INR update: January a crucial month for Yuan, dollar index nears crucial levels

Since 2016, every January CNY fix has moved by an average of 1.86%. This can be contrasted against average absolute monthly movement of 0.9% in the same period. Last 3 years since 2017 every January CNY has appreciated by 1% to 3%. This could indicate that China implements its desired currency direction from January every year. Looking at the CNY fix at the close of 2019 it seems the desire this time is to make Yuan stronger in the backdrop of a Phase 1 deal signing and ahead of a Phase 2 confrontation. Although CNY fix has given a break of 6.98 I would wait for another week till 8th of Jan so that higher market volumes affirm the lower breakout in USDCNY. Technically the target for USDCNY would then be 6.92 and lower, (CMP 6.9762).

USD index needs to break 96 to confirm dollar weakness as a trend for 2020. CMP 96.7, a break of 96 would need significant development and momentum which seems to be missing now. Perhaps a breakdown in USDCNY would be a catalyst for a broad based dollar weakness in January 2020.

A confirmed breakdown in USDCNY or dollar index should be INR positive in spite of sustained buying by nationalized bank. In this back drop the expected range till first half of January 2020 should be 71.45-70.80. For the day, CMP 71.26, Range 71.35-71.15. Expecting some INR gains in the second half  today given the quarter end.

INR update: USDCNY fix to be watched for sustained Yuan appreciation and dollar weakness

In otherwise muted markets CNY fix today printed at 6.9805 (from Friday's 6.9879) indicating that PBOC might be finally allowing the Yuan to appreciate in spite of the doubts markets had on the phase 1 deal. If this Friday's CNY fix is below 6.98, it would be significantly dollar negative for EURUSD and emerging market currencies alike.

While CNY fix must be seen to ascertain the direction for EM currencies in general, for USDINR appreciation would be controlled and limited because of continuous buying from nationalized banks in the futures and OTC market. Brent is trading higher at 68.30 because of increasing geopolitical tensions in middle east. Markets seem to be comfortable with Brent between 60-70 levels and we might not see any sustained impact on other asset classes till the time Brent moves higher than 70 levels.

With certain chunky inflows in pipeline for Jan 2020 and likelihood of fresh portfolio allocation along with a possibility of a lower USDCNY fix, first half of January 2020 might be positive for the rupee driving USDINR towards 70.70 levels from the current 71.3350. For the day CMP 71.34, Range 71.45-71.15.  

2019 snapshot and what's next for currencies?

2019 snapshot and what's next for currencies?

In 2019 dollar index gradually drifted higher as trade war escalated; trading above its 200 WMA (at 96) for the entire year and just below a 20 year downward sloping trend line (at 99), a break of either would determine the next move across currencies. CMP  97.65.

EURUSD similarly was not able to breach its 200 WMA during the year at 1.1357 and slowly drifted lower towards the 1.10 handle. In EURUSD a break of 1.10 and 1.1150 should determine but only the next 2 big figures. CMP 1.1080.

USDJPY trended lower from 112 to 106 in the first half and then back to 110 levels since August. The move up has got resisted at 200WMA at 109.75 which looks like a hard ceiling given the price action. CMP 109.40.

USDCNY fix started 2019 at 6.7 levels and headed to 7.1 as trade war escalated. The cool of to current 7 levels was on account of expectations of a phase 1 deal. A break of 6.98 on USDCNY fix would indicate a lower breakout in the pair and should result in EM currency appreciation across when it happens. CMP 7.01.

Price action in USDINR mostly stayed in the range of 69-72; but RBI intervention since October 2019 has shifted the base higher to 70.70 levels which looks like a hard floor now (except if USDCNY fix breaks below 6.98). On the other hand a weekly close past 72.40 in USDINR could pave the way for a move towards 74 levels. CMP 71.18.

INR update: Positives priced in, Rupee can now come under pressure given the macros

With the US-China phase 1 trade deal already digested in price, the one reason which could have led the dollar index to break 96 (200 WMA) has proved to be insufficient. We should continue to see USD index trade in a range of 96.65 and 99 for the foreseeable future (CMP 97.31). On the other hand, with US elections behind us, what lies ahead is again Brexit related uncertainty which should also weigh on the EURO making a weekly close above 1.1158 unlikely (CMP 1.1133).

USDINR has not been able to break lower in spite of the US-China deal plus large inflows. Therefore, now the focus shifts on the weaker macros helped by a possible move up to 99 levels on the dollar index. To add to this Brent has moved up by 7% in the last fortnight which will also help an up move in USDINR.  Last week’s close of 70.81 should act as a good stop for long USDINR positions. A close above 71.15 should pave the way for 71.70. CMP 71.09, Range 70.95-71.15.

