INR udpate: Oil supply concerns alleviate as Geo Political stress remains

Oil

The Saudi regime has swiftly announced that the supplies have been restored; the attack would not impact the production for September as a whole. This swift action was perhaps to help Aramco valuations whose IPO has been a source of anxiety within Saudi Arabia. The energy minister was changed a fortnight back perhaps to expedite this IPO. At the same time Saudi Arabia did not lose the opportunity to squarely blame Iran for the attacks. So we can say for now that the oil supply shock fear is behind us as Brent trades at 64.50 levels. But will the Geo political tension between US and Iran increase; fanned by Saudi Arabia (Iran’s arch enemy) and it’s motive to raise international oil prices before it dilutes its stake in Aramco. On the other hand Trump seems to have recently realized that international tensions are not helping his approval rating and fired his hawkish security advisor; it is unlikely that Trump will do a U turn on Iran within a week. With these factors in the backdrop geo political uncertainties remain.

US-China trade war

Trump said yesterday that US-China trade deal could come one day before the November 2020 elections. The President also stated that if the trade deal comes in his second term it will be much worse for China. These comments indicate that China is playing hard to get realizing Trump’s eagerness to get a deal before next year elections. Next info on this story is due after the first week of October when trade talks are likely to resume.

FOMC

Disruption does not seem to be FED’s motive so a rate cut today is a foregone conclusion. What remains to be seen is where an incremental rate cut chances for November which hovers at 67%  currently moves to post the FOMC. The FED is unlikely to be overtly dovish given that US data is still relatively better (current quarter GDP tracking at 1.8%). The fact that dovishness would indicate a lack of confidence and a self fulfilling prophecy the FED would not want the near term rates to move lower which should underpin the dollar.

US overnight rate spike

US overnight Repo rate traded at 10% yesterday on the back of dollar shortage in the system. The trigger for this was the debt ceiling respite that the US government secured on 1^st August 2019. This enables the US government to borrow more and shore up its cash balances with the FED thereby sucking out liquidity from the system. This balance has increased by almost $180 billion in the last 45 days. Historically these balances can be expected to move towards $400 bn (Currently at $300bn) thereby sucking out another $100 bn from the markets. But the FED can address this by arranging for overnight Repos among other tools; it need not go for a QE to address such liquidity concerns. Therefore at present the chances of this overnight rate spike to spill over to the rest of yield curve looks limited.  

USDINR

CNH and other EM currencies continue to trade weak which should underpin USDINR. FII outflows continue at a steady pace. Geo political uncertainties in the middle east is likely to keep markets tentative if not on the edge. China and US are done wooing each other and it’s unlikely that there will be another round of concession or appreciation bout in CNH before October (if at all). USDINR should stay supported at 71.35 with 71.85 as an immediate possibility. CMP 71.46, Range 71.35-71.65 for the day.   

Regards

Saket Agarwalla

INR update: Oil supply restoration news to drive markets

The attack on Saudi oil reserves comes after Trump fired Bolton (his National Security advisor) who was seen as an overt hawk on US-Iran relations. Observers thought that Trump might be moving towards a deal with Iran which has now become difficult given that Iran has been blamed for the attack by Saudi Arabia. The timing of the attack suggests that the same has been carried out to ensure isolation of Iran from the international energy markets via US sanctions.

Saudi Arabia on the other hand has downplayed the impact asserting that they will restore one third of the lost supply by today itself. One news report suggested that Saudi Arabia will restore 100% of lost supplies by tomorrow (Tuesday). Saudi Arabia’s motive to restore supply as soon as possible is to indicate that its facilities are not vulnerable to geo political tension. This assertion is in turn motivated by getting a better valuation for Aramco it seems.

The disruption in oil supply is the largest the world has seen since the gulf war in 1992. The total disruption is 5% of global oil supplies which commodity experts suggest is significant to take Brent prices towards 70, i.e., if the disruption is sustained.

Therefore at the moment news from Saudi Arabia about restoring oil supplies would determine direction for oil prices and by tomorrow morning the supply shortfall should be clearer. If the supplies are restored then we can expect a pull back in oil towards 64 levels.

