Friday, August 31, 2018

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.

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