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+.