INR update: Geo-Political tensions, Inflows & Intervention keeps range intact

The moves in USDINR will be dependent on sudden headlines and tweets related to Ino-Pak tensions. 4-5 days without incident would signal that the escalation risk is behind us, but in the interim the I would quantify the risk as high. Meanwhile there could be large inflows in pipeline in USDINR which can again take the pair towards 70.95 but sustaining lower than that would be difficult, till the time the geo political tensions are behind us. Price action yesterday indicated heavy intervention by RBI and the same seems to be the case today. In the offshore market also USDINR did not cross 71.23 which indicates possibility of an inflow. USDINR 1m NDF trades 8p right indicating upward risk to the pair. Without a wave of news like yesterday a move higher in USDINR cannot be envisaged. CMP 71.17, Range 70.95-71.50.  

INR update: Further escalation concerns

To summarize my expectation from the escalating geo political tensions between India and Pakistan, I would quote from an article in the Washington post published yesterday.

“If Modi does authorize military strikes, what will Pakistan do?

Pakistani Prime Minister Imran Khan has made promises of his own. On Tuesday, he emphasized, “If you think that if you can carry out any kind of attack on Pakistan, Pakistan will not just think about retaliating, we will retaliate.”

You can read the entire article (link below) which also cites the fact that how leaders commit themselves into actions like retaliation /war basis their speeches and posturing; very similar to how Modi’s posturing made it clear that he would definitely take action against Pakistan for the recent terrorist attack.   

Given the above line of thought I would expect the geo political tensions to escalate further but chances of a full scale war remain remote. In the past any sign of weakness or softness from an elected political leader towards India has resulted in a military coup in Pakistan (1977 Zia ul Haq executed Bhutto after the latter signed the Shimla agreement in 1972 and 1999 after the retreat in the Kargil war Musharaf toppled the democratic government of Nawaz Sharif). Therefore the past makes it unlikely for us to expect that Pakistan would not react.

In the medium term the actions from India increases Modi’s political capital on the back of a wave of Nationalism and boosts his chances to come back to power in the upcoming May elections. Therefore any signs of de-escalation would indicate the beginning of a rally in INR and Indian equities, but I would think we are still some time away from this.

Price action indicates that USDINR was sold aggressively by nationalized banks since morning. Large moves in USDINR remain unlikely and the broad range of 71-71.50 should prevail. Overnight longs would make sense as offshore market can be expected to buy the pair on the back of the concerns. For the day, CMP 71.05, Range 70.95-71.25.

https://www.washingtonpost.com/politics/2019/02/25/after-terrorists-attacked-kashmir-will-india-seek-vengeance-or-de-escalation/?noredirect=on&utm_term=.6627ad9a4e3c

Regards

Saket Agarwalla

INR update: Geo Political tensions and inflows keep Rupee in balance

The ECB minutes show that the next move from the central bank could be accommodative, perhaps in the form of fresh LTROs to provide banks with long term funds. On the other hand the FED which has shrunk its balance sheet by $480 bn in the last 16 months is anticipated to slow down its unwinding sometime in 2019. Thus from an equity perspective, liquidity tightness seems to be slowing down, which should ensure equity gains globally as long as growth does not surprise to the down side, especially in the US. Till now the growth slowdown in the US is on expected lines while EU slowdown has been faster than expected. EURUSD continues to hover around 200 WMA (@1.1336) and therefore it is better to trade range of 1.15-1.13, as prices remain in range more often than otherwise.

 

Momentum in gains of Brent prices seems to have cooled off which indicates that 68.3 as a resistance should hold. Geo political tensions between India and Pakistan is slowly increasing although still remains in the background. Planned inflows over the next 40 days should bring in some offers in USDINR as well keeping the upside limited unless geo political tension truly escalate. CNH pared gains on the back of news that China is considering buying additional $30 bn worth of agricultural products from the US. USDINR 1m NDF is trading 2p right while EM currencies have depreciated overnight. Broadly USDINR should remain in 71.05-71.55 range. For the day CMP 71.18, Range 71.11-71.33.    

INR update: Pledge for stable Yuan leads to Rupee gains

The idea of waiting for Euro breakout confirmation until 22^nd of February weekly close worked as EURUSD is trading back above 200 WMA. In addition to US-China trade tensions now we need to watch the auto tariffs that US might impose on the EU and how the reaction to the same. On the other hand EU data continues to weaken at a faster pace than US data, indicating that the ultimate direction for EURUSD could be lower only.

Oil prices are rising on account of production cuts and possible US sanctions on Iran and Venezuela. A weekly close above 68.30 on the Brent should bring in 70+ levels which could take USDINR towards 72.50. Higher oil along with stronger dollar against the Euro could take USDINR well past 72.50, therefore this is one scenario importers should be worried about in the near future.

