INR update: Markets quiet but on alert for fresh jolts

US economic policy uncertainty index which measures policy uncertainty basis newspaper articles in the US rose to 400 levels in August 2019 which was the highest level seen since 2008 GFC. This uncertainty should continue to drive dollar and government bond strength. Overnight Mnuchin claimed that US doesn’t plan to intervene in dollar markets as yet, which is more driven by the Trump administration’s lack of ammunition as allowed by law rather than intent.

PBOC faces the challenge of striking a balance between arm twisting US by driving USDCNH higher  and at the same time ensuring that a weakening Yuan doesn’t result in flight of capital from China. USDCNH is higher at 7.1730 as compared to yesterday afternoon’s 7.16 levels. Indian equities are in the red along with 10Y bond yields which are at 6.57 which is the pre fiscal windfall levels. Till the time there is further and definitive development in US-China trade war, USDINR should trade in 71.35-72.25 range. Market positioning for USDINR is neutral to marginally long (this is basis anecdotal evidence only). For the day, CMP 71.96, Range 71.80-72.25.

INR update: Lack of trade war resolution visibility to keep risk sentiments subdued

Dow closing 1% lower yesterday plus deeper yield curve inversion indicates that risk sentiments remain subdued. US data continues to indicate that there is no significant slowdown fears in the US which would make the FED overtly dovish. Although the FED is on track to cut rates in September and might cut again in November but the overwhelming reason will be trade war uncertainty and not US economy. The risk aversion plus relatively stronger US economy therefore continue to put the greenback on a stronger ground. EURUSD (CMP 1.1085) can now only be sold in case of a daily close below 1.1050 as the medium term view remains of EURUSD heading lower towards 1.06.

Looking at India 10Y government bond yield at 6.56 and equities at -0.3% one can assume that the effect of the RBI transfer to government has been digested in asset prices now. Given the lack of visibility in US-China trade war and no immediate trigger which can bring a resolution, I would continue to expect deterioration in risk sentiments. USDINR should now trade in a range of 71.35 and 72.25 before it breaks higher. Market positioning for USDINR would be largely neutral now after the long unwinding seen yesterday. For the day the Range should be 71.35-71.70 and for medium term I would want to buy near 71.40 levels. CMP 71.62.

INR update: Trump eager to strike a deal; India's windfall fiscal gain; Risk sentiments improve

In a series of volatile comments yesterday what came out was that Trump is very eager to strike a deal with China now. On the other hand, instant Chinese denial of weekend talks indicate that China will continue to act tough till the time they get a trade deal that is favorable to them. Therefore although resolution to the trade war is still not in sight, but both US and China seem closer to a resolution than they seemed yesterday morning. Consequently we have seen Dow rising by 1% yesterday while Asian equities are in the green by around 0.5% today. USDCNH is following the  USDCNY fix continues to indicate the firm Chinese stance on the trade war. Risk sentiments remain off the table but things do not look as bad as they yesterday morning. Euro is picking the properties of JPY and EURUSD has moved lower to 1.11 as risk sentiments improved in the last 24 hours.

RBI has announced a dividend of Rs. 123,000 crore ($17bn) to be given to Indian government. Of this Rs 28k crore was given in Jan 2019 itself which was a part of last financial year for the government. Rs. 90k crore was already budgeted as dividend by the government. So the dividend positive surprise for the government is Rs. 5k crore only. The remaining Rs. 53k crore is a positive one time wind fall gain to government finances. Markets were expecting a number of around Rs. 40k crore to be given to the government over the next 3 years or so. Given this expectation vs outcome the development should support government bonds (yields are down 14bps since yesterday highs), equities and INR for the day at least.

Yesterday morning participants were limit long in USDINR and that confidence has reduced now. Given the development on the fiscal front we can see some further long unwinding in USDINR along with the mild improvement in risk sentiments. Medium term views are risky and dependent on tweets. For the day, CMP 71.80, Range 71.95-71.55.

INR update: Advantage China; Local stimulus not enough against a global tide

China seems to have the upper hand in the US-China trade war for now. Trump seems to have lost the plot and perhaps fears that he will be blamed in case the economy slows down or equities continue to fall. This might prevent him from raking up the trade war rhetoric against the EU for the time being but it is unlikely that he will back out now from the Chinese front. Therefore it seems rational to expect that trade related tensions between US and China should further worsen from here on.

Short EURUSD trade in case of a weekly close below 1.1050 has not been initiated, given that Euro has attracted some safe haven bids on account of intervention fears in USD. Similarly GBP has also failed to give a close below 1.1975 and consequently short GBPUSD trade has not been initiated.

