INR update: Moderate INR gains expected in October

Medium term view

INR started its current slide in Feb 2018. If we compare the period of Feb-Sep for 2017 and 2018, then we observe that $27 bn of additional demand has come from the deterioration in trade deficit. As per RBI, investment flows have resulted in lesser inflows of $35bn in the same period. While in 2017 RBI net bought $52 bn this time they were net sellers of ~$46 bn. Assuming little changes in other components of BOP, this results in a net additional supply of $30 bn from the RBI which would be the net change in hedge positions of importers and exporters.

With a monthly trade and services volume of $70 bn a $30bn change in positioning over a period of 8 months would have resulted in complete internalizing of the weak INR view. On the other hand INR seems to be fairly valued at 73 levels as per 2012 base REER (36 currencies). Plus currently the government and RBI seem to be very vary of further INR depreciation.  Given the fact that in the last 6 months INR has depreciated higher than other EM currencies we can see a period of consolidation in INR which can take the pair towards 73-73.25 by October end, provided dollar remains soft ahead of the midterm elections in the US. Having said that any appreciation of the Rupee will be bought into as the country steps into a period of political uncertainty with state elections in December and central elections in May 2019.  

For the day

Today 1m NDF is trading 6.5p right as compared to 9p right yesterday while EM currencies have moderately appreciated since yesterday. Equity markets are in the positive territory as Saudi stocks closed 4% higher yesterday as Trump sent his secretary of state to discuss the brewing crisis between the two allies. Crude is trading softer at 81 levels while yesterday the FPI outflows seem to have abated. Given the medium term view and the factors today INR can appreciate by 30p today. CMP 73.86, Range 73.95-73.65.

INR update: US midterm election risks drive equities lower

US political risks ahead of the midterm elections on 6thNovember,  seem to be getting priced into US equity markets. US10Y yields and dollar index also cooled off as risk aversion reflected on the equity markets first. There doesn’t seem to be any US data that would have triggered the 3% selloff in Dow while the IMF cuts to growth forecast day before yesterday could be a catalyst. US CPI and ECB minutes today could be significant for the dollar index but having been rejected at 95.7 the dollar index can register 2-3% down move over the next fortnight.

 

EM currencies depreciated along with equity selloff. One might argue that INR was depreciating when equity was making new highs and therefore INR should not depreciate now. The move up in equities was led by domestic investors while FIIs are the major sellers in the last 15 days therefore the selloff in equities is likely to adversely affect INR. The positives for Rupee in this risk aversion move, is the correction in oil prices accompanied by a possible cool off in the dollar index which should ensure that pace of Rupee depreciation slows down in spite of equity outflows. Nifty looks like headed to 9950 now. The medium term outlook for USDINR remains clouded by confusion over policy. CMP 74.41, Range 74.25-74.75. 

INR update: FII outflows pickup as RBI aggressively defends 74

US10Y-2Y yield spread has widened to 36 bps which is the highest in the last 4 months indicating improved market confidence in long term inflation outlook for the US. Ongoing Italian budget concerns has resulted in Italy 10y yields touching 3.62% (up 90 bps in the last 1 month). US10 Y yields have broken the multiyear crucial level of 3.11% and is currently at 3.24%. In spite of all this USD index is unable to sustain above 200WMA at 95.7 currently. As we go near the US midterm elections on 6th November there is a possibility that political risks start getting priced in the greenback resulting in a 2-3% pullback. Consensus estimates currently indicate that Trump’s Republicans will retain the Senate while the House of Representative will have a democratic majority. The view of USD getting sold on the back of these political risks fails if we get a weekly closing above 96 on the dollar index.

USDINR 1m NDF is trading 15p right and oil continues to trade above 84 levels. EM currencies have been stable since the week opened yesterday morning except for a mild depreciation in CNH on the back of PBOC rate cut on Sunday. RBI on Friday indicated that interest rates would not be raised to protect the currency and since then RBI has more aggressively defended 74 levels. FII outflows have picked up substantially, October MTD outflows is $2.3bn as compared to $2.9bn for the whole of September 2018. RBI is likely to defend 74.20 aggressively during the day but overnight USDINR could see higher levels as oil remains at elevated levels along with an overhang of dollar strength across. RBI’s monetary policy stance gives more reason for speculators to bet against the Rupee. Even if we see dollar weakness ahead of the US midterm elections we will see limited INR appreciation as buyers would line up at lower levels. CMP 74.05, Range 73.85-74.20.

RBI policy expectations - 50bps hike

RBI last CPI projection for end FY19 was 4.8% and the last core CPI reading was 5.9% for the month of Aug 2018. Now with Rupee and Crude under pressure the case for CPI to edge higher than 5% by FY19 end and core inflation to remain or rise even higher becomes stronger. This perhaps gives RBI inflationary arguments to hike by 25-50 bps today, although the real reason would be to increase real rates further in this environment to prevent a currency stress.

A hike of 50 bps should result in temporary and moderate (30p) Rupee appreciation while a hike of 25bps might result in 73.80 being seen again. A no hike would result in 74 levels. I expect a 50 bps hike given that currency has been an area of concern for the RBI / government and raising rates in the current context is the minimum RBI could do.

Other measures like NRI bonds are unlikely to be announced immediately and the RBI will take time (and higher USDINR levels)  to reverse its aversion to oil window. Increasing rates, depreciating rupee and higher crude should result in lower growth forecast which should negatively impact equities and government bonds. Therefore the hike would not sustainably  alter the higher trajectory for USDINR.

INR update: Break out in US yields; global dollar strength

US 10 y yields broke the multiyear resistance at 3.11% and is currently trading at 3.21%. This was on the back of continued strong US economic data (both manufacturing and services ISM now hovering around the 60 level). Consequently the dollar index which has been attempting to break the 200 week moving average at 95.69 is now trading at 96.1. A weekly close above 96 should result in further up move. This dollar up move has been supported by the ongoing uncertainty of Italian budget which has resulted in Italy 10Y yields going to 3.32% from 2.7% in mid September.

Till yesterday morning 73.35 looked like a good support for INR as the expectations for an oil window was ripe before a news flash on Bloomberg indicated that RBI might be averse to the idea. This was the only hope the markets had for the rupee and that seems to have been busted for now. Subsequently in the evening the RBI announced relaxed ECB norm for oil companies working capital requirement. The problem with these is that companies will need to be sure that they can take the currency risk plus raising an ECB for PSUs is a time taking process (7-15 days) and therefore we have seen no impact on INR.

