INR update: Immediate break of 73 looks unlikely

FOMC expectedly raised rates and removed the word accommodative from its description of current monetary stance. FOMC expects the US economy to peak at 3.1% growth in 2018 and subsequently grow at 2.5% next year. This suggests that sometime in the next 3 months or so we will start getting negative surprise from US economic data release. Although the market impact of the FOMC was limited but as we close 2018 the FOMC’s expectation become significantly negative for the dollar in the medium term. Add to this the uncertainty of the US midterm elections in November 2018 and we can see the dollar peaking out near 96 levels before falling towards the end of the current year.

The government has shown concern plus intent to ensure that INR doesn’t depreciate beyond 73 levels. The measures announced till now have not been significant from a BOP perspective but indicate a willingness to do more if required which should keep USDINR longs cautious. Meanwhile the EM currency pressure we witnessed since end August has dissipated with TRY, CNH, and ZAR stabilizing. US 10Y yields have got rejected at 3.1% again and the FOMC statement should ensure that a breakout doesn’t happen. Add to this the developing dollar negative view (as above) and we can say that it’s likely that USDINR has peaked near 73 levels. I would sell USDINR at current levels of 72.55 and 72.95 with stop above 73.35 (daily close) or 73.55 (price) for a move to 71 levels in the next 2 months. For now Brent at 82 is the a risk to the view.

USDINR 1m NDF was trading 11p right yesterday while today it is 6p only. EM currencies have registered substantial appreciation since yesterday. Brent continues to trade above 82 on the back of US tensions with Iran. Equity markets locally seem to have stabilized and the liquidity measures announced by RBI should ensure limited stress in the BFSI sector. CMP 72.55, Range 72.62-72.31.

INR update: Eco affairs secretary thinks Rupee should be between 68-70

US10-2Y spreads widened to 27bps, the highest in a month indicating a pickup in risk appetite while the 10Y yields have started edging towards the resistance of 3.1%. With trade threats becoming real, the chances are that import tariffs and strong US growth are likely to keep US prices elevated ensuring that the FED stays on a rate hike path for the visible future. This week FOMC is likely to hike by 25bps but the most important aspect of the meeting would be the dot plots and fine prints on yields and neutral rate.

The economic affairs secretary for India believes that the fair value of Rupee is near 68-70 with an outer limit of 72. This is very different from what the same person believed a month ago, which goes to show how difficult it is to value a currency. But what the comments do indicate is that the government now aims to keep INR depreciation under control. With the selloff in EM currencies having cooled off globally the task might not be as difficult as it could have been 3 weeks back. The likely measure could be an oil swap window.

USDINR 1m NDF is trading 6.5p right as compared to 4p right on Friday. Most EM currencies have depreciated moderately since last week’s close as dollar regained some ground. Oil prices are touching $80  while Indian equities don’t show the nervousness seen last Friday. In the medium term it seems that USDINR will trade in the range of 72.85-71.50 with a possibility of a break lower. CMP 72.56, Range 72.69-72.30.

INR update: Weekend announcement awaited

The yoyo of trade tension related headlines kept swinging and currently it is slightly less worrying that Tuesday. On top of this US CPI mildly disappointed with positive comments from Draghi on EU inflation. Turkey central bank surprised by hiking rates by 625bps against expectations of 300 bps. All this resulted in USD index falling sharply from 95.60 (200WMA) to 94.50 currently. I would continue to hold the view that US economy outperformance and Trump’s pre election trade war campaign will keep USD well bid till some time before November 6^th. A weekly closing in EURUSD below 1.1650 would reassert the above view.

On Tuesday I expected the gov/RBI to announce some policy measure between then and Friday and coincidentally it was confirmed that over the weekend PM Modi will review the economic situation and come out with measures on USDINR. One of the measures could be reinstating buyers credit through LOUs which was the trigger for the change in sentiment for USDINR 6 months back. The impact for this has been significant in terms of short term trade credit unwinding plus reduction of trade credit cycle in number of months, resulting in increased demand for USDINR in the last 6 months. Rate hikes could also be announced given that it is a low hanging fruit. Somehow I believe that the government will not use its ultimate measure of raising FCNRB deposits as yet. Oil window could be another scheme that could result in reduced buying pressure.