Trump can only intervene in FX markets to the tune of $95 billion which is a small number in a daily $5trillion FX market. For further intervention the FED will have to align with Trump’s political objective which seems difficult. In order for Trump to increase the size of his intervention fund from $95 billion he would need congresses approval which also looks unlikely for now. So intervention in USD will only be verbal and mostly a failure. Although the ultimate settlement of the trade war could be in the form of a Plaza  kind of accord (similar to the one done in 1985) involving FED, PBOC and ECB but we currently seem far away from that eventuality so it is best ignored.

The stimulus package announced by the Indian government is unlikely to reverse the global trend against risk assets.

USDINR failed to give a closing last week above 71.80 but USDCNH trading above 7.16 today opens the door for 72.50 and higher gradually. This week we should see USDINR supported at 71.85 with a target of 72.50. Long trades should be exited in case USDNR trades below 71.64. This calendar year USDINR seems like headed significantly higher than 72.50 but in a world that changes because of 280 character tweets, having longer term views can be very risky. For the day, CMP 72.10, Range 71.95-72.25+.

INR update: Powell likely to be hawkish

Market is eagerly waiting for Powell’s keynote speech today at the Jackson Hole Symposium of central bankers. The market meanwhile has already effectively cut interest rates by 25 basis point for the 18^th September 2019 FOMC. The latest FED speakers tried their best to reduce the rate cut chances for September 2019 but failed. The FED would not want the market’s anxiety of trade war uncertainty to push it into a rate cut cycle earlier than what it anticipates. Therefore Powell would again talk up the economy and would want yields to increase post his speech. His main concern would be the 2 more rate cut chances at 100% and 80% for September and November respectively.

An uptick in yield should support the dollar and risk sentiments temporarily. The strange fact of the argument is that if risk sentiment deteriorates then also dollar gains as yields fall. On the other hand if yields increase due a less dovish FED, then also I would think USD would gain more so against the Euro and GBP. Therefore the only outcome for dollar losses would be a dovish Powell which looks unlikely given the low level of short term yields.

In the near term EURUSD weekly close below 1.1050 (CMP 1.1070) should result in EURUSD heading to 1.06 and lower. IN GBPUSD (CMP 1.2212) a weekly close below 1.1975 should take the pair 5 biggies lower. USDINR weekly close above 71.80 should bring in 72.50. Alternatively on Monday if USDCNH trades above 7.10 then USDINR could see 72.50 next week.

INR update: Less dovish Fed lends support to the greenback

The FOMC minutes showed that the FED is not as perturbed by the trade war as one would have thought in July. The committee members continue to see the economy as reasonably strong and do not want to go on a rate cut cycle mainly because they do not want to signal a slowdown fear to the economy. This should support the dollar as the ECB and BOJ do not have the backing of a similarly strong economy.

On the other hand Trump seems to be shifting focus away from China and onto the FED stating that the FEDs policies are the main problem for the US. The FED is highly unlikely to give in to the President’s pressure and therefore would continue to act as per incoming data. Meanwhile markets factor in 100% probability of a rate cut in September.

USDCNH has inched higher than 7.085 from yesterday’s 7.045 while equities in Asia are in the red. The government’s anticipated stimulus package has not been announced indicating the difficulty in managing fiscal responsibility and growth under the given circumstances. A weekly close above 71.80 should result in 72.50. Announcement of fiscal stimulus can take USDINR towars 71.35 (temporarily only). For the day, CMP 71.72, Range 71.60-71.85.  

INR update: An uncomfortable and temporary pause in trade war to help global dollar strength

Trump had postponed tariff increase on Chinese imports till December 15^th and on 19^th August he has given Huawei another 90 days to continue dealing with American entities. These two actions indicate that for CY2019 he wants the focus to shift away from China. The trade deal with China therefore should happen sometime in 2020 only.

Meanwhile as modern politicians operate Trump has to start a new battle to occupy the mind space of his electorate. That could come in the form of a trade rhetoric against the EU. This trade war possibility, plus increasing growth differential between the US and EU, along with no deal Brexit should make GBPUSD and EURUSD a good sell for the rest of the calendar year. A weekly close in EURUSD below 1.1050 can open the door for sub 1.06 levels. While a weekly close in GBPUSD below 1.1975 can open flood gates for a 5 biggie move lower. Meanwhile the unresolved US-China trade dispute should keep USDCNH grinding higher at the same time.

USDINR primarily follows global dollar strength/weakness above all the other factors. Given the above view of dollar strength plus CNH weakness the visible future for INR does not seem promising. The domestic slowdown should at some point of time start showing in heightened fiscal concerns . A weekly close above 71.80 on USDINR should bring 72.50 in range. CMP 71.57, range 71.45-71.80.

