, Range 69.40-69.70.

INR update: Increasing Italy uncertainty and hiatus in US-EM tensions

The weekly close in EURUSD was encouraging given the bounce from 200 WMA at 1.1360. On the other hand Italy 10Y yield at 3.14% (up 65bps in 1 month) indicates that for Euro zone the visible future would contain higher political risks. The next event in Italy is on the 27th September when Italy will give details of its next year’s fiscal deficit target. On the other hand Trump seems to benefit from continued noise around his foreign policy which therefore should result in continued headline risks on the trade tensions front. This could be his focus till the midterm elections in November at least. We have seen till now that trade tensions headlines results in a stronger dollar although equities don’t get affected as much. US data continues to show positive surprises although to a lesser degree while the EU data still shows more negative surprises. This data divergence along with uncertain political outlook does not give much confidence in EURUSD as a pair for the next month or so.

 

USDINR 1m NDF is trading 9p right which should prevent any sharp selloff in the pair. EM currencies have cooled off on the back of chatter of US-China talks and no incremental news from Turkey. Headlines should continue to dominate market sentiments and the immediate bias lies towards more negative headlines on Turkey and trade tensions. I would also expect some amount of panic in INR due to the recent depreciation. For the week I  would expect USDINR to trade in the range of 69.41-70.40. For the day, CMP 69.83, Range 69.70-70.13.  

INR update: USDINR breaks the psychological 70 barrier

The last thing preventing further dollar strength is perhaps the 200WMA on EURUSD at 1.1360. Looking at Italian yields at 3.10 (29bps higher in the last 1 week) and Turkish impact on European banks (although limited), it looks that it is a matter of time before EURUSD break lower than 1.1360 and provides momentum to dollar strength. On the other hand a quick resolution to the Turkish standoff might provide a relief rally but expect that to be short lived as markets will continue to focus on the vulnerabilities of various EM economies once it has got a taste of it.

 

India inflation cooled off but it doesn’t matter given the EM basket sell off where India seems to be in focus all of a sudden. USDINR 1m NDF is trading 7p right as compared to a higher 8p yesterday. The pressure on INR seems to be more offshore driven and therefore I would continue to expect INR to be under pressure during European and NY session. Other EM currencies are relatively stable today but it has not prevented USDINR from testing 70 levels. Anecdotal evidence suggest that RBI sold aggressively from 70.05 levels to 69.90. USDINR should continue to move with overall dollar index. For the medium term, volatility seems here to stay while the trend for USDINR is higher. CMP 69.87, Range 69.70-70.25.

INR Update: Rupee loses driven by EM basket effect

Turkish Lira and USDRUB depreciation spillover to other assets seems to be the reason for the overnight dollar strength and moderate risk selloff. Both are country specific scenarios with limited fundamental impact across the globe, nevertheless basket effect on EMs drove the all lower against the greenback. Today we have the US CPI where a higher number is factored in so a surprise could only be a lower than consensus print.

 

In spite of the overnight buying in USDINR, NDF 1 month continues to trade left by 1.5p like the entire week. Brent trading near 72.2 is positive for INR while CNH and KRW have also depreciated in the EM sell off overnight. PBOC has shown discomfort with Yuan at 6.85+ levels.  August FII flows seem to have turned a corner as small amount are consistently flowing back in. Dollar index still has the major hurdle of 95.4 (200WMA) to cross which it has failed since May (we have not got a weekly close). Similarly on the Euro 1.15 has held since May, in spite of the ECB talking down the single currency in its June and July policy meetings, which would make me think that a close below 1.15 on a weekly basis is unlikely. With these factors into play I think 69.10-68.30 range should continue to hold with a possibility of a break lower only. CMP 68.86, Range 68.95-68.65.

INR update: IRAN sanctions means stronger US-Saudi coordination

Contrary to disruption of supply theory, reinstatement of sanctions on Iran should keep the oil prices lower because US wants it. The primary reason for Iran to be continuously under US scanner is the fact that Saudi Arabia is a key US ally and Iran’s foe. Reinstatement of sanctions on Iran by the Republican government would have been a key demand of the Saudis, who had become quite distanced from the Obama administration who had struck a deal with the middle eastern Shea state. Thus now with the demand met oil prices should stay where Trump wants it, i.e., in check.

