INR update: Trade war campaign expands to EU; USDINR could see 74 by november end

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.