FOMC: End of rate hiking cycle?

The ECB recently was less dovish than the data warranted, perhaps to ensure that the outlook remains robust. The FED on the other hand seems to have become much softer than many anticipated. The FED clearly says today that the case for further rate hikes have weakened. While FED fund rates are the primary monetary policy tool, Powell asserted that adjustments to balance sheet reduction could be warranted as well. It’s a clear indication that the FED expects inflation to be muted from here on. With 2 year yields falling from 2.59 to 2.53 currently, it effectively signals that as far as market expectations are concerned it does not see a hike happening in the next 2 years, which in turn increases the chances of a yield curve inversion in case of weaker growth.  

The FOMC is certainly dollar negative (for 2019 I would think), positive for equities and other risk assets. One of the biggest risks to equities a year back was the shrinking liquidity guidance which seems to have been taken back by the FED today. All EM currencies have appreciated with USDINR trading at 70.85 currently in the offshore markets.

INR update: Budget concerns to prevent INR gains

USDINR went higher from yesterday’s 71.10 levels to 71.45 in the NDF markets on the back of higher oil prices (61.55 as compared to 60 levels yesterday). Globally mild dollar weakness is keeping EM currencies moderately appreciated while the dynamics in USDINR is different given oil and approaching budget. Broad range for USDINR is 70.90-71.45 and RBI seems to be protecting this range. We should head towards 71.50 given budget related position covering. A break of 71.50 (trading for 1 hour) can be called a breakout. CMP 71.33, Range 71.25-71.50.

INR update: Gradual rhetoric suggests a dovish FED

Incremental views on the FED perhaps taking its foot of the gas pedal (WSJ article on the FED not running down its balance sheet) took dollar lower. The ECB on Thursday was not as dovish as data would have made us assume which ensured that EURUSD did not bINR update: Gradual rhetoric suggests a dovish FED

Incremental views on the FED perhaps taking its foot of the gas pedal (WSJ article on the FED not running down its balance sheet) took dollar lower. The ECB on Thursday was not as dovish as data would have made us assume which ensured that EURUSD did not break lower than 200WMA at 1.1325. I would expect dollar index to gradually move lower given the falling rate hike expectations plus a potential resolution of trade conflicts between US and China. This would ensure that USDJPY stays below 110 (not withstanding risk sentiments) and EURUSD stays higher than 1.1325.

Price action  clearly suggests that RBI is uncomfortable below 71. The best chance of breaking below 71 was last week, we have the budget this Friday which should ensure that participants would not want to run short USDINR at least till clarity emerges. Other EM currencies have appreciated on the back of dollar weakness but USDINR trades in a narrow band guided by the central bank (perhaps). Range till Friday should remain 70.90-71.45, while for the day, CMP 71.13, Range 71.00-71.25.

Regards

Saket Agarwalla move lower given the falling rate hike expectations plus a potential resolution of trade conflicts between US and China. This would ensure that USDJPY stays below 110 (not withstanding risk sentiments) and EURUSD stays higher than 1.1325.

Price action  clearly suggests that RBI is uncomfortable below 71. The best chance of breaking below 71 was last week, we have the budget this Friday which should ensure that participants would not want to run short USDINR at least till clarity emerges. Other EM currencies have appreciated on the back of dollar weakness but USDINR trades in a narrow band guided by the central bank (perhaps). Range till Friday should remain 70.90-71.45, while for the day, CMP 71.13, Range 71.00-71.25.

INR update: Growth risks cool off Brent helping INR

Concerns of global growth slowdown was exacerbated by US existing home sales data which showed the sharpest decline in 3 years. German Zew indicated that people are growingly concerned about the current health of the economy although the outlook was less pessimistic than before. These clouds have led to a correction in equities although in currency markets participants are finding it difficult to ascertain as to which country will be more affected. Declining Japanese trade surplus data prevented JPY from appreciating in this risk off environment.

INR NDF 1m is trading 1.5p left today as compared to 2p right yesterday morning. Brent price movement from 63 to 61.5 has led to a small INR gain overnight. Other EM currencies are also trading a tad strong. INR bond yields are not moving higher anymore as market expectation for farm package moved from above Rs. 2 lakh crore (USD 28bn) to below Rs. 1 lakh crore of incremental expenditure. Given the sharp and isolated depreciation of INR in January because of local factors, I would think that USDINR should remain in 71.45-70.90 range before 1^st February budget. Visibility beyond the budget is difficult at this moment, but I would expect USDINR to remain in a range of 72.50-69.50 till May 2019. For the day, CMP 71.24, Range 71.15-71.40.

INR update: Global growth forecasts cut; India fiscal slippage concerns alleviate

The IMF cut its global growth forecasts by 20 bps to 3.5% citing trade and Brexit related uncertainties. Given that both US and EU are moving into headwinds as far as growth is concerned, it is expected that both ECB and FED will tilt towards the dovish side in their respective rate outlooks. This should keep EURUSD in a range, which should make a weekly close before 200 WMA at 1.1325 very unlikely. On the other hand JPY could gain against the dollar given the relative improvement in Japanese outlook vis-à-vis the US making USDJPY unsustainable above 110.20 (55WMA) levels. Brexit related uncertainty could weigh on GBP but GBP gains could be also strong in times of positive news, making Cable highly unpredictable.