Tomorrow we have the RBI policy where market is pricing in a 25 bps rate hike. Given the increase in MSPs for Rabi crop the chances of a 50 bps rate hike increases. The fact that RBI has turned down governments proposal for a oil window also increases the chance of a 50 bps rate hike which can support the currency. The problem here is that the government would not want rates to increase by more than 25 bps given the negative impact on growth.

Since mid August the dollar index fell from 96.4 to 93.8 and in that period INR depreciated sharply. Now that the dollar index is trading above 96 again with US 10 Y at 7 year highs in terms of yield, USDINR can accelerate higher. The road ahead will be bumpy with the RBI policy tomorrow but increasingly 74.5 looks likely. CMP 73.75, Range 73.95-73.60.

INR update: Immediate break of 73 looks unlikely

FOMC expectedly raised rates and removed the word accommodative from its description of current monetary stance. FOMC expects the US economy to peak at 3.1% growth in 2018 and subsequently grow at 2.5% next year. This suggests that sometime in the next 3 months or so we will start getting negative surprise from US economic data release. Although the market impact of the FOMC was limited but as we close 2018 the FOMC’s expectation become significantly negative for the dollar in the medium term. Add to this the uncertainty of the US midterm elections in November 2018 and we can see the dollar peaking out near 96 levels before falling towards the end of the current year.

The government has shown concern plus intent to ensure that INR doesn’t depreciate beyond 73 levels. The measures announced till now have not been significant from a BOP perspective but indicate a willingness to do more if required which should keep USDINR longs cautious. Meanwhile the EM currency pressure we witnessed since end August has dissipated with TRY, CNH, and ZAR stabilizing. US 10Y yields have got rejected at 3.1% again and the FOMC statement should ensure that a breakout doesn’t happen. Add to this the developing dollar negative view (as above) and we can say that it’s likely that USDINR has peaked near 73 levels. I would sell USDINR at current levels of 72.55 and 72.95 with stop above 73.35 (daily close) or 73.55 (price) for a move to 71 levels in the next 2 months. For now Brent at 82 is the a risk to the view.

USDINR 1m NDF was trading 11p right yesterday while today it is 6p only. EM currencies have registered substantial appreciation since yesterday. Brent continues to trade above 82 on the back of US tensions with Iran. Equity markets locally seem to have stabilized and the liquidity measures announced by RBI should ensure limited stress in the BFSI sector. CMP 72.55, Range 72.62-72.31.

INR update: Eco affairs secretary thinks Rupee should be between 68-70

US10-2Y spreads widened to 27bps, the highest in a month indicating a pickup in risk appetite while the 10Y yields have started edging towards the resistance of 3.1%. With trade threats becoming real, the chances are that import tariffs and strong US growth are likely to keep US prices elevated ensuring that the FED stays on a rate hike path for the visible future. This week FOMC is likely to hike by 25bps but the most important aspect of the meeting would be the dot plots and fine prints on yields and neutral rate.

The economic affairs secretary for India believes that the fair value of Rupee is near 68-70 with an outer limit of 72. This is very different from what the same person believed a month ago, which goes to show how difficult it is to value a currency. But what the comments do indicate is that the government now aims to keep INR depreciation under control. With the selloff in EM currencies having cooled off globally the task might not be as difficult as it could have been 3 weeks back. The likely measure could be an oil swap window.

USDINR 1m NDF is trading 6.5p right as compared to 4p right on Friday. Most EM currencies have depreciated moderately since last week’s close as dollar regained some ground. Oil prices are touching $80  while Indian equities don’t show the nervousness seen last Friday. In the medium term it seems that USDINR will trade in the range of 72.85-71.50 with a possibility of a break lower. CMP 72.56, Range 72.69-72.30.

INR update: Weekend announcement awaited

The yoyo of trade tension related headlines kept swinging and currently it is slightly less worrying that Tuesday. On top of this US CPI mildly disappointed with positive comments from Draghi on EU inflation. Turkey central bank surprised by hiking rates by 625bps against expectations of 300 bps. All this resulted in USD index falling sharply from 95.60 (200WMA) to 94.50 currently. I would continue to hold the view that US economy outperformance and Trump’s pre election trade war campaign will keep USD well bid till some time before November 6^th. A weekly closing in EURUSD below 1.1650 would reassert the above view.

On Tuesday I expected the gov/RBI to announce some policy measure between then and Friday and coincidentally it was confirmed that over the weekend PM Modi will review the economic situation and come out with measures on USDINR. One of the measures could be reinstating buyers credit through LOUs which was the trigger for the change in sentiment for USDINR 6 months back. The impact for this has been significant in terms of short term trade credit unwinding plus reduction of trade credit cycle in number of months, resulting in increased demand for USDINR in the last 6 months. Rate hikes could also be announced given that it is a low hanging fruit. Somehow I believe that the government will not use its ultimate measure of raising FCNRB deposits as yet. Oil window could be another scheme that could result in reduced buying pressure.

USDINR 1m NDF is trading 6p right as compared to 16p on Tuesday morning. Today morning we saw some bids which would be overnight shorts cutting positions plus some importer buying. Over the approaching weekend there is an unpredictable event and therefore participants will lighten position during the day today. Most of strategic positions would be USDINR longs which therefore should result in the pair going towards 71.50 today. USDINR can for sometime consolidate in the range of 71.50-72.50. CMP 71.81, Range 71.92-71.45.

INR update: Oil price gain drives Rupee towards 73

US job openings data continued to surge indicating the positive surprise in US data release since mid August. As a result further narrowing of 10-2Y yields have stopped which bodes well to the USD. Positive developments in the EU-UK negotiations for a Brexit deal might keep the dollar index from breaking the 200WMA at 95.60 this week, but at the same time trade tensions and US macro performance should prevent the index from breaking 95 convincingly either.

USDINR 1m NDF is trading 16p right as compared to 12p yesterday. This is on the back of a surge in oil prices (Brent at 79.31) and continued lack of action from Indian policy makers emboldening the USDINR long positions. Yesterday I expected that there is room for 73 on USDINR but if we do not see any significant measures which bring down USDINR by 1 rupee or so, then next week markets will put Rupee through an even tougher test. I would think that RBI and the government realize this and therefore we should see some major announcement between today and Friday. Other EM currencies have depreciated only mildly since yesterday while equity markets seem to be reacting moderately now to losses on the Rupee. CMP 72.80, Range 72.95-72.60.