Trump on the other hand has become dovish on his international relations outlook last week and it would take some time for him to change his stance on Iran again.

Therefore incoming news would determine the direction of oil prices and risk sentiments globally. USDINR should track oil directly. In the absence of fresh news we could see USDINR heading to 71.30 today while a closing above 71.60 would indicate elevated concerns on account of recent events. 

INR update: Trade war Recess might last through September

Both China and US are paving the way for a more conducive environment to facilitate the October trade talks. Trump’s announcement to delay the increase of 5% incremental tariff on $250 bio of Chinese imports from 1^st Oct to 15^th Oct, further strengthens the argument that Trump is changing his stance on foreign policy across because of his fall in approval ratings over the last 3 months. The fall in approval rating is primarily on account of trade war concerns resulting in recession fears in the US which was reflected in equity markets plus the yield curve inversion. The yield curve 10-2y USTs is mildly upward sloping again with the spread at 7bps. This risk sentiment should now be supported till the conclusion of October trade talks which is still 4 weeks away. Therefore for the time being the markets might stop looking at US-China trade war as a theme, unless there is further development before the expected time frame.

Today the ECB is most likely to cut rates by 10bps but the market will closely watch whether a QE is announced. Quantitative easing can be argued both ways with those in support saying that EU economic weakness warrants incremental liquidity. On the other hand those against say that it signals and facilitates further weakness in business confidence while the data is not bad enough as yet for the ECB to pull that trigger. In case there is no QE or a less dovish surprise then EURUSD can give a bounce towards 1.1084 where I would like to sell the pair for a move lower towards 1.08.

USDINR moved lower overnight along with USDCNH and EM basket. Equity markets across have registered gains on account of the thaw in US-China trade war. Yields have risen across markets although the yields in India rising is also to do with the rising fiscal concerns. Today’s CPI print for India should be read for growth with a higher than 3.3% reading positive for growth and perhaps INR as well. A mildly positive CPI print is unlikely to change the course for RBI which is expected to cut rates by more than 25bps in October. September is seasonally a positive month for INR and now with risk sentiments supporting USDINR can head towards 71.05 in this month. A daily close above 71.45 can again bring 71.65. CMP 71.38, Range 71.45-71.25 for the day.

INR update: US-China seem to be moving closer; Risk sentiment improves

There were 3 positive news yesterday for global risk sentiments. China lifted limits on FII investments into local bonds and stocks which is a positive step as China become more open to overseas investments. Ease of investments has been one of the complains US has with Chinese administration. Yesterday evening Chinese media reported that China might be now ready to make concessions and import more from US to facilitate a trade deal. In the US, Trump fired his National security advisor John Bolton who anecdotally was behind the increased US animosity with Iran, North Korea among other countries. This would indicate that Trump perhaps wants to soften his stance against Iran and other foreign countries wherever US was nearing a military standoff.

Trump’s approval ratings have gradually fallen from 46% (in April 2019) to 39% currently (source news.Gallup,com) primarily on the back of recession and trade war concerns. Perhaps this gradual fall in approval rating has resulted in Trump trying to make a trade deal with China and now firing the hawkish NSA. On the other hand this is the first time China seems to giving ground to the US on the trade war. If this is the case then the market assumption that a US-China trade deal could be a possibility in October looks more palatable (today). Till this landscape changes, risk sentiments should remain supported in the short term.

Since 1^st August, USDINR has moved higher by 4% as compared to a 2% on USDCNH. India 10Y yield at 6.6% shows that markets are now worried about local growth and therefore fiscal slippages. Tomorrow the India CPI print will be critical to read from a growth perspective. Most of the market participants now expect more than 25 bps rate cut in October RBI policy. Broad range for USDINR remains 71.35-72.25 and currently with improving risk sentiments the pair looks like a sell for a move to 71.50 levels by tomorrow. For the day, CMP 71.74, Range 71.80-71.55.

INR update: US economy's relative strength; No hard Brexit for now?