CNH appreciated on back of news that US wants China to keep a stable currency. This led to 0.9% appreciation in the Yuan since yesterday and strengthened most of the other EM currencies. USDINR traded near 71.60 yesterday in the offshore markets and since then has appreciated by 0.6%. USDINR 1m NDF is trading 4p right. Brent near 67 levels should keep USDINR well bid. USDINR should continue to trade in the range of 71-71.50. For the day, CMP 71.20, Range 71.15-71.35.  

INR update: Higher Brent and geo political factors to weigh on Rupee

Price action suggests that EURUSD should break lower but it will continue to test as there is no runaway trends currently. US-China trade talk chatter indicated towards a positive outcome as White house said that an MOU could be released before the 1^st March deadline.  Equities in the US have had a stellar start to 2019 which is primarily on accord of a dovish FED and a developing view that the FED might announce a slowdown in balance sheet unwinding sometime during the current year.

Brent oil prices rose on the back of US-China trade talks and US sanctions related chatter on Venezuela and Iran. With global growth slowing and Saudi Arabia out of US favor, Brent should find it difficult to sustain above 68.3 levels. USDINR 1m NDF is now trading 6p right on the back of increased geo-political risk between India-Pakistan and Brent oil prices gains. Overnight EM currencies had strengthened but the same did not reflect on INR given gains in crude prices. With India bond yields rising higher, the optimism of further rate cuts seems to totally digested. USDINR should find it difficult to sustain below 71.20 now with a possibility of 71.85 this week. CMP 71.45, Range 71.35-71.60.

INR update: US slows and Oil gains; Rupee back in range

Weaker retail sales in the US has led to GDP estimates being revised to 1.5% from 2.7% a week back (by Atlanta FED for Dec qrtr). With EU and US both slowing down, the view of a slowing global economy is gaining ratification. Oil has gained on the back of further production cuts chatter, but global demand outlook doesn’t support a view of a runaway rally. The NOPEC bill (which would prosecute OPEC members for cartelizing and rigging oil prices) is unlikely to get favor in the US congress, and thus far has had limited market impact. Today the FED will suck out liquidity to the tune of $23 bn which is one of the reason for sustained dollar strength this week. EURUSD continues to trade below 200WMA (1.1334, CMP 1.1285) and a weekly close today will provide more conviction to a view of further losses in the pair (but I would wait another week before confirming a breakout).

USDINR 1m NDF is now trading 7p right indicating increased offshore demand. Broad dollar strength is not supportive of INR gains while the expectation of inflows have withered down. India 10 Y yield have inched up again showing signs of fiscal worries. Oil above 65 will start reflecting on INR if the price levels sustain. The attacks in Kashmir will make participants think of a possible retaliation by India, which should again cap INR gains. Lined up inflows should ensure that USDINR does not run up far above 71.50. I would revert to the view of broader range of 71 and 71.50. For the day CMP 71.25, Range 71.15-71.45.

INR update: Inflows drive USDINR lower

EURUSD 200 WMA is at 1.1333 (CMP 1.1276). A break of 200 WMA essentially means 4 year price levels breaking and it technically signals a further large move down. Looking at Euro area data release the chances of it bouncing from the current levels look slim although from a trading perspective it is prudent to wait till 22^nd Feb (2 weekly closes) before we confirm the break out. The chances of a runaway move immediately looks low as US data surprise is also in the negative. The developing breakout in EURUSD also challenges the view of a weaker USD this year on back of a dovish FED. US-China trade talks is the nearest big event from a market perspective.

USDINR 1m NDF is trading 5 p right. Price action suggests that some inflow is going through. News reports suggest that certain telecom and divestment related investments are resulting in USDINR getting sold off. Global queues should have driven USDINR higher (USD strength and firm oil prices). But in spite of that if USDINR has gotten sold it confirms supply of dollars for the time being. Broader range of 71-71.50 should continue to hold but temporary break to 70.85 is possible given the inflow. CMP 70.99, Range 70.85-71.20.

INR update: US-China trade talks to guide market direction

US-China trade talks could keep markets on the edge this week although commentary doesn’t suggest any quick resolution to the differences between the two countries. US-Korea talks and another US government shutdown do not seem to be very relevant for the markets at present. Italian growth concerns have pushed its 10 year yield from 2.55% to 3% in February itself, which is reflecting in EURO’s inability to make gains over the dollar in spite of a dovish FED. This week has a host of inflation prints from India, US, EU and China. But the global growth tide has turned and rate hikes are ruled out, making growth data more important than inflation, for which we have the EU GDP and US retail sales on Thursday.

 

USDINR 1m NDF is trading 6p right indicating moderate buying pressure on the pair. EM currencies have depreciated moderately since Friday as dollar registers strength and risk sentiment remains muted. Oil has given up its recent gains on the back of growth concerns helping INR. RBI’s rate cuts and expectations of another cut in April perhaps have resulted in some debt inflow over the last couple of days, although the same looks unsustainable. Overall range of 71-71.50 to hold. For the day CMP 71.24, Range 71.15-71.45.