INR update: US-China trade deal done, Brexit ambiguity over, markets celebrate

It has been an eventful morning. US announced that a Phase 1 trade deal has been agreed to with China. Consequently USDCNH is trading at 6.96 as compared to 7.025 yesterday. China is still to announce the same and USDCNY fix at 7.0156 still prices in some amount of caution. A USDCNY fix next week below 6.98 would be a Chinese confirmation on the in principle agreement with US. Technically USDCNY fix moving below 6.98 calls for at least another 1% appreciation towards 6.92.

With the conservatives likely to win a clear majority in UK elections the uncertainty around Brexit seems to be reducing leading to a relief rally in GBPUSD. GBPUSD seems poised for 1.37 today (CMP 1.3460). driven by positional short covering.

A weekly close in USD index (CMP 96.77)  below 96.00 (200 WMA) would likely bring in 94.5 levels and therefore seems unlikely (prices stay in range more often!). On the other hand if EURUSD closes above 1.1150 today, then it would be significantly bullish for the pair with a target of 1.1357.

Price action yesterday suggested that the inflow is done with. Price action yesterday afternoon also suggested some large buying driving the pair higher from 71.60 to 71.85 perhaps driven by nationalized banks. There doesn’t seem to be any likely bullet inflows in the pipeline for the next 1 month in USDINR.

USDINR will be driven by USDCNH for the next few session post which local macros should start dominating. 70.30 is 200 WMA for USDINR and a weekly close below the same would be significantly bullish for the Rupee and therefore unlikely. For import 70.30-70.50 is a buy zone from a 1-2 month hedge perspective. For the day CMP 70.61, Range 70.35-70.70.    

INR update: FOMC dovish on rates but unchanged on growth/inflation indicates a structural change

Before the FOMC yesterday the message was that 2% CPI in the US is enough for the FED to consider hiking rates but Powell’s comments that persistent high inflation is required to hike, changes that expectation. Yesterday US CPI printed at 2.1% but now the FED doesn’t see it as reason enough to even consider hiking in 2020.

For 2020 the FOMC has kept GDP and inflation forecasts at September levels but lowered the rate forecast from 1.9% to 1.6% which is a change of approach for the FOMC. The reason for this change of approach could be trade war concerns with an objective to reach even lower levels of unemployment. If this change indicates a structural shift then it perhaps paves the way for a substantially weaker dollar in 2020. Dollar index CMP 97.03 with immediate objective at 96.01 (200WMA).

USDCNY fix came in lower at 7.0253 against 7.0383 indicating moderate optimism ahead of the trade deadline. Although for Trump the choices are increasingly difficult, delaying additional tariffs would suggest Chinese victory and implementing incremental duties could result in a stock market fall. Price action suggests that the large inflow in USDINR is over although the trend is still lower with next support zone at 70.30 (200 DMA) to 70.55 levels. With other EM currencies also supporting INR strength one can expect USDINR to head lower towards 70.50 today. CMP 70.66, Range 70.50-70.75.

INR update: FOMC likely to sound more optimistic; Inflows dominate USDINR price action

The FOMC’s communication strategy has aimed to ensure that markets remain confident of the economic outlook when times are good. In the current situation FOMC will look to boost market sentiments further. Currently the market prices in the next move as a rate cut somewhere in mid 2020, which the FOMC will look to delay or change into a rate hike. Therefore the dot plots from the FED can be expected to be somewhat hawkish even though there is no immediate rate action likely.

The FOMC today plus the nearing trade tariff deadline of 15^th Dec can result in the dollar index heading towards 97.8 levels from the current 97.50. UK election results will be available on Friday morning only. Markets have priced in a Conservative majority in spite of the market’s poor track record in predicting election outcomes and its impact on asset prices.

