INR update: G20, Opec meet, budget to drive USDINR in the near term

Trump had announced the US-Mexico-Canada trade deal on October 1^st 2018 just before the November 2018 midterm elections. Therefore there might not be any political upside for Trump to resolve the China trade dispute in a hurry and consequently I would not expect any big positive outcomes from the G20 meet. The marginally positive developments could be a hold on tariff (already priced in) plus a confirmation that talks between US and China would begin again to finalized the agreement. The US-China trade deal would likely drag on for another 6-12 months and could eventually bring in the EU as well into the controversy, as without a big bang deal Trump would not be able to get the eyeballs he needs to win the November 2020 reelection.

Meanwhile the local markets for the next week should remain focused on the 5^th July budget which should likely bring in some growth supportive measures. The Opec and Opec+ meets on 1^st and 2^nd July should only result in a softer oil price as that’s what Mr. Trump wants and currently it seems that Saudi Arabia is completely in agreement with the Trump administration (after Iran sanctions). On the other hand anecdotal evidence suggests a few capital account inflows could be in pipeline locally which could keep USDINR well offered. Overall the range of 69.30-69.80 has shifted lower to 69.10-69.60 this week. I would expect this range also to break on the lower side as INR catches up with other asset classes / factors. CMP 69.29, range 69.40-69.10.    

INR update: US-China to resume talks, Jalan committee report postponed

Chinese media reports suggest that US and China agreed to resume high level talks ahead of Trump-Xi meet on Saturday on the sidelines of G20. Apart from this US seems to be focusing its attention on Iran now with fresh sanctions against its supreme leader. Not much news on economic front overnight as market continues to guess the outcome of the G20 meet over the weekend.

The Jalan Committee on RBI’s capital will now submit its report after budget next month only. Therefore USDINR is likely to remain in the broad range of 69.30-69.80 for some more time. A risk to the range view could be unexpected volatility after the G20 this weekend. Today we are witnessing aggressive buying by nationalized banks and commodity importers. For the day, CMP 69.33, Range 69.25-69.45.  

              

INR update: Rupee appreciation is overdue; Jalan committee report could be the trigger

In the last 1 month India has seen a confirmation that political certainty is going to stay for at least another 5 years. The dollar Index has lost 2% from 98 to 96 levels. All emerging marker currencies have appreciated around 3% in the same period while Rupee has been in the same range with a lagging appreciation of 1% compared from 70.50 levels. In the same period Oil has moved lower from 73 levels to 65 levels currently.  Nifty has moved higher from 11,200 to 11,700 levels. India bond yields have fallen with a dovish RBI, political certainty and dovish global central banks.

All the above factors should have resulted in another 1-2% rupee appreciation but the same has not happened because anecdotally RBI has been buying USDINR aggressively in the same period. The reason for the increased intervention could be to keep USDINR propped up ahead of the Jalan committee decision which can give the government a fiscal relief (either on the balance sheet or P&L) of around Rs. 3 lakh cr (estmates only). The Jalan committee  decision is due by latest July 1^st week. I would expect that once this fiscal bonus is delivered to the government Rupee should reflect all the above factors and register its overdue gains. I would expect that RBI’s capital transfer to the government will not have a negative impact on India country rating given that market has been informed of the same for almost 6 months now and the concerns around the same has been absorbed in price. For the next month I would expect USDINR to move lower with 70 as a good resistance and potential to appreciate to 68.30-68.80 levels.

Resignation of Mr. Viral Acharya and higher Brent prices could bring in some more bids than offers today. For the day 69.57, Range 69.76-69.40.   

INR update: Risk sentments improve with dovish Draghi and potential Xi-Trump meet

Dovish comments from the ECB pushed the Euro lower while news headlines that Xi and Trump might meet at the G20 raised the possibility of a solution to the trade dispute. Both these news have led to a temporary and moderate improvement in an otherwise muted risk environment in global markets. Today we have the FOMC where the FED has enough reasons to be dovish (slowing US growth and trade war concerns) but since its accommodative stance is priced in, the FED might want to check such expectations and might deliver a mild surprise, by being less dovish than the conditions warrant. This can lead to the dollar index rising towards 98 levels  by tomorrow (CMP 97.6).