INR update: Policy expectation to only slow down Rupee losses for now

 

Trade tensions abated with news of US talking with China, Canada and EU. Brexit deal related optimism prevented dollar index from breaking 200WMA at 95.56 yet again. A  weekly closing above 95.56 should ensure that the dollar index heads to 97 levels.

 

Indian policy makers all this while attempted to play down concerns on depreciating Rupee by suggesting that the same is because of external factors and therefore is  not too much of a worry. This was interpreted by the markets as a free hand to go long in USDINR. Yesterday the policy makers realized the duality of the argument and expressed worry on depreciating Rupee. It is unlikely that the government would be able to come out with some measure immediately as brainstorming and execution would take some time. On the other hand the government would want to see the effect of its verbal intervention yesterday and perhaps would look to implement new policy only at the break of 73. In other words there seems to be room for 73 albeit with policy risk.

 

USDINR 1m NDF is 12.5 p right as compared to 10p yesterday. EM currencies have not registered moderate appreciation since yesterday. FII flows continue to be negative as debt outflows have picked up in September. Oil is at elevated levels of 77.52. CMP 72.36, Range 72.20-72.55.

INR update: Rupee depreciation not much of a worry till now

Trump clearly wants to beat the trade war drums louder and louder before the midterm elections. To reiterate, every time we have seen a new piece of information which negatively affects global trade, the greenback gains. On Friday Trump said that the US would put tariffs on additional $267 bn of Chinese imports raising the total target to ~$500 bn now. To add to this average hourly wages increased by 0.4% mom which was the highest since 2009. Average hourly earnings was the one component in NFP report which was not justifying the rate hike path taken by the FED, now with this parameter also showing robust US growth the case for rate hikes, FED balance sheet reduction and therefore USD gains becomes stronger. This might be the week when USD index breaks the 200 WMA AT 95.56 (cmp 95.45) convincingly and move higher than 96.

Google trends show that the public interest in USDINR in Aug 2013 was at 85 which peaked at 100 in September 2013 (perhaps due to the FCNRB announcement). This parameter currently stands at 42 only indicating that public interest and therefore the effect of the move in USDINR, is not as much till now to warrant any major policy action by the government/RBI. Also in 2013 USDINR had moved higher by 30% (53 to 69) visavis 12% (64to72) currently, which is also an indication that the move higher from here also can be substantial.

USDINR 1m NDF is trading at 11.5p right which is similar to Friday levels. Other EM currencies have depreciated on the back of a fresh assault by the US on trade with China, but USDINR seems to have been the worst hit today morning. Equity markets and government bonds seem to be starting to react only. In 2013 Nifty had fallen by 9 percent before FCNRB policy was announced. The range for this week should now be 72.20-73.20. CMP 72.40, Range for the day 72.25-72.55.

INR update: Trade war advances along with strong US data

Trump is perhaps  opening a new front in his trade war campaign and now facing the heat would be Japan. Although it is known that the US is likely to announce duty on $200 bn of Chinese imports, but the announcement could still lead to a risk off as the focus would shift to Chinese retaliation.  Given the continuation of the trade war rhetoric and strong US data it is likely that we should see USD index breaking above 96 (CMP 95). Oil has gradually come lower because of higher inventories plus mildly deteriorating risk sentiments.

USDINR 1m NDF is trading 11p right while 1y is trading 31p right only, this shows that there is no incremental offshore buying pressure on USDINR. Oil has gradually drifted lower from 79 to 76.3 now while other EM currencies have been stable over the last couple of days. India 10Y bonds are at 8.04%, off from the yield highs of 8.1% on Wednesday. All this would suggest that a break of 72.11 would need a fresh trigger and doesn’t seem likely today. RBI would want to create sharp two way movements so the correction could take USDINR to 71.45 levels which gives me a broad range of 71.45-72.20 with likely break higher. CMP 71.91, Range for the day 71.70-72.10.

INR update: Higher US growth continues as EM selloff spreads

US Manufacturing ISM printed at a robust 61+ levels much higher than the highest of expectations. This is in contrast to EU manufacturing PMI which came in weaker than its prior print of 55.1 at 54.6. China PMI was also weaker than its prior print whereas global manufacturing PMI also printed lower. The point is that this indicates that the higher US growth differential continues and in this environment the FED is unlikely to stop raising rates or slow its tapering. Thus the growing strain of dollar liquidity is going to continue which in turn will make market participants dig for reasons to sell other currencies and specially EMs. On the price action front, dollar index is making its 12^th weekly attempt since June 2018,  to cross the 200WMA at 95.56 (CMP 95.35) and a healthy print on the US Services ISM tomorrow might be the trigger for the level to be decisively taken out.

USDINR 1m NDF is trading 10p right as compared to 9p yesterday while 1y NDF is trading 42p right as compared to 36p yesterday. EM currencies are flat while KRW has moderately appreciated since yesterday night. Brent has come lower from 79.2 to 78 levels. FII flows continue to be negative for INR. The Indonesian Rupiah seems to be the latest EM currency which has joined the selloff bandwagon. Yesterday it is likely that RBI sold aggressively in the morning but that proved to be ineffective by second half. Broader range now is 71.20-72.20 while for the day CMP 71.52, Range 71.40-71.60.

INR update: US-India talks on Thursday; India Yields rise with Brent

On Thursday Mike Pompeo is in New Delhi to discuss greater cooperation in defense. But in an environment where the US is launching trade strikes on countries a meeting with the secretary of state would not come with its own risks which can hurt market sentiments in India. On the other hand US has warned India to not buy the Russian anit aircraft defense system, while Indian officials confirmed that they are going ahead with the deal. This can result in US imposing economic sanctions on India. On the back of this I would think that today and tomorrow might be days when USDINR would be bought in anticipation of a negative US comments on Trade with India.

 

Equity markets in India look stable after yesterday’s hiccup on a certain FPI regulations which came out in April 2018. USDINR 1m NDF is trading 9p right as compared to 8p right yesterday. EM currencies have registered mild depreciation since today morning. FII flows are not very encouraging for the Rupee while Brent above 78 levels will give confidence to USDINR longs. India 10y Yields are at 8% indicating spreading effects of INR depreciation. All this along with Mike Pompeo’s New Delhi visit on Thursday should keep the pair well bid. RBI allowed INR to depreciate yesterday during the Indian session which shows comfort with a gradually depreciating Rupee. Medium term range now shifts to 71.20-72 provided we don’t close below 71.15 today.  CMP 71.26, Range 71.20-71.55.