INR update: Trade war and Brexit should continue to weigh on risk sentiments

With USDCNH trading above 7.05 and CNY fixing getting weaker every day the US-China trade war related risk cannot be ignored. Meanwhile China has continued to make aggressive statements on retaliatory tariffs while Trump administration has said that the President is not ready to make a deal as yet. These developments along with hard Brexit related news would indicate that there might be more risk negative news in store which should keep a cap on INR gains.

Domestically the market is abuzz with chatter of a growth stimulating package which can bring temporary relief to equity markets and INR as well. India-Pakistan related geopolitical developments seem to be a tail risk only for now.

Price action suggests that nationalized banks have been buying USDINR aggressively. In the medium term 70.75 should continue to hold while 71.80 can be tested on the higher side. For the day, CMP 71.10, Range 70.95-71.25.

INR update: Trade talks to resume; Risk sentiments to remain supported

US delayed tariffs on select imports from China till Dec 15^th plus they agreed to resume talks in 2 weeks time. For Trump to retrace yesterday and give ground to China would not have been easy. Headlines said that China and US will talk again in 2 weeks over phone. Now for 2 weeks at least Trump would not touch the trade war topic and at the same time we could see China ensuring that Yuan moves towards or below the 7 handle to facilitate talks.

While there is no consistent trend to a politician’s mind, it seems that the next two weeks or slightly more can be good for risk sentiments. This time leading to the talks between US and China should see both parties maintaining market calm and positivity. Plus the risk off move that we have seen in the last 10 days would be reversed leading to a decent rally in risk assets over the next fortnight.

USDINR should overall follow USDCNH. A move towards 70.55 this week should not be a surprise now considering the Yuan move plus squaring of long positions.

What next for Trump on US-China trade war?

It has been a week that Yuan broke 7 levels without any concrete reaction from Trump administration (naming China currency manipulator was at most cosmetic). The options and their viability for the administration to reply to China or to divert public attention from the US-China trade war are as follows:

1.      Treasury intervention in FX markets: Trump administration can intervene in the FX markets through the $100 bn US government stabilization fund. The fund size is too small to make any impact in global currency markets. China has far more firepower (USD 3 trillion) and independence than US government and FED put together for FX intervention. For intervention of more than $100 bn Trump would need Congress’s approval which might be difficult to obtain given the increasing domestic reservation against Trump’s rhetoric on the trade war.

2.      FED cutting rates: The FED would want to maintain its independence and therefore it is unlikely to deviate from a rational monetary policy track based solely on Trump’s coaxing.

3.      Iran: Trump can take on Iran in the strait of Hormuz but to what end / political victory remains uncertain. Therefore this seems a no go option given military involvement and the empirical evidence of no action against North Korea.

4.      Increase trade rhetoric: Trump can increase its trade rhetoric on EU / slam additional tariff on China.

  

Of all the options above it seems that the lowest hanging fruit is to increase the trade dispute rhetoric against the EU or increase tariffs on Chinese goods. This would help Trump garner more support for a future dollar devaluation domestically. The increasing trade dispute concern would also reflect in the yield curve pushing the FED to cut and therefore keeping the dollar muted.

Therefore Trump administration would most likely step up the trade war roiling risk sentiments further. Driving USDCNH and USDINR higher. With this thought USDINR looks like a good buy at the current 70.75 levels for a move to 71.50 next week. The fact that intervention looks like a difficult option for Trump a sudden dollar slide looks like a smaller possibility in the near future.  

INR update: Trade war to drag on keeping risk sentiments muted

In spite of the last shot being played by the Trump administration in the trade war (labeling China as a currency manipulator), the ineffectiveness of the action ensures that the ball is still in Trump’s court. Trump seems to be scrambling for options pushing the FED to cut rates aggressively or intervene in the dollar market. Both these options seem to have been turned down by the US Fed and Cabinet respectively. Between the two options the Fed is less likely to give in while currency intervention might be more under Trump’s control.

Trump would want to raise the trade rhetoric with EU as well, before going in for currency devaluation/intervention. Therefore trade war should worsen before it gets better. End of August Jackson hole might be the catalyst for the FED to become more dovish than it was in the last FOMC, which in turn could result in a fall in dollar against the majors at least.

USDINR is largely tracking USDCNH plus nationalized banks are protecting a runway INR depreciation by selling dollars at the current levels. USDINR 1m NDF is 10p right showing that buying pressure would have taken USDINR well above 71 if it was not for nationalized bank selling. I would think that Kashmir related geo-political tensions are still to be factored in dollar rupee pricing. Overnight longs are recommended. USDINR should continue trending higher till the Jackson hole (22-24^th August) going towards 71.80 levels. CMP 70.83, Range for the day 70.65-70.95.