USDINR has been kept in range by nationalized bank action on both sides. Rising chatter about the RBI using some of its capital to exhaust government debt (in some form or the other) should result in India bond yields going lower which could attract debt inflows. The pair should continue to trade in 69.30-69.90 range for some time unless USDCNH breaks out either side (most likely lower). For the day CMP 69.65, Range 69.50-69.75.

INR update: Range prevails as views remain muted

While last week’s retail sales in the US painted a rosy picture for the world’s largest economy, other data prints (like Empire state manufacturing survey yesterday and lower GDP growth expectations for the current quarter) show that the US economy is slowing down. For the FOMC decision tomorrow, markets see only a 20% chance of a rate cut while the expectations for July FOMC rate cut is at 80%. Therefore it seems rate action tomorrow is highly unlikely and the task at FED’s hand is to tinker with July rate cut expectations only. There is no advantage to the FED to increase the July rate cut chances beyond 80%, rather it would want to keep the door open with market expectations around 60% only and therefore we could see a marginally less dovish FOMC tomorrow. But overall given the slowing economy and recent FED speak July rate cut should remain the base case.

Currently USDINR prices are driven by RBI action plus CNH moves. RBI wants USDINR to stay range bound for now and therefore at 69.80 levels from a near term perspective USDINR should not be bought. There is no news to suggest that US-China trade dispute is coming to an end immediately but what is clear is that China has not weaponized its currency  and has shown more sanity than its adversary. I would continue to believe in the theory that the ultimate result of US-China trade dispute will be a strong CNH as a concession to the US. For the day, CMP 69.80, Range 69.90-69.60.

INR update: Is a weaker USD the most likely outcome of the trade war?

It is widely said that The US-China trade dispute is quite similar to the 1980s US-Japan trade dispute. In the 1980s the dispute resulted in the Plaza accord of September 1985 after which the dollar depreciated by ~50% against major world currencies.

Come to think of it, the US-China or a potential US-EU trade dispute cannot result in China or EU agreeing to export less or import more as these are controlled by market forces. On the other hand tariffs will hurt US consumption, world trade and therefore global growth. Therefore the only adjustable piece (or the lowest hanging fruit) in the hands of governments would be currency adjustments, apart from softer policies like better Chinese market access, security of IP rights and easier business ownership in China.

Basis which it would be fair to think that over the next year we can see the broad USD weakness led by CNH. Euro will have to register gains as well while INR would also follow suit along with the likes of JPY. Although whenever trade war concerns have heightened USD has registered gains, finally the reverse should happen, i.e., other countries would agree to appreciate their currencies against USD. This is not to suggest that a weaker USD would result in a lower CAD for the US, but at least it will be a good victory for Trump before next November elections. Trying to predict when this would happen is trying to guess what politicians would do next, but a weaker USD seems to be the only outcome that the US can feasibly get from the ongoing trade war.

The Indian rupee will track the global currencies and specially CNH and therefore should correspondingly register sharp appreciation as well during the next 1 year. A break of 98.5 on the dollar index on a monthly basis should conclude that the above view has failed.

On the other hand the fact that US (under Trump) has distanced itself from Iran and has allied with Saudi Arabia again, will ensure that oil prices stay under $70 levels (as desired by US leadership currently) till this political equation changes. This would mean one less concern for INR from a CAD perspective.

Meanwhile in the short term USDINR has been held in tight range of 69.20 and 69.50 by nationalized banks activity on both sides. News of bond inflows have resulted in some selling pressure for the pair today while bids from nationalized banks has kept further appreciation in check. Currently USDINR should trade in the empirical RBI defined range of 69.20-69.50. Negative news (domestic growth and credit concerns or trade war related) can at max take USDINR to 70.53 in the medium term.