INR update: 67 by September but possible uptick in August

Trump administration’s flip flop on dollar intervention indicates that they are itching to do something on that front. It could be a ploy to push FED to be more dovish than it would otherwise be. But these comments were followed by Trump’s comment that China might not settle the trade dispute till after November 2020 US elections. This indicates US’s growing frustration with China on the trade deal which can push the US to act unilaterally which is possible only in the case of currency intervention (verbal or otherwise). All in all there is no reasonable basis to predict this unless it actually happens but the chances of the same are not ignorable currently.

Weaker economic outlook, dovish ECB and no deal Brexit is pushing EURUSD lower. On the other hand markets could likely hammer GBPUSD to new lows to prevent the new Prime Minister from pushing through with a politically motivated no deal Brexit. The FOMC would be the most critical event this week followed by beginning of the month data and then potential sharp reactions from President Trump.

If there were a business confidence index for India, it would definitely be deep in the negative territory currently. This is getting reflected in the FPI outflows from the equity market in July (more than $2bn). This benign economic outlook plus low inflation should make RBI more dovish than market anticipates currently (market expects a 25bps rate cut) for the 7^th August RBI policy. Contrary to general economic theory INR appreciates  around RBI cuts, because of debt flows plus the fact that rate cuts are seen as growth supportive.

Seasonality is a global phenomena and dollar index generally strengthens in August. For INR August consequently is the 2^nd most negative month after May. On the other hand September is normally a very positive month for rupee.

Given the current dollar strength, seasonality and equity outflows, I would think a move up to 69.30 is possible in the next 2 weeks, which could be a good opportunity to create shorts. Therefore I am revising my near term outlook from an unlikely close above 68.95 to a possibility of 69.30 in the next 2 weeks. I would continue to hold the view that by September end we would see USDINR headed to 67 primarily driven by a weaker outlook on dollar (Trump’s threat and dovish FED) plus the strong inflow pipeline for USDINR.   

Regards

Saket Agarwalla

INR update: ECB today, then FOMC and US-China trade negotiation to drive markets

Looking at the Fed fund rate along with the dollar index since 1971, it seems that dollar starts falling well after the fed fund rate has peaked or 3-6 months after the first rate cut. The reason could be that the market is always unsure if the first rate cut is an insurance cut or the start of a new cycle of cuts, as is the case this time. Therefore the factor to watch out for now is the near term yield curve which would make it clear whether the FED is going to cut for a third time in 2019 itself. Rate cut chances for 31st July is 100% (therefore it is a foregone conclusion) with a 20% chance of a 50 bps cut. For September 2019 market is factoring in a 75% chance of a second rate cut. While a 3rd rate cut is only 60% probable by November 2019. In the near term if the chances of a 50bps rate cut for July increase or the 3rd rate cut for 2019 become 75%+ probable, the markets would be more convinced of a series of rate cuts coming our way which could result in a dollar sell off.

The complication here is that EURO is similarly placed with the ECB monetary policy due today. The chance of a 10bps rate cut today is 50% while the probability of another 10% rate cut by Dec2019 is only 60%. Therefore if the ECB makes rate cuts more likely and sustainable, then in spite of the FED also easing we could see EURUSD moving lower in the near term as expectations are set for rest of 2019.

USDINR has been held in a tight range like USDCNH. Nationalized banks continue to buy aggressively. Last week market chatter suggested a defense outflow while this week it is accompanied with equity outflows. At the same time bond issuance inflows are also in the pipeline and perhaps continuing in the background. The economic guidance accompanying corporate results, generally is the most accurate estimate of future growth. The guidance given by FMCG companies specially is not very encouraging which at some point of time would result in fiscal concerns matching the ongoing equity concerns.

USDINR has not broken 68.30 but at the same time fails to follow through on the upward momentum. My view of 67 on USDINR by September end remains given the inflow pipeline plus the view of dollar weakness. Next week US-China start face to face negotiations on the trade dispute which could result in CNH gains and the same could be mirrored on INR.

INR update: IMF says dollar overvalued; DM central banks seen easing

The IMF says that the US dollar is overvalued by 12% while Euro and Yuan are fairly valued. This should give fodder to Trump’s demands of a stronger Euro and Yuan against the dollar. US data has been better than expected in July but not significant enough (Bloomberg data surprise index is still at -0.3) to rule out a 3^rd rate cut in 2019 itself. The yield curve shows a 90% chance of ECB also cutting its rate in September 2019 by another 10bps to -0.5%. The FED in addition to two cuts by September 2019 is expected to tweak its asset purchase program also in order to support a slowing economy. Therefore basis economic data and central bank stance only the USD is unlikely to get support, unless the US data surprise index moves into positive territory that is diametrically against expected lines.