USDINR 1m NDF is trading 6p right as compared to 16p on Tuesday morning. Today morning we saw some bids which would be overnight shorts cutting positions plus some importer buying. Over the approaching weekend there is an unpredictable event and therefore participants will lighten position during the day today. Most of strategic positions would be USDINR longs which therefore should result in the pair going towards 71.50 today. USDINR can for sometime consolidate in the range of 71.50-72.50. CMP 71.81, Range 71.92-71.45.

INR update: Oil price gain drives Rupee towards 73

US job openings data continued to surge indicating the positive surprise in US data release since mid August. As a result further narrowing of 10-2Y yields have stopped which bodes well to the USD. Positive developments in the EU-UK negotiations for a Brexit deal might keep the dollar index from breaking the 200WMA at 95.60 this week, but at the same time trade tensions and US macro performance should prevent the index from breaking 95 convincingly either.

USDINR 1m NDF is trading 16p right as compared to 12p yesterday. This is on the back of a surge in oil prices (Brent at 79.31) and continued lack of action from Indian policy makers emboldening the USDINR long positions. Yesterday I expected that there is room for 73 on USDINR but if we do not see any significant measures which bring down USDINR by 1 rupee or so, then next week markets will put Rupee through an even tougher test. I would think that RBI and the government realize this and therefore we should see some major announcement between today and Friday. Other EM currencies have depreciated only mildly since yesterday while equity markets seem to be reacting moderately now to losses on the Rupee. CMP 72.80, Range 72.95-72.60.

INR update: Policy expectation to only slow down Rupee losses for now

 

Trade tensions abated with news of US talking with China, Canada and EU. Brexit deal related optimism prevented dollar index from breaking 200WMA at 95.56 yet again. A  weekly closing above 95.56 should ensure that the dollar index heads to 97 levels.

 

Indian policy makers all this while attempted to play down concerns on depreciating Rupee by suggesting that the same is because of external factors and therefore is  not too much of a worry. This was interpreted by the markets as a free hand to go long in USDINR. Yesterday the policy makers realized the duality of the argument and expressed worry on depreciating Rupee. It is unlikely that the government would be able to come out with some measure immediately as brainstorming and execution would take some time. On the other hand the government would want to see the effect of its verbal intervention yesterday and perhaps would look to implement new policy only at the break of 73. In other words there seems to be room for 73 albeit with policy risk.

 

USDINR 1m NDF is 12.5 p right as compared to 10p yesterday. EM currencies have not registered moderate appreciation since yesterday. FII flows continue to be negative as debt outflows have picked up in September. Oil is at elevated levels of 77.52. CMP 72.36, Range 72.20-72.55.

INR update: Rupee depreciation not much of a worry till now

Trump clearly wants to beat the trade war drums louder and louder before the midterm elections. To reiterate, every time we have seen a new piece of information which negatively affects global trade, the greenback gains. On Friday Trump said that the US would put tariffs on additional $267 bn of Chinese imports raising the total target to ~$500 bn now. To add to this average hourly wages increased by 0.4% mom which was the highest since 2009. Average hourly earnings was the one component in NFP report which was not justifying the rate hike path taken by the FED, now with this parameter also showing robust US growth the case for rate hikes, FED balance sheet reduction and therefore USD gains becomes stronger. This might be the week when USD index breaks the 200 WMA AT 95.56 (cmp 95.45) convincingly and move higher than 96.

Google trends show that the public interest in USDINR in Aug 2013 was at 85 which peaked at 100 in September 2013 (perhaps due to the FCNRB announcement). This parameter currently stands at 42 only indicating that public interest and therefore the effect of the move in USDINR, is not as much till now to warrant any major policy action by the government/RBI. Also in 2013 USDINR had moved higher by 30% (53 to 69) visavis 12% (64to72) currently, which is also an indication that the move higher from here also can be substantial.