If contraction in US manufacturing ISM on Tuesday (at 49.1) showed that the US is also slowing down, yesterday’s services ISM at 56.4 debunked that interpretation for the economy in general. Therefore the manufacturing slowdown which looks like a global phenomena could be more to do with a slowdown in global trade while the robust services PMI indicates the relatively better shape US economy is in. This makes cutting rates for the FED even more difficult with the markets pricing in a near 100% chance for September FOMC while the economy giving signals of it not being as weak; preventing the FED from ushering in a rate cut cycle. The same doubt does not extend to the European economy (which undoubtedly is on a very weak footing) but the ECB is being careful so as to not signal a weakness in confidence and making recession a self fulfilling prophecy. The ECB meets on 12^th Sep next week where a rate cut is a significant possibility which does not seem priced into EURUSD as yet.

Price action and political developments seem to suggest that the risk of a hurried hard brexit on 31^st October has been averted. The short covering seems to be complete with GBPUSD rallying 4 biggies this week. A weekly close below 1.2287 should make the pair a short again, with a stop above 1.2360 for a move towards 1.21 levels again.

USDINR continues to follow USDCNH and EM basket. Risk sentiments across have improved in the last 2 days. USDINR has moved lower from 72.40 to 71.70 for most of this week and today being a Friday we might see a 38 to 50% retracement of this down move taking the pair back to 72.05. Broad range should be 71.35-72.25 while for the day range could be 72.05-71.65. CMP 71.72.

INR update: Hard brexit chances reduce; HK unrest eases; US-China to talk again!

Taking a step back the main reason for a global risk off recently was US-China trade tensions and not Hong Kong civil unrest. Therefore the reaction to yesterday’s positive news on Hong Kong unrest seems to be overdone. US-China would be talking at a ministerial levels in the first week of October but the fact remains that the two sides are far apart to come to a common ground swiftly and Trump does not get any votes for solving the issue one year before elections. On the other hand China-Iran strategic tie up will result in some reaction from the US which could again spoil risk sentiments. The view on EURUSD remains a sell on the back of last week’s bearish close (below 1.1050) with a stop above a weekly close of 1.1144 for a target of 1.06.

GBPUSD is caught between Brexit news swings. No one can reasonably predict where its headed politically but fundamentally against the dollar cable looks weaker only. A weekly close below 1.1975 will indicate hard brexit expectations crystallizing and a weekly close above 1.23 would indicate that market is expecting that a hard brexit has been avoided.

USDINR rally from August beginning was on the back of a depreciating CNH plus local slowdown concerns. Since 1^st August USDINR has moved higher by 4% as compared to CNH at 2.5% now. Given the local factors it is difficult to say that INR losses is in excess. The view remains of USDINR going higher towards 72.50+ in the next week or so. A daily close below 71.78 will likely bring in 71.50 levels, therefore long USDINR here should be stopped if we are going into a close below 71.78. CMP 71.83, Range for the day 71.78-72.05.

INR update: Trade war escalates further as locally growth slows

US-China trade war appears to be in a headlock but the match continues and so will the risk off sentiments across asset classes globally. US not agreeing to postpone the implementation of fresh tariffs is a sign of further escalation which is reflected in USDCNH today morning. EU and Japan both appear to be slowing down faster (retail sales data) while the US economy continues to show more resilience than expected. The risk off sentiment plus stronger US economy accompanied by hard brexit related anxiety should continue to boost the greenback against G7 and EMs.

Weekly closing in EURUSD last week below 1.1050 (at 1.0989) should take the pair towards 1.06 with support at 1.0860. Similarly a weekly close in GBPUSD below 1.1975 should indicate that hard brexit is a consensus expectation which should result in the pair getting sold for a 3-4% kind of movement.

USDINR continues to follow USDCNH. Local sentiments are negative considering the slowdown in GDP (Apr-June growth came in lower at 5% against expectations of 5.7%). Lower bond yields now reflect lack of growth rather than controlled inflation and might not result in bond inflows as risk of fiscal slippages increase gradually during the year. USDINR should now not go below 71.70 which is a good 50p lower from current levels making it difficult to initiate fresh longs here. 72.30 should support for the day with 72.50 as the next resistance. Range for the week 71.70-72.50++. CMP 71.23, Range for the day 72.00-72.30. I would be more comfortable buying USDINR near 71.85 levels with stop below 71.70 for a move to 72.50.