INR update: RBI-Gov spat reports could take USDINR higher

If Section7 has been invoked to overrule the RBI then perhaps it will be safe to infer, that morally the RBI governor will find it difficult to continue. This would not be taken kindly by foreign investors and USDINR could move towards 75. Also comments have shown that the government was more worried about the Rupee fall than the RBI which believed the Rupee fall to be moderate till the beginning of October. Therefore till the issue is resolved RBI might not aggressively defend the Rupee either. This coupled with dollar strength and Indian political uncertainty should result in higher capital outflows from India. The risk is intermittent intervention by RBI and the issue between the government and RBI getting resolved, which would take some time.

USDINR 1m NDF was trading 3p left yesterday and today it is 1p right. Other EMs would not matter much in the current situation and would only affect the pace of move. CMP 74.05, Range 73.95-74.30.

INR update: Dollar breaks higher; Rupee trades resilient

In spite of the fact that Draghi made the right noises for the Euro, EURUSD broke 1.14 convincingly with the next major support at 1.1316 and 1.1297 (200 wma and last low). Similarly the dollar index has convincingly broken 200WMA and looks headed to 97 where it will face the last high resistance (CMP 96.6). Equity markets continue to register large intraday fluctuations although the weekly trend still points towards further losses. Today the most critical piece of information will be the US GDP for 3^rd quarter and a surprise above 3.3% can result in further dollar gains.

CNH and other EM currencies have weakened overnight as dollar strengthened. Crude oil continues to trade lower around 76 levels. USDINR 1m NDF is trading flat in spite of the weakness in other Asian currencies. Price action since morning is similar to what has happened this week which is showing more offers than bids in USDINR. Over the last 2 days FPIs seem to have invested significantly in Indian debt while outflows continue from equities. Medium term range for USDINR should remain 73.25-73.75 with dollar strength likely to prevent more INR gains. CMP 73.36, Range 73.32-73.50.

INR update: Oil breaks lower helping Rupee gains

Equities trade weak and US yields came off. Oil also slipped along with equities plus the fact that Saudi Arabia assured the market of adequate supply. Today morning Asian equities are in the positive on the back of US stock recovery towards the end. EM currencies have appreciated since yesterday night. USDINR 1m NDF is trading at 2.5p right as compared to 4p right yesterday. Weakness in oil prices will give more confidence to RBI only if the price sustains here, so currently I would think that RBI would want to rebuild reserves at 73.20 levels, medium term range should be 73.25-73.75. CMP 73.27, Range 73.10-73.35.

INR update: Saudi journalist's murder unlikely to snowball, USDINR to stay ranged for now

A bit of political background on USA and Saudi Arabia. Historically US has been responsible for supporting the Saudi family and creating a state under them which makes the two regimes close allies. The alliance became even deeper once Iran distanced itself from the US in the 1970s and since then, US has benefitted from the Saudi ambition of becoming the only super power in the middle east. More recently the Obama administration tried to take a more neutral approach to its middle east policy by striking a deal with Iran and slowly distancing itself from the Saudi family. The result was that when Obama visited the Saudi family’s country last time as President, the Saudi king did not even come to the Airport which is generally a protocol. But it seems that President Trump has gone back to square one with clear allegiance to the Saudi family. He has revoked the Iran deal, allowed Saudi Arabia to again determine international oil prices (and this time with Russia) and consequently this has resulted in warmer relations between the two powers. With the history and the current administration’s preference for the Saudi family it is highly unlikely that the Saudi journalists murder in Turkey will snowball into anything that can affect economic stability in the middle east.

Dollar index continues to hover around its 200 week moving average and to reiterate, I believe that a convincing break higher before the midterm elections is unlikely. Similarly I would expect EURUSD to trade in the broad range of 1.1450 and 1.1750. The confidence in the Euro range increases given the fact that latest comments and rating downgrade indicate that the Italian fiscal deficit related uncertainty might be coming to an end now. USDINR 1m NDF is trading 7p right as compared to 4 p yesterday, this is on the back of mild depreciation in CNH and KRW along with other EM currencies. Equity markets lack upward momentum while selling pressure has abated for now. In the absence of convincing dollar strength and sub 80 oil price, policy makers might not be comfortable with USDINR trading near 74 levels, therefore the broad range of 73.75-73.25 should continue to hold with bulk of price action happening in that corridor. CMP 73.81, Range 73.86-73.60.

INR update: RBI intervention could result in tighter range

The bounce in EURUSD on Friday ensured a closing above 1.15 and USD index closing below 200 week moving average  again, indicates that Euro stays in the range of 1.1450 and 1.1750 for now. The dollar index could break higher only when it is clearer that the incumbent Republicans retain both the houses in the November mid terms. Till then the dollar index could stay in established price ranges even though the US 10Y is at 3.2% on the back of the latest tax cuts for middle income groups in the US.