USDINR was bought aggressively by nationalized banks yesterday while rumors of a bond outflow was also doing the rounds. A daily close above 68.85 can drive the pair higher. USDCNH is back below 6.88 while Brent has also retraced below 65  again. Medium term view of 67 by September remains on the back of a softer dollar and large inflow pipeline. A daily close above 68.95 should call for stops on this view. CMP 68.80, Range 68.90-68.68.   

INR update: Dollar index likely to continue in range; Inflows should help INR break 68.30

Dollar index continues to move sideways, a weekly close below 96 should signal the start of a downtrend, but it could be some time (perhaps not before 24^th August Jackson hole) before that happens. Chinese retails sales and GDP data yesterday calmed fears of a higher than expected slowdown in China.

USDINR continues to trade in a tight range as debt inflows (both FPI and corporate borrowings) seem to be absorbed by nationalized banks. India 10y bonds have rallied by 35 bps to 6.36% now since the budget and there could be some more room left for the rally to continue. Indian equity markets continue to show resilience in spite of slowing growth. The trade balance of $15bn deficit was near expected lines. The medium term view remains of USDINR heading towards 67 by September end. A daily close above 68.95 should call for stops on this view. CMP 68.55, range for the day 68.68-68.40. We could see 68.30 breaking this week as news reports suggest a quite a few inflows in the near term.

INR update: FED is focussed on slowing growth

Powell confirmed the need for rate cuts and told us that the US growth slowdown (in the shadow of a trade war) is the FED’s focus and not US labor market specifically. July rate cut chances are at almost 100% now with September rate cut chances at 75%. The watch now is for the 3^rd rate cut where market is pricing in a chance of 58%.

Slowing US and global growth, softer FED and trade war are the three themes driving the market. The markets COULD at some point start selling the USD when trade war rhetoric rises, which would be a diametric change from the market reaction till now. This is still an expectation only, basis Trump’s last couple of comments directly demanding a weaker USD accusing China and EU of currency manipulation. Larger view remains of a softer USD.

Brent has moved higher this week from 64 to 67 but market is not following small moves in Brent now. Market assumes that Brent is going to stay in and around $65, till such time that this assumption is broken with a breakout Brent could be ignored for short term USDINR movements. Empirically it seems that not many participants are sitting short USDINR therefore I would think that short USDINR is still not a crowded trade. As expected for the last fortnight 68.30 target has been achieved. On the other hand nationalized banks seem to buying USDINR aggressively here, therefore this might not be a good level to create fresh shorts. A convincing break of 68.30 should lead to stop sells on the pair. Otherwise one could get around 68.45-50 to create fresh shorts. The larger view till September 2019 remains of 67. CMP 68.35, Range 68.50-68.25.

INR update: Powell could at most be less dovish; Dollar gains to be temporary

US services ISM of 55+ and manufacturing ISM of 51+, notwithstanding the US GDP is coming off (latest forecast of 1.3% growth for the current quarter). The turning economic cycle plus headwinds from the trade war will ensure that the FED continues its rate cut rhetoric. Currently market is unanimous in its expectation of a rate cut in July and September. The 3^rd rate cut by Dec 2019 is highly likely with a 45% chance in market pricing.

Today Powell testifies in front of the congress at 7-30PM IST where it is highly unlikely that he would take the July and September rate cuts off the table. At the same time he doesn’t gain much by increasing the chances for a third rate cut so much in advance. Therefore he might be less dovish resulting in a mild and temporary uptick in yields and therefore the dollar.

USDINR continues to be driven by nationalized banks action on both sides. Price action continues to show dominance of selling pressure on the pair. The larger view remains of USDINR heading to 67 by September end. For the week the range should be 68.85-68.30. For the day CMP 68.58, Range 68.68-68.45.  

INR update: USDINR headed to 67 by end September?

Since Friday morning we have two new pieces of meaningful information. The first being that the government intends to focus on fiscal discipline much more stringently than anticipated earlier (FY 20 fiscal deficit targeted at 3.3% against Thursday’s expectations of 3.4%). Second is that the government is going to raise around $10bn in the second half of the financial year through foreign currency bonds. First factor ensures that overall supply of India government bonds is going to be on the lesser side which should ensure high FPI inflows in the next 3 months into Indian Gsec markets considering the high real rates. Second factor will ensure that the domestic money markets will have $10bn of additional appetite to buy bonds plus dollar inflows of the said amount. Even if RBI sterilizes these dollar inflows then the central bank’s appetite to buy dollar from the market on a daily basis would reduce, in either case both these news are positive for bonds and INR.

