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.