The RBI sold $5.1bn in the week following its monetary policy where it surprised the markets by retaining benchmark rates. This shows that action resulted in commitment to ensure that Rupee doesn’t depreciate further on the back of the monetary policy decision. The move has helped drive away reckless USDINR longs from the market. On the other hand the sharp sell side intervention will also ensure that RBI would buy aggressively at lower levels like 73 to 73.25 as the erosion in Reserves for this year has already been significant above $40bn. This should result in USDINR trading in a narrow and well defined range of 73.25-73.75 until global dollar or oil cues provide new insights.

USDINR 1m NDF is trading 4p left like Friday while FPI outflows have abated. Oil trades below 80 levels while other EM currencies have mildly appreciated since Friday. Indian equities continue to exhibit selling pressure as they pared early gains. CMP 73.25, Range 73.20-73.40.

Buyers credit scam started the slide in Rupee; Merchant buying is coming off now

• -        The above chart shows the net purchases of FX by Indian merchants from banks on a daily basis in USD mn, 20 day moving average (source RBI website).
• -        The long run average for this is USD 256 mn (since 2010). Since the exports and imports in 2011 were virtually at the current levels, there is no need to adjust this level to current date for comparison purposes.
• -        This doesn’t include interbank purchase or sale.
• -        The data clearly shows that net purchase of merchants increased as soon as the buyers credit scam broke out (Feb 2018) and buyers credit availability became scares. Subsequently RBI disallowed buyers credit altogether.
• -        This move up in USDINR further accentuated the increasing trade deficit fears. The trade deficit fears gained momentum because of increasing oil prices.
• -        The buying by merchants seems to have peaked in May 2017 but has far from normalized even now. Although the per day average is coming down but it is resulting in incremental buying of $150 mn per day above the long run average of $256 bn per day.
• -        Therefore even a decreasing average is leading to higher USDINR as it continues to put demand pressure on the pair.
• -        The below data suggests that merchants have net bought ~$35 bn extra in the last 7 months.
• -        This data is till Aug 2018 and it indicates that the average per day of buying is moving lower. September data when available should corroborate the same
• -        Going by this decreasing trend, if external factors (like dollar weakness) supports then USDINR might move lower towards 73 before pre election uncertainty kicks in.

INR update: Moderate INR gains expected in October

Medium term view

INR started its current slide in Feb 2018. If we compare the period of Feb-Sep for 2017 and 2018, then we observe that $27 bn of additional demand has come from the deterioration in trade deficit. As per RBI, investment flows have resulted in lesser inflows of $35bn in the same period. While in 2017 RBI net bought $52 bn this time they were net sellers of ~$46 bn. Assuming little changes in other components of BOP, this results in a net additional supply of $30 bn from the RBI which would be the net change in hedge positions of importers and exporters.

With a monthly trade and services volume of $70 bn a $30bn change in positioning over a period of 8 months would have resulted in complete internalizing of the weak INR view. On the other hand INR seems to be fairly valued at 73 levels as per 2012 base REER (36 currencies). Plus currently the government and RBI seem to be very vary of further INR depreciation.  Given the fact that in the last 6 months INR has depreciated higher than other EM currencies we can see a period of consolidation in INR which can take the pair towards 73-73.25 by October end, provided dollar remains soft ahead of the midterm elections in the US. Having said that any appreciation of the Rupee will be bought into as the country steps into a period of political uncertainty with state elections in December and central elections in May 2019.  

For the day

Today 1m NDF is trading 6.5p right as compared to 9p right yesterday while EM currencies have moderately appreciated since yesterday. Equity markets are in the positive territory as Saudi stocks closed 4% higher yesterday as Trump sent his secretary of state to discuss the brewing crisis between the two allies. Crude is trading softer at 81 levels while yesterday the FPI outflows seem to have abated. Given the medium term view and the factors today INR can appreciate by 30p today. CMP 73.86, Range 73.95-73.65.

INR update: US midterm election risks drive equities lower

US political risks ahead of the midterm elections on 6thNovember,  seem to be getting priced into US equity markets. US10Y yields and dollar index also cooled off as risk aversion reflected on the equity markets first. There doesn’t seem to be any US data that would have triggered the 3% selloff in Dow while the IMF cuts to growth forecast day before yesterday could be a catalyst. US CPI and ECB minutes today could be significant for the dollar index but having been rejected at 95.7 the dollar index can register 2-3% down move over the next fortnight.