INR update: Yuan depreciates; Trade war turning into a currency war

China seems to have reacted with a change of policy taking USDCNH well beyond 7 (CMP 7.077). China till now had a very accommodative and non provocative approach in the trade war which seems to have changed. Now it is Trump’s turn to react or retract, the latter looks unlikely though. Given the situation we can expect a 5-10% depreciation in CNH from 6.95 levels taking the pair to 7.3-7.5 levels.

Yuan depreciation is also accompanied with Kashmir related uncertainties plus intermittent news of disturbance in Hong Kong. All these should heighten the risk off sentiments locally taking USDINR to higher levels (immediate target 70.80+).

The risk to this view (Long USDINR) is that CNH depreciation gives Trump the chance and argument to depreciate the dollar also. Therefore the trade war is now becoming a currency war.

At 68.75 (30^th July), I was expecting USDINR to head higher towards 69.50 in the first fortnight of August while maintaining a view of 67 by September end. This was based on the premise that China will continue to prevent 7 levels on USDCNH, which has been proved wrong. Therefore the view of 67 by September on USDINR has been proved incorrect.

INR update: Trump hits back with tariffs, CNH nears the red line of 7

Trump had tweeted that China is unlikely to close a deal before Nov 2020 elections. This along with yesterdays 10% tariff announcement on $300 bn of Chinese imports show that Trump is finding it difficult to get the terms he wants from the Chinese. Therefore it is likely that Trump would now start a new battle and most likely that would be a trade war with EU. If PBOC prevents USDCNH from crossing 6.98 as it has been till now then within a few days markets will start ignoring the US president again.

The negative dollar repercussion of the tariffs is that markets have started factoring a 96% chance of a second rate cut by FED in September. A 3^rd rate cut in December is now 77% likely. These chances were at 62% and 40% yesterday morning. If the elevated rate cut chances persist then dollar index will eventually break lower as markets will get more convinced that a rate cut cycle has started.

Therefore the arguments are evenly balanced on both sides of dollar weakness and strength. I believe China will again be able to control CNH at 6.98 and within a week the markets would start ignoring the trade war threats.

Although on 30^th July at 68.75 I had expected 69.30 to be seen and then after the FOMC I was of the view that 69.50 is likely, I would continue to  hold on to the view of 67 by September end. I would want to revisit this view after RBI policy next week by which time the heightened trade war tensions would also have alleviated.

USDINR CMP 69.28, Range 69.20-69.40 for the day. Overnight longs are suggested for the time being given NFP and heightened trade war tensions.

INR update: Less dovish FED to keep USD supported; INR to draw strength from easier global financial conditions

Historically dollar weakness starts 3-6 months after the first rate cut of the FED interest rate cycle. This is precisely for what happened yesterday, which is the FED calling this rate cut as mid cycle adjustment and not a change in trajectory of rates per say. If economic growth follows cycles then US growth does seem to have peaked in 2018 and therefore the next rate movement by the FED should again be a cut. But will the next move happen in 2019 or 2020 remains debatable for now. This debate should provide support to the dollar index for the next couple of months ensuring that it does not break its 200 WMA at 96 (CMP 98.8). The view that Trump will push for a weaker dollar remains but again the timing of the same remains uncertain.  

On the other hand the ECB is now much more dovish than the FED. The EU has bigger growth worries than the US plus UK is threatening to go for a hard Brexit. All these factors might bring in further dollar strength against Euro and GBP specially. GBP remains a sell on upticks as markets push UK to tone down its stance of a hard Brexit.

The fact that US has ended its balance sheet shrinking endeavor and delivered the first rate cut of the cycle (still a may be), is something that should ensure that structurally INR will not weaken against the dollar because of global factors (for now global growth and politics makes me assume that oil is not breaking higher).

Locally the inflow pipeline for INR still looks promising specially till September. RBI should cut on the 7^th August and apart from the rate cut the RBI could be more dovish than markets anticipates. To reiterate a rate cut in India is generally INR positive given debt inflows and rate cut been seen as growth supportive. Therefore I have a view of dollar strength (against G7) and view of inflows in USDINR which should keep USDINR in range making a breakout in either direction unlikely.

Given the inflows and INR supportive global financial conditions, I would persist with my view of 67 till September but with a possibility of seeing 69.50 in August. Today we have seen nationalized banks selling at 69.15. Looking at CNH and overall dollar strength we could see USDINR heading to 69.30 today. For the day CMP 68.08, Range 69-69.30.