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 (30th 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.
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