INR update: Fundamentally dollar unlikely to weaken; Policy looks comfortable with a lower rupee

So in the last 48 hours Trump said he wants to go ahead with further tariffs on China, threatened to leave WTO, accused China of stopping NK denuclearization and rejected EU’s offer to remove auto tariffs. On the other hand US data continues to print better than the EU. All this would ensure that a sharp dollar selloff against G7 is some time away even though the dollar index on the weekly charts showed a false higher break of 200 WMA at 95.5 and then reversed to 94.7 (CMP). EU inflation print will be the most important piece of data today along with India GDP.

According to 2012 REER, INR is fairly valued at 72 (Aug end 2018 along with some REER assumptions). One can argue that RBI would not be bothered till 72. Then another argument could be that being a developing country attracting capital, a x% overvaluation (per year from 2012) should be maintained (Raghuram Rajan’s argument from March 2014), this clearly has been ignore by the current regime. Then another argument could be that for so long INR has been overvalued so for a substantial period it has to be undervalued as a compensation. Therefore the answer to where INR is headed doesn’t lie in theory but where RBI decides to intervene and change its policy, which looks some time (at least a month) away.

USDINR 1m NDF is trading 11p right which would indicate offshore buying pressure. RBI yesterday likely sold USDINR aggressively at 70.80 levels (perhaps to control volatility) but overall the policy makers seem comfortable with a depreciating INR. Today price action suggests that the central bank is uncomfortable allowing USDINR going higher for the time being even though in the offshore market overnight, it touched 71.20. Bond markets seem to be mildly reacting to a depreciating INR as the 10Y inches towards 8% while equity markets have stopped running higher for a change. During the day all EM currencies should move in tandem as INR movements have been clubbed with TRY, ZAR, ARS (yes Argentinean Peso). Today being a Friday the light longs could book profits. CMP 70.98, Range 70.80-71.20.

INR update: Policy takes time to change, INR losses to continue

The government and RBI have changed their stance on USDINR frequently. From a bias towards weak INR pre March 2017 to allowing appreciation after UP elections. Then again RBI built reserves aggressively at 64 levels and then intervened aggressively at 69 to prevent further slide in INR. Then 69 was allowed to pass and someone said that even 80 is not bad if other currencies also move in tandem. In all of the above RBI/government has taken at least 3 months before it changes its stance. Given that allowing INR depreciation beyond 69 is not even 2 weeks old, it will be some time before aggressive intervention or policy stance would be taken to prevent further INR losses. Currently the argument of REER adjustment is back at the forefront and therefore USDINR has more room to go higher. Other asset classes (Bonds or equities) have to panic before policy prevent INR slide.

Pre election year of 2008 and 2013 have seen sharp INR depreciation on account of rising inflation and fiscal concerns. Although inflation is not a problem this time (till now) but expectations of fiscal slippages can take USDINR substantially higher. The fact that in the last 2 days even EURO, KRW and CNH gains has not affected INR, it seems that USDINR is just gaining momentum. USDINR 1m NDF is trading 11p right as compared to 4p on Friday. Oil at 77.25 (+1.5$) will ignite further trade deficit concerns. INR should not have been bothered about Argentinean Peso and Turkish Lira but because of our own choices we should watch them now.  Medium term range is 70.40 and 71.20+. CMP 70.67, Range 70.50-70.85.

INR update: Reversal signs in DXY, EUR and CNH

EUR, DXY and CNH weekly charts are showing a 3 candle pattern of a strong reversal. The last time we saw a reversal like this in EURUSD was in Nov 2017 which led the single currency gain from 1.16 to 1.25 levels. This is on the back of Trump going slightly soft on trade (Mexico deal), the FED becoming more cognizant of further rate hikes (Powell’s comments) and marginal data disappointment in the US (PMI). China on the other hand has shown that it does not want Yuan to depreciate beyond 6.9 at this juncture which also adds to the overall dollar weakness.

USDINR 1m NDF is trading 6p right today as EM currencies are trading slightly weaker than yesterday night when USDINR traded at 69.85 in offshore markets. Brent above 76 levels will put doubts into the minds of people who would want to sell USDINR on the back of dollar weakness. Equity markets and USDINR have shown little correlation as FII flows remain muted. For the week USDINR could trade in a range of 70.30-69.60. CMP 70.11, Range 70.20-69.90.

INR update: Did the FED shift to a less hawkish tone?

Powell and Bullard seem to have started a new communication theme for the FED which is not as hawkish and could be in sync with what their President wants, i.e., slower rate hikes. The FED generally persists with a particular line of communication for months and therefore further FED speakers must be closely heard now, incidentally there are no FED speakers scheduled this week.

The other interesting development was PBOCs announcement of using counter cyclical factor again for CNY fixing. Last time PBOC used it in 2017, it led to a 8% appreciation in Yuan. Technically, on the weekly charts USDCNH is showing signs of a strong reversal which could take it to 6.76-6.71 levels (CMP 6.80).

USDINR 1m NDF has cooled off to only 4.5p right from 8p right last week. On the other hand an appreciating USDCNH should be the overriding factor in the short term for INR even though Brent at 76 levels is a bigger worry from a CAD perspective. MXN can register further appreciation if the NAFTA deal is announced which can positively affect all EM currencies. The range for the week could be 69.50-70.10. CMP 69.88, Range for the day 69.95-69.70.

INR update: Expect more aggression from Trump as his risks increase

With Trump’s associates confirming felony charges against themselves they have put the President in the dock, i.e., if he loses the midterm elections in November 2018. The elections are being held for all the 435 seats of the house of representatives and 34 seats of the senate. Thus Trump would now be more desperate than ever to ensure that Republicans do not lose the elections which was visible in his comments yesterday about the markets crashing if he is impeached. Basis this I would think that Trump would step up his aggression against immigration and trade in the next 2 months. That would mean increased volatility in the currency markets with dollar gaining against the EUR, GBP, AUD and other EM currencies. US data disappointed yesterday but then politicians have become more important for markets now.

USDINR 1m NDF is trading exactly the same as yesterday, i.e., 5.5p right while the more fragile EM currencies have depreciated since yesterday evening. FII flows have picked up in August but do not seem to be enough to counter the demand arising out of the trade deficit and the pressure on other EM currencies. Oil is back at 75 levels which should continue to put pressure on INR. A close above 70.15 today would be further rupee negative. CMP 70.14, Range 70.11-70.40.

