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.