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.