INR update: Trump intervenes and contradicts the FED and his own government

With US core CPI at 2.4% and healthy growth it is unlikely that the Fed can pay heed to Trump’s comments yesterday where the president wanted the central bank to not raise rates. Powell would most likely refrain from making a direct comment on the President’s view on the monetary policy in his 24^th of August speech at the Jackson Hole. On the other hand Trump’s mention of CNH and EUR being manipulated is in direct contrast to the treasury report (equivalent to a finance ministry report in India) which said that China has intervened heavily to prevent sharper depreciation in CNH and EU has not intervened in the currency markets as per international agreements. Basis this, I would think that yesterdays move in dollar index from 96 to 95.5 would be reversed by the end of this week.

USDINR 1m NDF is trading 7p right which is less that the 9p yesterday indicating reduced offshore buying pressure. EM currencies have appreciated in tandem with the overnight dollar weakness. From the price action since open it seems that today also INR should remain on a mild and temporary appreciation trajectory. The movement in USDINR should closely track EURUSD during the day. CMP 69.57, Range 69.40-69.70.

INR update: Increasing Italy uncertainty and hiatus in US-EM tensions

The weekly close in EURUSD was encouraging given the bounce from 200 WMA at 1.1360. On the other hand Italy 10Y yield at 3.14% (up 65bps in 1 month) indicates that for Euro zone the visible future would contain higher political risks. The next event in Italy is on the 27th September when Italy will give details of its next year’s fiscal deficit target. On the other hand Trump seems to benefit from continued noise around his foreign policy which therefore should result in continued headline risks on the trade tensions front. This could be his focus till the midterm elections in November at least. We have seen till now that trade tensions headlines results in a stronger dollar although equities don’t get affected as much. US data continues to show positive surprises although to a lesser degree while the EU data still shows more negative surprises. This data divergence along with uncertain political outlook does not give much confidence in EURUSD as a pair for the next month or so.

 

USDINR 1m NDF is trading 9p right which should prevent any sharp selloff in the pair. EM currencies have cooled off on the back of chatter of US-China talks and no incremental news from Turkey. Headlines should continue to dominate market sentiments and the immediate bias lies towards more negative headlines on Turkey and trade tensions. I would also expect some amount of panic in INR due to the recent depreciation. For the week I  would expect USDINR to trade in the range of 69.41-70.40. For the day, CMP 69.83, Range 69.70-70.13.  

INR update: USDINR breaks the psychological 70 barrier

The last thing preventing further dollar strength is perhaps the 200WMA on EURUSD at 1.1360. Looking at Italian yields at 3.10 (29bps higher in the last 1 week) and Turkish impact on European banks (although limited), it looks that it is a matter of time before EURUSD break lower than 1.1360 and provides momentum to dollar strength. On the other hand a quick resolution to the Turkish standoff might provide a relief rally but expect that to be short lived as markets will continue to focus on the vulnerabilities of various EM economies once it has got a taste of it.

 

India inflation cooled off but it doesn’t matter given the EM basket sell off where India seems to be in focus all of a sudden. USDINR 1m NDF is trading 7p right as compared to a higher 8p yesterday. The pressure on INR seems to be more offshore driven and therefore I would continue to expect INR to be under pressure during European and NY session. Other EM currencies are relatively stable today but it has not prevented USDINR from testing 70 levels. Anecdotal evidence suggest that RBI sold aggressively from 70.05 levels to 69.90. USDINR should continue to move with overall dollar index. For the medium term, volatility seems here to stay while the trend for USDINR is higher. CMP 69.87, Range 69.70-70.25.

INR Update: Rupee loses driven by EM basket effect

Turkish Lira and USDRUB depreciation spillover to other assets seems to be the reason for the overnight dollar strength and moderate risk selloff. Both are country specific scenarios with limited fundamental impact across the globe, nevertheless basket effect on EMs drove the all lower against the greenback. Today we have the US CPI where a higher number is factored in so a surprise could only be a lower than consensus print.

 

In spite of the overnight buying in USDINR, NDF 1 month continues to trade left by 1.5p like the entire week. Brent trading near 72.2 is positive for INR while CNH and KRW have also depreciated in the EM sell off overnight. PBOC has shown discomfort with Yuan at 6.85+ levels.  August FII flows seem to have turned a corner as small amount are consistently flowing back in. Dollar index still has the major hurdle of 95.4 (200WMA) to cross which it has failed since May (we have not got a weekly close). Similarly on the Euro 1.15 has held since May, in spite of the ECB talking down the single currency in its June and July policy meetings, which would make me think that a close below 1.15 on a weekly basis is unlikely. With these factors into play I think 69.10-68.30 range should continue to hold with a possibility of a break lower only. CMP 68.86, Range 68.95-68.65.

INR update: IRAN sanctions means stronger US-Saudi coordination

Contrary to disruption of supply theory, reinstatement of sanctions on Iran should keep the oil prices lower because US wants it. The primary reason for Iran to be continuously under US scanner is the fact that Saudi Arabia is a key US ally and Iran’s foe. Reinstatement of sanctions on Iran by the Republican government would have been a key demand of the Saudis, who had become quite distanced from the Obama administration who had struck a deal with the middle eastern Shea state. Thus now with the demand met oil prices should stay where Trump wants it, i.e., in check.

 

TRY continued to depreciate yesterday on account of concerns that the central bank’s independence might have been compromised and capital controls might be on their way. Although not related to INR, EM basket effect will ensure that INR appreciation would not happen when TRY depreciates sharply during intraday movements. On the other hand USDCNH continues to move higher after the Friday PBOC measure and further depreciation looks likely towards 6.9. USDINR 1m NDF is slightly left (1p) which shows no significant offshore buying pressure on USDINR. FII outflow pressure has significantly reduced on INR. Medium term range of 69.10-68.30 should continue to hold even if other EM currencies depreciate or dollar strengthen further towards 96 levels. For the day 68.85, Range 68.96-68.70.

INR update: Italy Budget concerns and Chinese data to be watched

 

The reason for the Euro selloff seems to be worries surrounding Italy’s next year budget which can lead the country to a fresh standoff with the EU, which wants the country to reduce debt. Italy 10Y yield have jumped by 20bps in the last 2 days and a meeting on 8th August would be the next event in this emerging theme for the single currency. The NFP report (U6 unemployment specifically) seems to suggest that US economic growth is picking up further creating an increasing divergence with other DMs like EU and Japan. A convincing break (weekly close or 1% higher) of 95.37 (200 WMA) on the dollar index (cmp 95.3) should indicate further up move and would lead to an all round dollar strength.