USDINR has seen large inflow getting sold over the last 2 days. USDINR 1m NDF is trading marginally right (1p) since yesterday even though RBI fix is trading around -0.75p. This seems to suggest short unwinding in NDF and actual inflow in onshore market. Likely that some large inflow is continuing even today. Nationalized banks are buying since morning but that has not been able to arrest the price fall. I would expect the downtrend to continue today, CMP 70.77, Range 70.85-70.60. The next major support for USDINR is in the zone of 70.30-70.55

INR update: Trade deal becomes less likely although market sentiments remain supported

Considering that less than a week remains for the trade deal deadline the chances of a phase 1 deal being struck before 15^th Dec 2019 appears to be less bright as compared to last week. The political compulsion for Trump to push for a deal also seems to have abated with his approval ratings not declining any more plus equity markets holding on to their gains. Until November 2020 elections Trump gains not as much by doing the trade deal but rather by keeping hopes alive of a deal and simultaneously keeping his constituents involved in the match between the two super powers. This makes me think that Trump will make the contest more difficult before he wins it sometime before the elections which are still 11 months away.

Dollar index failed to continue its downward trend and closed just higher than its 200 DMA (97.67). Asian currencies trade weaker against the dollar as mild risk off plus dollar strength weighs on the currencies. USDCNY fix has moved higher from Friday’s 7.0383 to 7.0405. This lack of global support makes me believe that the lower break in USDINR today morning is not sustainable and is flow driven. The pair should be bought here for a move back towards 71.40. Range for the week 70.95-71.45. CMP 71.12, Range for the day 71.04-71.30

How Real estate prices are the key to boosting demand in India?

Although I refrain from writing anything which can be construed a suggestion to policy makers but today I am making an exception. The reason for not doing so is simply because there is no end to it. And the reason for making the exception is the news about government exploring personal income tax cuts to boost demand.

It is the individual’s balance sheet which needs to be boosted to get the wealth effect back; and this can be done without putting the country at risk of a credit rating downgrade.

India’s adult population (above 18 years) is roughly 870 million; out of which 680 million have a total wealth of Rs. 0.7 million or less (www.statista.com), let's call them the Mass. Yes total wealth and not yearly earnings. 

Out of the remaining 190 million people, 170 million have a total wealth of Rs. 7 million or less. Let’s call them the Fortunates. The remaining 20 million are richer and let us call them the Wealthys.

If we were to list the financial assets of the 870 million adults in the country who drive economic demand then the Mass (680 million people  with wealth below Rs. 0.7 million) would have around 20% of their assets in banks or government saving schemes or gold. 80% of the Mass’s assets by value would be made up of agricultural land or the house that the family lives in. Considering the low wealth levels of the Mass, bulk of their assets would be functional (i..e., agricultural land or occupied house).

The Fortunates (170 million people who have Rs. 7 million or less in total wealth) will again have at least two thirds of their financial assets in real estate specially agricultural land, occupied house or workplace. The remaining one third would be in other financial products and gold. The split would not change substantially from the Mass as the Fortunates would use their higher but still low earnings to first get basic assets like a better house or an income generating land or shop.

Even if we were to assume that the 2.5% Wealthys have a median income which is double that of the richest Fortunate, the median would be Rs. 14 million. Thus at this level also real estate is likely to form a substantial part of total asstes, let us assume a fifty-fifty split.

Therefore basis the above assumptions we can say 97.5% percent of Indian adults have at least more than two thirds of their wealth in real estate in the form of agricultural land, occupied house or place of work. 

Now if the prices of these real assets go down the population becomes less prosperous and over a period of time starts feeling it too.

The house that one lives in is not marked to market at the end of every financial year. But the price of that asset forms the pivot of future security and savings estimates, simply because it forms bulk of the savings for bulk of country's population.

One might argue that these real estate holdings are not liquid and therefore do not affect demand. But what cannot be argued is that these real estate assets are bulk of the individual's balance sheet. What cannot be argued is that if your balance sheet shrinks then you become less Fortunate. If one becomes poorer then sooner or later one behaves accordingly. The "how" of it is very important and lack of an elaborate behavioral explanation in no way suggests that it does not happen.

Therefore till the time prices of these real estate linked assets go up we are unlikely to see demand picking up sustainably across the population.

The nominal prices of Real Estate have corrected 20% since 2014 according to estimates. It is no coincidence that growth has seen a steady deceleration in the same time period.

Now what can the government do to revive real estate demand and therefore prices, without taking the fiscal route?

A simple method could be to allow first time home buyers full deduction of interest against their income, for personal income tax purposes. This would effectively reduce the funding cost of home buying by a third without any drag on tax collection as currently home offtake is at a record low.

It would lead to releveraging of the individual's balance sheet with a less risky and now reasonably priced real asset. Noteworthy is that there is no other transaction in which an individual commits herself to an asset which is worth multiple years of her income. Therefore such transactions inevitably result in higher growth with large amounts of money changing hands in such short period of time.