Oil gave up gains on the back of lower growth outlook. 1m NDF is trading 2p right as compared to 3p right yesterday morning. The fiscal concern for a populist budget in India ahead of central elections is fully priced into bonds and currency. Yesterday we saw some amount of positives getting priced into the fiscal outlook with reports suggesting that the fiscal dole out would be under Rs. 1 lakh crore only. I would expect yesterday’s high of 71.50 to be not breached this week while a test of 71 looks likely. For the day, CMP 71.32, Range 71.40-71.15.  

INR update: Fiscal slippage, improving trade deficit to keep Rupee in balance

The FED speak continues to be dovish while the US government shutdown has been ignored by the markets for now. Dollar index should continue to drift lower with 95.3 as a crucial support (Currently at 96). With concerns of a global slowdown and assurances by Saudi Arabia of further production cuts, oil looks balanced at 60 levels. Technically, the run up in oil prices seem to have lost momentum for now.

 

The sentiment for INR seems to be primarily driven by concerns on fiscal slippage. Indian assets do not seem to be in favor currently given the upcoming elections resulting in FPI outflows on a daily basis. On the other hand expectations of a rate cut and lower trade deficit numbers are the arguments in favor of the Rupee, which should ensure that USDINR’s higher run would be lower than market expectations (which ranges from 71.50-72.50) in the current move. Given that oil prices have a lagged impact, the maximum gains in trade deficit could be recorded in January. This, along with the news of oil companies drawing down on ECBs recently could curtail buying in USDINR. Given balancing arguments for INR, for the medium term, I would continue to expect price to be in more traded zones, rather than breaking out into less traded area of 71.50+. For the day, CMP 71.04, Range 71.15-70.85.

INR update: CNH gains and USD weakness

The noise from US-China trade talks is positive (USDCNH below 6.75) while the FED seems to be talking cohesively signaling a wait and watch 2019, which is positive for equity markets. Market expects US CPI to print below 2% today which if true, could lead to further dollar weakness. Given the disappointments in ISM and softer crude prices, a softer CPI looks more likely. US shutdown should start creating some concerns from a USD weakness and risk perspective which would keep equity markets sideways for now.

 

Brent is creating only mild concerns on INR as 70.50 top remains intact (closing basis). INR NDF 1m and 1y have become 1p and 30p right which indicates moderate USDINR buying, also because of fiscal slippage concerns. News of oil companies drawing down ECBs would shave off oil buying demand from the market in the coming days while India CPI and Trade number should be further supportive of INR gains. The outflow that we saw from Monday seems to have gotten over sometime yesterday, most of the commentary suggested that it was defense related. Medium term range should be 70.50-69.50. Friday could see a reversal of the up move seen during the day, CMP 70.41, Range 70.50-70.28.

INR update: Thoughts on RBI's MTM gains and its effect on Rupee

As per the last annual report, the RBI had Rs. 7 Lakh crore of currency and gold revaluation (CGRA) gains  on its balance sheet. Assuming a nominal growth of 12% pa and a constant FX Reserves to GDP ratio, in 5 years India’s FX reserves would be $700 bn. Assuming that USDINR is at Rs. 80 in 5 years the total gains in RBI balance sheet would be close to Rs. 13 Lakh crores or $185 bn. These gains are like high return savings of the economy, the fruits of which the country cannot enjoy. Therefore these gains have been a point of contention for the government in the last 3 years and I would think that given the recent developments at the regulator’s level there could have been a few agreements to prevent this build up of CGRA gains in the RBI’s balance sheet. These agreements could have been:

1) Restricting the intervention capability of the RBI in the FX market (which is visible in the increased volatility in the last two months).

2) Capping the FX reserves to GDP ratio of the RBI

The above is a speculation on my part, but seems logical given that the root cause of the problem is RBI’s increasing FX reserve along with a depreciating Rupee. The effect of this could be increased volatility in USDINR (which we have seen recently) plus increased INR gains in times of inflows (which RBI didn’t allow since 2014).

Consensus view of short USDINR got negated yesterday morning as we are back in the 69.50-70.50 range. Price action yesterday indicated stops while the price action today morning suggests some outflow. EM currencies have depreciated mildly since yesterday. Middle of the range a 25 paisa move either ways is very easily justifiable. Over the medium term I would think INR would gain towards 68.80 levels. CMP 70.06, Range 70.25-69.80.

INR update: Slowing but Growing US & Dovish FED, good for Rupee

NFP is a lagging indicator while ISM (or PMI) is a confidence indicator which should reflect more of the future. Therefore between the strong US NFP and the weak ISM print last week I would give more importance to the ISM number. Today’s services ISM therefore becomes very important to understand where the US economy is heading over the next 2-3 months. The slowdown in the US is not a surprise as the same was built into the FED forecasts, but the financial market and political reaction to the same, has led the FED to back off significantly which has resulted in lower US rates, than one would have imagined one month back. US is likely to grow in the range of 2-2.5% this year with a likely less hawkish FED which should be positive or neutral for equities. US-China trade talks will create volatility in risk assets but the ultimate result should be pro risk only (given Trump’s history of always striking a beautiful deal). Given this backdrop it looks like USD weakness and positive/neutral risk is the most logical view to have for the visible future.

 

Oil at 53 or 57 is the same and therefore the extract is that oil is in favor of India’s BOP. Given the above view of weak USD and positive/neutral risk, USDINR looks headed lower. India’s fiscal overshoot and political concerns should slow the pace of rupee appreciation but are unlikely to stop the gains. A break below 68.80 would be difficult but when it happens 67.50 can be expected. A daily close above 69.56 should again bring 70 on the other hand. CMP 69.32, Range 69.45-69.15.