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.