 

TRY continued to depreciate yesterday on account of concerns that the central bank’s independence might have been compromised and capital controls might be on their way. Although not related to INR, EM basket effect will ensure that INR appreciation would not happen when TRY depreciates sharply during intraday movements. On the other hand USDCNH continues to move higher after the Friday PBOC measure and further depreciation looks likely towards 6.9. USDINR 1m NDF is slightly left (1p) which shows no significant offshore buying pressure on USDINR. FII outflow pressure has significantly reduced on INR. Medium term range of 69.10-68.30 should continue to hold even if other EM currencies depreciate or dollar strengthen further towards 96 levels. For the day 68.85, Range 68.96-68.70.

INR update: Italy Budget concerns and Chinese data to be watched

 

The reason for the Euro selloff seems to be worries surrounding Italy’s next year budget which can lead the country to a fresh standoff with the EU, which wants the country to reduce debt. Italy 10Y yield have jumped by 20bps in the last 2 days and a meeting on 8th August would be the next event in this emerging theme for the single currency. The NFP report (U6 unemployment specifically) seems to suggest that US economic growth is picking up further creating an increasing divergence with other DMs like EU and Japan. A convincing break (weekly close or 1% higher) of 95.37 (200 WMA) on the dollar index (cmp 95.3) should indicate further up move and would lead to an all round dollar strength.

 

On Friday evening PBOC impost a 20% reserve requirement on forwards (from the earlier 0%). This was a signal that PBOC is not willing to allow a further selloff in Yuan. The first such signal to have come since June mid when the slide started. This week Chinese trade and CPI data would be critical to market expectations of further liquidity easing thereby driving the currency. USDINR 1m NDF is trading 3p left which should prevent large up move in the pair. FII outflow pressure has alleviated from the rupee. A break of 96 on the dollar index could take USDINR higher than 69. Medium term range 68.30-69.10. For the day CMP 68.61, Range 68.55-68.75.

 

INR update: Currency war could create sharp two way moves

The great things about our time is that we (most of us at least) don’t have to hide in bomb shelters when two powers fight. If this is a currency (depreciation) war then China cannot keep on winning, it is a matter of time before the US talks down the dollar. One way moves in most of the currency pairs would be difficult as the rhetoric battles swing sentiments like a pendulum. This should go on till November midterm elections in the US post which there will be a North Korea like resolution, i.e., without any conclusion.

 

Today EU retail sales would be a good indicator of EU economic activity pick up (or lack of it) in the current summer. Markets will also look at NFP and US services ISM wherein a weaker data might be of larger impact than otherwise, but the focus remains on news headlines.

 

USDINR 1m NDF is trading 3p left now while KRW has depreciated along with CNH since yesterday evening. Dollar strength should continue to push USDINR higher. Indian equities are in the green while oil levels are 140 cents higher than yesterday. Medium term USDINR range should continue to be 69.10-68.30. For the day, CMP 68.71, Range 68.65-68.85.

INR update: Trade tensions dominate; INR on track for gradual appreciation

 

A month back the flattening yield curve showed risks of the FED backing out on further rate hikes. These risks have totally abated with the FED looking all set for 2 more hikes this year as the yield curve starts steepening again. EU data has not improved as much as markets expected and therefore we continue to see EURUSD trade in the 1.16-1.750 range. Trade tariff related worries continue to dominate overall sentiments. Today the most volatile DM central bank, BOE meets. It is expected to hike which is factored in expectations.

 

RBI rate hike of 25bps has been seen as proactive and coupled with its inflation forecast, market seems to have believed that yesterday’s rate hike was the last in the foreseeable future. Given this India 10Y yield has moved lower and the cool off in yields could lead to some amount of medium term focused debt inflows.  

 

Trade worries seems to be dragging Chinese equities lower with Nifty down by 0.7% now. USDINR 1m NDF is trading 1p left only. EM currencies have mildly depreciated since morning today while in the last fortnight INR seems to have been less affected by trade related CNH selloff. FII outflows seem to have abated/reversed. Oil at 72.65 is positive for the rupee. Today does not seem to be the kind of day when INR can appreciate beyond 68.25 although my medium term bias is shifting to 68 and lower. CMP 68.37, Range 68.25-68.43.