 

On Friday evening PBOC impost a 20% reserve requirement on forwards (from the earlier 0%). This was a signal that PBOC is not willing to allow a further selloff in Yuan. The first such signal to have come since June mid when the slide started. This week Chinese trade and CPI data would be critical to market expectations of further liquidity easing thereby driving the currency. USDINR 1m NDF is trading 3p left which should prevent large up move in the pair. FII outflow pressure has alleviated from the rupee. A break of 96 on the dollar index could take USDINR higher than 69. Medium term range 68.30-69.10. For the day CMP 68.61, Range 68.55-68.75.

 

INR update: Currency war could create sharp two way moves

The great things about our time is that we (most of us at least) don’t have to hide in bomb shelters when two powers fight. If this is a currency (depreciation) war then China cannot keep on winning, it is a matter of time before the US talks down the dollar. One way moves in most of the currency pairs would be difficult as the rhetoric battles swing sentiments like a pendulum. This should go on till November midterm elections in the US post which there will be a North Korea like resolution, i.e., without any conclusion.

 

Today EU retail sales would be a good indicator of EU economic activity pick up (or lack of it) in the current summer. Markets will also look at NFP and US services ISM wherein a weaker data might be of larger impact than otherwise, but the focus remains on news headlines.

 

USDINR 1m NDF is trading 3p left now while KRW has depreciated along with CNH since yesterday evening. Dollar strength should continue to push USDINR higher. Indian equities are in the green while oil levels are 140 cents higher than yesterday. Medium term USDINR range should continue to be 69.10-68.30. For the day, CMP 68.71, Range 68.65-68.85.

INR update: Trade tensions dominate; INR on track for gradual appreciation

 

A month back the flattening yield curve showed risks of the FED backing out on further rate hikes. These risks have totally abated with the FED looking all set for 2 more hikes this year as the yield curve starts steepening again. EU data has not improved as much as markets expected and therefore we continue to see EURUSD trade in the 1.16-1.750 range. Trade tariff related worries continue to dominate overall sentiments. Today the most volatile DM central bank, BOE meets. It is expected to hike which is factored in expectations.

 

RBI rate hike of 25bps has been seen as proactive and coupled with its inflation forecast, market seems to have believed that yesterday’s rate hike was the last in the foreseeable future. Given this India 10Y yield has moved lower and the cool off in yields could lead to some amount of medium term focused debt inflows.  

 

Trade worries seems to be dragging Chinese equities lower with Nifty down by 0.7% now. USDINR 1m NDF is trading 1p left only. EM currencies have mildly depreciated since morning today while in the last fortnight INR seems to have been less affected by trade related CNH selloff. FII outflows seem to have abated/reversed. Oil at 72.65 is positive for the rupee. Today does not seem to be the kind of day when INR can appreciate beyond 68.25 although my medium term bias is shifting to 68 and lower. CMP 68.37, Range 68.25-68.43.

INR update: Inflow expectations suggest INR gains

The fact that BOJ did not change the target for 10Y yield should ensure that US10Y also keep hovering below 3% which should again support the view that dollar index looks due for a correction towards 92 levels. Mixed to slightly disappointing EU data has been a hindrance for sustained gains on EURUSD, in light of which today’s EU GDP and HICP flash would be important. While a disappointment would have a smaller impact, positioning suggests that a positive surprise can take EURUSD higher than 1.18.

 

USDINR 1m NDF is trading 1p left while CNH and other EM currencies are trading flat as compared to yesterday. The price action in USDINR for today and tomorrow would be focused on a large QIP related inflow (~$2bn) most of which should be absorbed by RBI which has already sold quite a bit of its reserves in the last 3 months. Medium term range for USDINR is 68.30-69.10 with the likelihood of the lower end being tested this week. For the day, CMP 68.61, Range 68.65-68.45.

INR update: CNH increasingly disconnects from INR

US economy did not grow at the higher end of expectations but the truth remains that the economy is growing at its fastest pace in the last 4 years. The theme now is that of trade war and since 12th June 2018 (Trump-Kim Summit post which Trump announced the tariffs on Chinese imports) CNH has depreciated by 7%. But other Asians have lost much lesser with KRW at 3.4% and INR at less than 2%. On the other hand MXN, ZAR and BRL have appreciated in the same period as Trump shifted focus on China. This empirical evidence of 1.5 months show that although directionally Asian currencies are looking at CNH but the quantum of move is much more muted and therefore increasingly CNH depreciation does not seem to be a risk for INR. On the other hand till the time CNH depreciates INR is unlikely to register any significant appreciation. PBOC is on an easing cycle now as it cuts rates and infuses liquidity to support growth on the other hand RBI in India is likely to raise rates to fight off inflation concerns and ensure that the currency remains attractive to foreign investors. This divergence in policy rates should also result in the decoupling of CNH and INR.

 

Given the above inferences, the main variable for INR is oil and as long as Brent continues to trade soft below 75 markets will price in some improvement in India CAD and Fiscal situation for the year. Also the fact that RBI has shown resolve and backed it with intervention of more than $20b in the last 3 months to ensure that INR does not depreciate beyond 69 should ensure for the time being that the pair remains below 69. INR forming a top at 69 view would need to be revisited if Brent goes near 78 levels or dollar index goes near 96 levels. Therefore under the present construct with a rate hike in offing on Wednesday, it is likely that USINR trades in a range of 69.10-68.30 with a possibility of a break on the lower side. Today NDF1m is trading 1p right indicating mild offshore buying pressure. CMP 68.73, Range 68.80-68.60.

INR update: US-EU trade tensions abate, ECB and US GDP ahead

The Trump-Juncker conference has ended with a positive outcome where both the leaders agreed to discuss a path which would effectively lead to free trade between the EU and US. This development should prevent the ECB to talk down the Euro like they did in June 2018 as they would not like to perturb Trump and reignite the transatlantic trade war. Therefore I would now change my view and expect EURUSD to head higher towards 1.18+ after the ECB today evening. Post this the focus shifts to US GDP tomorrow wherein the forecasts already seem to be factoring in all of US economy’s robustness (4.5% to 5%) and therefore from a risk reward perspective the likelihood of a disappointment is far more.

USDINR 1m NDF is trading 2p left now which indicates offshore selling pressure. CNH has strengthened since yesterday morning although in the last couple of hours it has slipped from 6.74 to 6.77. EM currencies have generally strengthened along with overnight dollar weakness and all time high on equities. We are nearing the month end now and general participant action suggests that between today and tomorrow we should see a lot of USDINR longs (who had earlier expected 70+ levels this month) exit their position, which should result in the pair coming lower. Broad range remains 68.30-69.10. For the day CMP 68.63, Range 68.71-68.45.