USDINR 1m NDF is trading at 11.5p right which is similar to Friday levels. Other EM currencies have depreciated on the back of a fresh assault by the US on trade with China, but USDINR seems to have been the worst hit today morning. Equity markets and government bonds seem to be starting to react only. In 2013 Nifty had fallen by 9 percent before FCNRB policy was announced. The range for this week should now be 72.20-73.20. CMP 72.40, Range for the day 72.25-72.55.

INR update: Trade war advances along with strong US data

Trump is perhaps  opening a new front in his trade war campaign and now facing the heat would be Japan. Although it is known that the US is likely to announce duty on $200 bn of Chinese imports, but the announcement could still lead to a risk off as the focus would shift to Chinese retaliation.  Given the continuation of the trade war rhetoric and strong US data it is likely that we should see USD index breaking above 96 (CMP 95). Oil has gradually come lower because of higher inventories plus mildly deteriorating risk sentiments.

USDINR 1m NDF is trading 11p right while 1y is trading 31p right only, this shows that there is no incremental offshore buying pressure on USDINR. Oil has gradually drifted lower from 79 to 76.3 now while other EM currencies have been stable over the last couple of days. India 10Y bonds are at 8.04%, off from the yield highs of 8.1% on Wednesday. All this would suggest that a break of 72.11 would need a fresh trigger and doesn’t seem likely today. RBI would want to create sharp two way movements so the correction could take USDINR to 71.45 levels which gives me a broad range of 71.45-72.20 with likely break higher. CMP 71.91, Range for the day 71.70-72.10.

INR update: Higher US growth continues as EM selloff spreads

US Manufacturing ISM printed at a robust 61+ levels much higher than the highest of expectations. This is in contrast to EU manufacturing PMI which came in weaker than its prior print of 55.1 at 54.6. China PMI was also weaker than its prior print whereas global manufacturing PMI also printed lower. The point is that this indicates that the higher US growth differential continues and in this environment the FED is unlikely to stop raising rates or slow its tapering. Thus the growing strain of dollar liquidity is going to continue which in turn will make market participants dig for reasons to sell other currencies and specially EMs. On the price action front, dollar index is making its 12^th weekly attempt since June 2018,  to cross the 200WMA at 95.56 (CMP 95.35) and a healthy print on the US Services ISM tomorrow might be the trigger for the level to be decisively taken out.

USDINR 1m NDF is trading 10p right as compared to 9p yesterday while 1y NDF is trading 42p right as compared to 36p yesterday. EM currencies are flat while KRW has moderately appreciated since yesterday night. Brent has come lower from 79.2 to 78 levels. FII flows continue to be negative for INR. The Indonesian Rupiah seems to be the latest EM currency which has joined the selloff bandwagon. Yesterday it is likely that RBI sold aggressively in the morning but that proved to be ineffective by second half. Broader range now is 71.20-72.20 while for the day CMP 71.52, Range 71.40-71.60.

INR update: US-India talks on Thursday; India Yields rise with Brent

On Thursday Mike Pompeo is in New Delhi to discuss greater cooperation in defense. But in an environment where the US is launching trade strikes on countries a meeting with the secretary of state would not come with its own risks which can hurt market sentiments in India. On the other hand US has warned India to not buy the Russian anit aircraft defense system, while Indian officials confirmed that they are going ahead with the deal. This can result in US imposing economic sanctions on India. On the back of this I would think that today and tomorrow might be days when USDINR would be bought in anticipation of a negative US comments on Trade with India.

 

Equity markets in India look stable after yesterday’s hiccup on a certain FPI regulations which came out in April 2018. USDINR 1m NDF is trading 9p right as compared to 8p right yesterday. EM currencies have registered mild depreciation since today morning. FII flows are not very encouraging for the Rupee while Brent above 78 levels will give confidence to USDINR longs. India 10y Yields are at 8% indicating spreading effects of INR depreciation. All this along with Mike Pompeo’s New Delhi visit on Thursday should keep the pair well bid. RBI allowed INR to depreciate yesterday during the Indian session which shows comfort with a gradually depreciating Rupee. Medium term range now shifts to 71.20-72 provided we don’t close below 71.15 today.  CMP 71.26, Range 71.20-71.55.