Considering the above development plus the view of continued dollar weakness on account of a slowing US economy and  a dovish FED. This accompanied with the view that the trade war will ultimately result in the US pushing for a weaker greenback should ensure a strong INR for the next 3-6 months. The view on oil remains that it should remain capped at 70 with a potential to break lower given the slowing global economy.

Given the above broad factors I would think that by September end USDINR is headed to 66.85-67 levels. Meanwhile nationalized banks would continue to buy aggressively slowing the pace of INR gains. Given the high forwards, shorting USDINR looks like a very attractive trade plus not a crowded one as yet. My stop would be a daily close above 69.20 for a medium term trade. CMP 68.59, Range for the week 68.85-68.10, Range for the day 68.67-68.30. 

INR update: Trump's comments indicate that US wants a weaker Dollar

 President Trump’s latest comments (accusing EU and China of currency manipulation) seem to be laying ground for a forced currency revaluation for China and EU which is consistent with the theory, that the ultimate outcome of the trade war between US and China (and EU ultimately) would be an agreement to depreciate the USD against Yuan and Euro. After the 2013 EU fiscal crisis Euro was devalued by the ECB through interest rate cuts and blatant comments on the currency taking the single currency from 1.4 to 1.05 levels. Now with Trump threatening EU and China with tariffs the EU would not mind returning the favor to help the US president win the November 2020 reelections. The big unanswered question for this outlook is when would this happen, for which I would think that the ultimate resolution is still a few months to a year away. But the markets will start seeing through the eventuality sooner than later. Weakening US economic print and softer FED stance will also help the soft dollar outlook.

USDINR continues to trade in its new range of 68.80-69.20 with clearly selling pressure on the lower side outweighing bids. Nationalized banks continue to buy USDINR aggressively near 68.80 levels and for them to allow further appreciation we would need a fall in USD or oil prices. Medium term view continues to remain of 69.20 and 68.30. For the day CMP 68.86, Range 68.80-69.10.

INR update: Range prevails as nationalized banks continue to buy

Chinese, Indian and Korean data releases suggests that  emerging markets in Asia are struggling for growth but the impact on their respective currency is made difficult to comprehend with a slowing US economy and ongoing trade war. ECB and FED seem to be tilting more and more towards easier monetary policy. Overall given the dovish DM central banks and trade war I would continue to expect a weakening dollar in the medium term (3-6 months). This week US Services ISM, EZ retail sales and NFP would be critical for global currencies.

USDINR continues to see heavy intervention by nationalized banks and therefore in the short term 68.90-69.20 range should prevail unless crude oil or CNH moves substantially. I would continue to expect limited but further INR appreciation, a break of 68.80 should bring in 68.30. Today there seems to be an inflow which is getting absorbed by nationalized bank buying. For the day CMP 68.98, Range 69.10-68.85.    

INR update: Russia-Saudi agree on oil prodution, G20 meet leads CNH and INR gains

Saudi Arabia and Russia agreed on the sidelines of G20 before the OPEC+ meet today, to continue the production cuts in order to keep a lid on the abundant supplies. The timing of the announcement (i.e., along with G20) seems to suggest that the US is also in agreement to this and therefore the view that oil prices should not go above 70 continues to hold (given Trump’s open criticism for higher oil prices). US economic surprise index has dipped significantly in June taking with it the GDP forecast to 1.5% for June quarter. This developing reality of a slowing US should continue to get priced in US yields and therefore the dollar.

The US-China announcement was in line with market expectations although concession to Chinese firm Huawei are being dubbed as a significant positive development.   

Higher oil prices, nationalized bank’s buying of USDINR and 68.80 support should prevent further and immediate INR appreciation. As I had expected last Monday USDINR has trended lower breaking the 69.30-69.80 range but further appreciation would happen only because of CNH or growth positive developments locally. US-China trade dispute should drag on so I would not expect much from CNH in the near term. Locally one can expect a breather to the liquidity issues of NBFCs and with budget on this Friday there are possibilities of certain pro growth announcements as well. For the week we should see 69.20 before USIDNR breaks 68.80 convincingly, medium term target is 68.30. For the day, CMP 68.90, Range 69.05-68.75.