Friday, August 2, 2019

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 3rd 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 30th 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.

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