Real estate inventory reduction would help NPAs giving room to banks and NBFCs to lend to other areas of the economy. The resultant uptick in real estate prices will show on the balance sheet of the individual although only as a passing thought; But that passing thought is enough to choose between a Rin or a Surf and sometimes between starting a new business or not.

INR update: Dollar index heads towards a trend reversal

Today is a crucial day for the dollar index (CMP 97.37). As suggested dollar index was not able to surpass 98.9 levels last week / month. A weekly close for the dollar index below 97.35 would open the door for 97 figure and 96.01 (200 WMA). NFP today would be crucial as a weaker NFP would result in the overtly dollar long positions against EUR ($8.5b long according to IMM) and JPY ($4.5b long) to be unwound. This would reflect across EM currencies and notwithstanding the connotations of risk on-off sentiments.

RBI has clearly shown for records that its mandate is managing inflation at 4% and not core inflation or some other measure of price. This stance is worth applauding, at least currently as inflation is above 4% and likely headed towards 5%. Unlike in the recent past, RBI hopefully would show the same determination to keep inflation at 4% when inflation dips below median. If there is one macro factor which has been a problem for the country it has been inflation but in the same breath I must mention that for a growing country, inflation at 5% is perhaps much better than inflation at 3%.

The next level to watch for USDINR is that of the dollar index as mentioned above. A downward break of dollar index as mentioned earlier could take USDINR to 70.30 next week. For today we are seeing a correction in the short positioning built over the last 2 days. For the day CMP 71.35, Range 71.50-71.25.

INR update: US pushes China to close phase1; dollar weakens against G7 as US slows

The US seems to be putting more and more pressure on China to complete the Phase1 deal. In November 2019, Trump had asserted that the deal with China a day after his inauguration in Jan 2021 will be much worse than a deal before. What he said yesterday was just rephrasing the same sentiment.  US House of Representatives has approved a bill sanctioning human rights violations by China against Uighur Muslims, this too seems to be to put more pressure on the Chinese administration to close a Trade deal. As we approach the deadline more volatility can be expected as the US pushes China to close a deal while the Chinese seem to be playing the waiting game. There doesn’t seem to be a reasonable way to guess the outcome to this contest.

On the other hand, equity market’s being at record highs have given more teeth to the US administration as it opened the French front in the trade war, threatening to put tariffs on French imports worth $2.4 billion.

The fact that US manufacturing ISM has been under 50 for four times in a row makes me believe that the US data would start surprising lower as the economy slows down. For a change the currency markets, seem to focusing on US data and not the increased trade war rhetoric which has resulted in dollar weakness after the US manufacturing ISM data on Monday. Today’s US ISM services print becomes a very important piece of information for this argument.

USDCNY fix has moved higher from yesterdays 7.0224 to 7.0383 and this week we can see the fix headed towards 7.05 given the situation in US-China trade war. While dollar weakness could prevail against G7 (as mentioned last week dollar index is unlikely to sustain above 99 in the medium term). EM currencies are more likely to move on account of risk sentiments which seem to be off the table for now. For the next few days USDINR should trade in a range of 71.55 to 72.20. For the day CMP 71.72, Range 71.60-71.85 with 71.85 the preferred destination.

In the medium term even if US-China trade deal doesn’t happen USDINR is unlikely to sustain above 72.44 levels.

INR update: Chinese and Indian data indicate a pause in pace of slowdown

Today morning market sentiments are a tad positive given China manufacturing PMI (Caixin) which came in at its highest in 3 years (51.8 vs 51.7 last month). On the trade front China seems to have laid down clear terms which is a rollback of all existing tariffs as a part of phase 1 deal. 

India’s GDP was expected by many to be much below 4.5%, making the print at 4.5%, a relief. On the other hand GST collection figure at higher than Rs. 1.03 lakh crores for November indicates that growth momentum has perhaps stopped getting worse, first sign of bottoming out. Although it is too early to form a definitive view on domestic growth as yet. 

This week RBI is likely to cut rates again and many believe that this could be the last cut in this cycle given that inflation is running higher than 4%. Contrary to normal economics, INR appreciates in a run up to a rate cut perhaps because it is seen as growth supportive. Dollar index closed November well below 98.9 levels indicating price action to be likely range bound for global currencies. USDINR failed to sustain above 71.75 in the first hour of trading today indicating that the pair returns to the  71.75-71.40 range for the rest of the week. First half of December should see some inflows making 71.40 the preferred direction. For the day, CMP 71.69, Range 71.78-71.55. 

Thanks 
Saket Agarwalla