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.