INR update: Euro moves to drive INR for the rest of the week

Trade tensions have materialized since the last ECB meeting on 14th June 2018. Although EU data negative surprise improved but it continues to be in the negative territory and gradually it is becoming clearer that the EU economic activity is not comparable to the US. Given this backdrop it is likely that the ECB stays dovish in the monetary policy meeting tomorrow driving EURUSD lower. Before shorting EURUSD I would wait for the Juncker-Trump conference outcome today, as that could be a joker in the pack.

 

USDINR has clearly not being allowed to sustain above 69. USDINR 1m NDF is trading 1p left. The risk of USDCNH moving towards 6.85 remains but with each failed impact on INR, the rupee’s resistance to CNH depreciation increases. But in case Euro depreciates to 1.1550 levels again then the risk of 69+ levels (although temporarily only) increases. Brent trades near 74 levels while India 10Y is stable t 7.8%. Medium term range is 69.10-68.30 with a possibility of a blip to 69.25 levels this week in case Euro moves lower. CMP 68.86, Range 68.80-69.00.

INR update: Trump intervenes, PBOC eases further

 

Trump directly commented on a stronger dollar, the FED raising rates and other countries manipulating interest rates and their currencies. The Fed’s interest rate policy would be not affected by what Trump says and rather it would make it more difficult for the Fed to retreat from its gradual rate hike path in case the economy actually warrants that. Going forward any trade war related news would have a muted dollar positive move. On the other hand PBOC today made the biggest single injection of medium term lending facility funds to its major banks. This is in continuation to the various measures China has taken to lower its lending rates and inject the system with more and more liquidity.  Easier monetary conditions results in depreciating local currency. Therefore with two forces acting against each other , only thing certain is uncertainty, in times of which, safe haven assets and currencies gain. Namely JPY, CHF and the USD.

 

Overnight we have seen across the board dollar weakness which has driven USDAsia lower as well. USDINR 1m NDF is trading flat while USDCNH is trading stronger today at 6.7722 from Friday’s 6.8+ levels. Brent on the other hand is trading stable in the 72-73 range which makes it a not so important factor for short term movements. Given the PBOC’s action I would continue to expect a depreciating Yuan which should keep USDINR well bid. In the times of uncertainty I have not seen INR appreciating. Medium term range 68.30-69.10. For the day CMP 68.71, Range 68.65-68.85.

INR update: Oil gains as CNH losses drive dollar strength

US 10 Y yield went higher to 2.89% with the 10-2 spread widening to 27bps. This was perhaps on the back of Powell’s reassurance that gradual rate hikes are the best way forward. A weekly closing in the dollar index above 95.25 tomorrow should boost the greenback again and bring other G7 currencies under pressure.

 

Oil moved higher to 72.8 levels (Brent) from 71.5- yesterday taking the positivity out of Indian bonds and INR partially. My expectation that USDCNH would remain well supported at 6.70-6.72 has gone wrong as the Yuan depreciated to 6.77 today. This would ensure that INR appreciation is stalled till the time Yuan reverses. On the other hand the vulnerability of INR on the back of CNH depreciation has seemed significantly less in the last 1 week. Oil would therefore remain the primary driver for INR followed by overall dollar strength weakness which would be reflected in CNH as well. Another interested correlation is that between CNH and EUR which seem to be moving in tandem with a lower beta on the Euro. USDINR 1m NDF is trading flat today as compared to 2p left for the most of this week indicating that offshore selling pressure on the pair has faded. Broad range for USDINR continues to be 68.85-68.25. For today, CMP 68.74, Range 68.85-68.70.

INR update: Dollar gains as CNH shows depreciations risks again

Powell’s speech showed a mild doubt in continuing to raise rates by saying that “for now” gradual rate hikes seem appropriate. But overall post Powell’s speech we saw shorter end US yields rising as markets became more confident of further rate hikes and the 10-2 spread narrowed again to 25bps. The dollar gained on the back of rising shorter term yields and continued strength in US economy.

 

Oil is trading lower while USDCNH continues to show risks of trade war. USDCNH has moved from 6.68 yesterday afternoon to 6.74 now. This has only caused mild selloff in other EM currencies but at the same time it will prevent incremental appreciation of EMs. USDINR 1m NDF is trading 2p left like yesterday. Equities continue their stellar run (at the headline index level at least). Runaway depreciation in INR for now looks unlikely. Broad range is 68.25-68.85. For today CMP 68.51, Range 68.45-68.70.

INR update: Robust US data fails to bring in USD gains

With US retail sales coming in line with expectations, US Atlanta FED increased its current quarter GDP growth expectations to 4.5% from 3.9%. This led to US2Y yield breaking 2.6% and taking it to its highest level since 2008. Now either market has to believe that the current growth in the US is going to sustain in the longer run, which then takes 10Y yield higher. Or the lack of reason to not hike rates in the near term, would lead to further narrowing of the 10-2Y yield spread. The former looks difficult in an environment where the US is going into a cocoon of its own with the trade war and therefore good US data looks likely to result in further narrowing of 10-2Y spread. With EU data bottoming out in June the chances are that the recovery will help EURUSD move towards 1.19 levels. Today Powell speaks at 7-30 PM IST in front of the Senate committee of banking, which could be significant and interesting given the robust US data, trade war and falling 10Y yield.

 

USDINR 1m NDF is trading 2p left indicating mild offshore selling pressure. Oil fell on news that Trump is seriously considering releasing SPR stocks while US is considering giving minor exceptions to Iran for its oil sale. Technically Brent can move lower to 68.9 levels (61.8% retracement of 80.49 and 61.77) from the current 72.2 levels. CNH looks stable today and has been well supported above 6.70 levels. India bond yields have moved lower on the back of oil at 7.74% which should help INR gains. 68.30 is a strong support and convincing break of the same can bring in another 1%+ kind of appreciation. I would expect a lower break overnight only as during the day RBI continues to buy USDINR to refurbish its reserves. CMP 68.42, Range 68.30-68.50.

INR update: Lower oil prices and softer USD outlook

Reports of Trump considering selling emergency oil reserves to tame oil prices plus positive developments in Libya (the recent stoppage in its largest oil field seems temporary) has kept oil prices below 75 levels. Dollar index reversed from 95.25 (200WMA) and is trading lower now at 94.63. US 10-2Y spread is trading at a 11 year low of 24.6 bps. This narrowing of spread should keep dollar index capped at 95.25 for the time being. Today we have the US retail sales where robust data would have little impact while a disappointment could lead to sharp fall in shorter term yields and therefore the dollar.