INR update: Expect range of 71 and 71.50 for some time

BOE revised UK growth forecast lower for 2019 (from 1.7% to 1.2%) while incoming EU data continues to create worries. This accompanied with swinging outlook on the US-China trade deal did not help risk assets yesterday. Overall global growth slowdown in 2019 seems to be market’s base case with US-China trade deal as the unknown variable. Today a weekly close for EURUSD below 1.1330 (unlikely) can start a fresh down move taking the pair below 1.12, but then prices remain in range more often.

RBI cut rates against 75% market expectations of no cut. Fiscal and monetary policy are both pro growth while the only worries are the bond supply and political uncertainty. USDINR 1m NDF is 5p right while EM currencies have depreciated on the back of moderate risk off tone. Both 70.80 and 71.80 can be reasoned out currently and therefore I would expect USDINR to stay in the range of 71 and 71.50 for some time. Price action suggests presence of RBI on both sides in case of large intraday moves. CMP 71.32, Range 71.42-71.10.

INR update: Correlation between Rates and INR

While it seems that RBI is not going to hike or cut tomorrow, one of the point which always remain contentious is whether INR appreciates or depreciates in response to movement in interest rates.

Contradictory to traditional currency/interest rate correlation, USDINR reacts to interest rates moves more from a growth and capital account perspective, as INR is not freely convertible to make good of rate related arbitrage. A rate hike often follows worries of rising inflation and is generally seen as a move to curtail growth. While a rate cut is seen as growth positive helping equity and bond market valuation and thereby attracting capital inflows.

Empirical evidence also suggests the above observation (chart below). In the early 2000s when rates in India came off sharply, INR appreciated led by robust growth and capital inflows. As rates were increased from 2005 and growth started peaking out we again saw INR losing till 2009. The period from 2009 to 2011 saw USDINR coming off from the crisis peaks and the central bank supporting growth through aggressive rate cuts like elsewhere globally. Post 2011 was a period when India’s twin deficit started raising its head and 2013 saw interest rate confusion or policy missteps due to taper tantrum in the US. During this period INR continued to depreciate sharply while rates remained near the same. Post 2014, in spite of robust capital inflows and stable growth, RBI stepped up its currency intervention / management and ensured that INR does not appreciate too much while REPO rate was cut from 7.5% to 6%. Then the latest run up in USDINR to 74 in 2018 coincided with rate hikes.

Therefore the takeaway for me is that a dovish RBI is supportive of INR gains and vice versa.

Although tomorrow rate action looks unlikely given arguments on both sides, it seems that RBI will tend to be more dovish. This should ensure that the up moves in USDINR remains limited to the top already created at 71.80 while the chances of seeing 71 again increases significantly.  

INR update: Higher oil, Budget, CNH drive USDINR higher

More than the strong January NFP print, it was the US PMI numbers which led to dollar strength in the NY session on Friday. Although ISM was better than expected (in contrast to a disappointing December print)it won’t change the outlook of an approaching slowdown in the US which has been acknowledged by the FED. Therefore I would keep my trades in the direction of the major trend which should be of a slowly and gradually weakening dollar. Consequently a daily close for EURUSD below 1.1392 (55DMA, CMP 1.1440) and for USDJPY above 110 (CMP 109.8), looks unlikely.

USDCNH move higher today morning has driven buying in USDINR, driving NDF 1m 8p right. Budget was on expected lines and has given rise to the usual questions about assumptions. Higher gross and net borrowing number for FY20, have made bond markets look beyond fiscal as a percentage of GDP, and consequently driven 10Y yields higher by 20bps. Overall I think the budget and its impact are behind us now. The movement in CNH today morning seems idiosyncratic given the lunar holiday and contradicting positive noise on US-China trade talks. The fact oil prices moved higher by 2$ has also contributed in USDINR opening at 71.60. I am still weary to trade a breakout in USDINR and don’t expect a big move higher unless Gsecs see a further selloff. CMP 71.67, Range 71.50-71.85.    

INR update: Strong revised GDP indicates India's commitment to numbers

 

According to the revised GDP numbers India grew by 8.2% in the year of demonetization (FY17) better than previously reported 7.1%, and accelerated from FY16’s 8% (revised). This indicates that today’s budgets will also have very good numbers in spite of whatever sops are given to whosoever.

 

The changed interest rate outlook in the US indicates growth concerns and perhaps puts the dollar on a moderate weakness path for 2019. With growth outlook becoming softer, the twin deficits of the US (fiscal and current) should come into focus.

 

Today’s’ budget has been the main reason why participants have not sold USDINR on the above development. Once the budget is digested in price then given dollar weakness, equity risk sentiments, stable oil prices and lower domestic inflation, the short term outlook should become INR bullish. Commentary suggests that if FY20 fiscal deficit is maintained within 3.5% then it should not be a shock to the markets, which should easily be achieved given the revised GDP numbers. Given the government’s commitment to keep numbers strong (like the GDP numbers above), the budget should not be a negative surprise. Therefore on the back of an outlook of gradual dollar weakness, I would want to sell USDINR between 71.30-71.45. CMP 71.15, Range 71.30 (71.45) – 70.80.