Trump slapping tariffs on EU imports indicate two things. First,
trade war is not getting resolved in the Oct 2019 round of talks with China because of which Trump is
expanding the conflict. Second the long held view that the trade war will end
sometime before Nov 2020 elections with a Plaza kind of accord which would
result in dollar depreciation against major exporting currencies like CNH and
EU has progressed with EU being made part of Trump’s campaign. Trump mentioning
repeatedly that dollar is too strong also asserts the theory of a Plaza 2 accord
in 2020. The president is trying to make a problem (if it is one) as Top of
Mind, which he will solve with dollar depreciation.
So October and subsequent months would be a time of uncertainty
in global markets which is symbolic of dollar strength. Trump’s impeachment
proceedings will add to uncertainties but this is no way indicative of Trump’s
popularity or lack of it. A failed impeachment (most likely outcome) might
indicate Trump’s victory and result in higher votes for the incumbent
president.
US manufacturing ISM weakens further which is the first sign
of a slowdown that’s approaching the world’s largest economy. But relatively
the US is still better placed that EU or Japan. This would weigh on US yields but more so on
equities resulting in a risk off sentiment which should ensure that this factor
would have limited negative impact on the dollar.
In India, September 2019 recorded the lowest GST collection in
19 months which would weight on fiscal concerns from revenue side. The
approaching festive reason would be critical to ascertain if the fiscal
concerns alleviate or accentuate from here. Therefore Oct2019 GST collection
numbers should now be the focus along with other high frequency indicators. RBI
is likely to cut rates tomorrow which is a consensus view. RBI’s comments on fiscal
and growth outlook would be more critical.
Given that trade war seems to be heating up again, USDINR
should remain well bid and track USDCNH and now EURUSD closely. Given the lack of BOP concerns a benign oil
price should not have positive impact on INR for now. The tax cut euphoria is
totally digested in equity price. Given
the backdrop of expected dollar strength, trade war related risk off globally,
slowing growth domestically and increasing fiscal slippage possibilities one
can expect USDINR to touch 74 by November end. One can go long at current
levels with stop at a daily closing below 70.80.
