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.