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