 

EM currencies depreciated along with equity selloff. One might argue that INR was depreciating when equity was making new highs and therefore INR should not depreciate now. The move up in equities was led by domestic investors while FIIs are the major sellers in the last 15 days therefore the selloff in equities is likely to adversely affect INR. The positives for Rupee in this risk aversion move, is the correction in oil prices accompanied by a possible cool off in the dollar index which should ensure that pace of Rupee depreciation slows down in spite of equity outflows. Nifty looks like headed to 9950 now. The medium term outlook for USDINR remains clouded by confusion over policy. CMP 74.41, Range 74.25-74.75. 

INR update: FII outflows pickup as RBI aggressively defends 74

US10Y-2Y yield spread has widened to 36 bps which is the highest in the last 4 months indicating improved market confidence in long term inflation outlook for the US. Ongoing Italian budget concerns has resulted in Italy 10y yields touching 3.62% (up 90 bps in the last 1 month). US10 Y yields have broken the multiyear crucial level of 3.11% and is currently at 3.24%. In spite of all this USD index is unable to sustain above 200WMA at 95.7 currently. As we go near the US midterm elections on 6th November there is a possibility that political risks start getting priced in the greenback resulting in a 2-3% pullback. Consensus estimates currently indicate that Trump’s Republicans will retain the Senate while the House of Representative will have a democratic majority. The view of USD getting sold on the back of these political risks fails if we get a weekly closing above 96 on the dollar index.

USDINR 1m NDF is trading 15p right and oil continues to trade above 84 levels. EM currencies have been stable since the week opened yesterday morning except for a mild depreciation in CNH on the back of PBOC rate cut on Sunday. RBI on Friday indicated that interest rates would not be raised to protect the currency and since then RBI has more aggressively defended 74 levels. FII outflows have picked up substantially, October MTD outflows is $2.3bn as compared to $2.9bn for the whole of September 2018. RBI is likely to defend 74.20 aggressively during the day but overnight USDINR could see higher levels as oil remains at elevated levels along with an overhang of dollar strength across. RBI’s monetary policy stance gives more reason for speculators to bet against the Rupee. Even if we see dollar weakness ahead of the US midterm elections we will see limited INR appreciation as buyers would line up at lower levels. CMP 74.05, Range 73.85-74.20.

RBI policy expectations - 50bps hike

RBI last CPI projection for end FY19 was 4.8% and the last core CPI reading was 5.9% for the month of Aug 2018. Now with Rupee and Crude under pressure the case for CPI to edge higher than 5% by FY19 end and core inflation to remain or rise even higher becomes stronger. This perhaps gives RBI inflationary arguments to hike by 25-50 bps today, although the real reason would be to increase real rates further in this environment to prevent a currency stress.

A hike of 50 bps should result in temporary and moderate (30p) Rupee appreciation while a hike of 25bps might result in 73.80 being seen again. A no hike would result in 74 levels. I expect a 50 bps hike given that currency has been an area of concern for the RBI / government and raising rates in the current context is the minimum RBI could do.

Other measures like NRI bonds are unlikely to be announced immediately and the RBI will take time (and higher USDINR levels)  to reverse its aversion to oil window. Increasing rates, depreciating rupee and higher crude should result in lower growth forecast which should negatively impact equities and government bonds. Therefore the hike would not sustainably  alter the higher trajectory for USDINR.

INR update: Break out in US yields; global dollar strength

US 10 y yields broke the multiyear resistance at 3.11% and is currently trading at 3.21%. This was on the back of continued strong US economic data (both manufacturing and services ISM now hovering around the 60 level). Consequently the dollar index which has been attempting to break the 200 week moving average at 95.69 is now trading at 96.1. A weekly close above 96 should result in further up move. This dollar up move has been supported by the ongoing uncertainty of Italian budget which has resulted in Italy 10Y yields going to 3.32% from 2.7% in mid September.

Till yesterday morning 73.35 looked like a good support for INR as the expectations for an oil window was ripe before a news flash on Bloomberg indicated that RBI might be averse to the idea. This was the only hope the markets had for the rupee and that seems to have been busted for now. Subsequently in the evening the RBI announced relaxed ECB norm for oil companies working capital requirement. The problem with these is that companies will need to be sure that they can take the currency risk plus raising an ECB for PSUs is a time taking process (7-15 days) and therefore we have seen no impact on INR.

Tomorrow we have the RBI policy where market is pricing in a 25 bps rate hike. Given the increase in MSPs for Rabi crop the chances of a 50 bps rate hike increases. The fact that RBI has turned down governments proposal for a oil window also increases the chance of a 50 bps rate hike which can support the currency. The problem here is that the government would not want rates to increase by more than 25 bps given the negative impact on growth.

Since mid August the dollar index fell from 96.4 to 93.8 and in that period INR depreciated sharply. Now that the dollar index is trading above 96 again with US 10 Y at 7 year highs in terms of yield, USDINR can accelerate higher. The road ahead will be bumpy with the RBI policy tomorrow but increasingly 74.5 looks likely. CMP 73.75, Range 73.95-73.60.