USDCNH looks relatively stable today and is nearing its resistance zone of 6.72. USDINR 1m NDF is trading 2p left indicating lack of offshore buying pressure. Most EM currencies have appreciated since Friday evening. India’s trade deficit of $16.6bn on the back of higher oil imports affected INR appreciation sentiments adversely. But I would think this was expected plus is a lagging indicator. With oil prices appearing to be capped near 80 levels and the worst season for INR behind us along with an outlook of a softer dollar in the near term, I would think that USIDNR can still head towards 68.30. Medium term range 68.30-68.85. CMP 68.55, Range 68.60-68.40.

INR update: Trade tensions abate, could lead to short term INR gains

US core and headline CPI came in line with expectations leaving the yield curve where it was and with it the dollar. News reports suggests that China and US have shown intent for engaging in talks again to resolve their trade tensions. Fed speakers in general seem to be mildly concerned about trade war but at the same time do not want the market to unwind two more rate hikes from the curve. A weekly close in USDJPY below 112 would signal a reversal or else the target remains 113.26 (200wma). Similarly on the dollar index 95.19 (200 wma) looks like a good resistance now (CMP 94.87).

 

USDINR moved towards the lower end of the range of 68.30-69.10 with declining oil prices and higher equities. USDCNH looks toppish near 6.7 (CMP 6.685) and a move lower in USDCNH would make INR appreciate sharply as well. The news of US and China engaging in talks again along with Trump’s longer deadline of 30th August on next round of tariffs makes me think that 6.60 to USDCNH is more likely than 6.75, therefore now 68 could come sooner than 68.50 on USDINR. A daily close below 68.30 on USDINR can create a sharp down move towards 67.50 levels. A daily closing today above 68.40 would put the pair back in the broader range. With oil coming lower, India 10Y gsec yield below 6.8%, USDINR 1m NDF trading flat the likelihood for 69+ levels in the near term looks low. Important weekly close for USDINR today, CMP 68.34, Range 68.20-68.40.

INR update: Lower Oil; stronger dollar and higher equities

Brent oil fell from ~79 to 74.75  levels on the back of Libya production coming back into the market (at 350k bpd). This plus trade war hit commodities across the board driving US equities lower. I would think the recent escalation in trade sanctions (US-China, US-EU) led to the CNH weakness and dollar strength across DM and EM currencies. What is not explainable is the bounce in equities that we have witnessed across Asia today morning, which just reiterates the fact that it doesn’t pay to be an equity bear. Today US CPI would be critical for currency and bond markets. A YOY number of 2.8% and higher should ensure continuity of current market levels, while a lower print could result in markets driving shorter term yields lower and along with it the dollar index.

 

INR is the only currency which has not been hit with the overnight dollar strength, a true decoupling (temporary for sure!). On one hand there is the positive of a lower oil price while dollar strength against all EM currencies should have driven USDINR higher. USDINR 1m NDF is trading flat to slightly left. I would think that oil prices sentimentally would only affect USDINR for a shorter period of time while overall dollar strength/ weakness should remain the primary driver for USDINR. Medium term range 68.30-69.10. My view for short USDINR for a target of 68.40 would be under scrutiny today because of dollar strength. CMP 68.65, Range 68.55-68.85.  

INR update: Equities and Yield curve suggests an approaching risk on

Longer term yields had started running up since August 2016 and perhaps they made a peak in April 2018 when markets started expecting ECB to delay rate hikes on the back of weaker data. Now for the shorter term, where overnight rates become more important, the FED might be the next DM (and last one) to delay rate hikes. US2Y yields have not been able to break 2.59 for 3 months and the flattening of 10-2 spread, could push the FED to push shorter term yields lower.  With this change in the yield curves, monetary conditions could start looking accommodative again resulting in US and EM equities making new highs. The concoction of lower short term yields and higher equities in turn should keep the dollar subdued, Euro stronger with ample support to EM currencies. Meanwhile German Zew today could provide direction to Euro.

 

Looking at CNH it seems that the US-China trade story is on the backburner now. The same indicator (CNH) prevents me from buying USDINR now. USDINR 1m NDF is trading flat now as compared to onshore 1 month. EM currencies since yesterday night are mixed while since today morning they have appreciated mildly. Reiterating, medium term range for USDINR 68.30-69.10, with a break resulting in sharp moves. Currently my bias for the pair is lower, i.e., USDINR can head towards 68.40 this week. CMP 68.79, Range 68.85-68.65.   

INR update: Dollar fatigues as US wage increase disappoints

 

The lack of upward momentum in dollar index played out as expected driving it lower than 94 (CMP 93.88). Technically the next target could be 93.17 and 92.89. This has been accompanied by a mild risk on as the trade sanctions kicked in (as it was already well priced in). The other reason for equity markets to celebrate could be the flattening yield curve (sounds absurd!), as markets would now expect the FED to slowdown and therefore monetary conditions would become more accommodative. The first seeds of this FED rate hike slowdown has been sown by Atlanta FED President by starting a debate around the flattening yield curve. Strong job creation in the US accompanied by lack luster wage increase perhaps also helps the argument that the Fed need not be so worried about inflation.  A decline in short term yield curve should have a negative impact on the dollar, i.e., as and when the market prices a step back from the Fed. Today we have Draghi speaking while this week we will get the inflation number from the US which will be the most important.

USDCNH has cooled off post the event date of trade tariffs. USDINR 1m NDF points have come lower to 27p as compared to most of last two weeks 35p and current onshore’s 26p. The dollar index and mild risk on climate is the driver for the half a percentage overnight INR appreciation, which in line with most EM currencies globally. During the day we expect aggressive buying from importers as markets still see INR weakening over the medium term. Broadly USDINR should trade in a range of 68.25-69.10. A daily close outside this range will call for a sharp move in the respective directions. FII outflows continue on a regular basis but dollar weakness currently could outweigh the buying. Since morning we have seen aggressive bids which can reverse during the European session. CMP 68.67, Range 68.75-68.45.

INR update: Flattening yield curve could indicate reversal in DXY

 

The FOMC minutes showed worries over trade sanctions and inverting yield curve. The trade tariffs kicked in earlier today while Trump tweeted that US can finally put duty on Chinese goods worth $500bn. I would think if trade war tensions escalate then the FED will be forced to retreat and markets would take off medium term rate hikes out of the pricing which can result in dollar heading lower again. The narrowing 10-2 spread (now at 29bps) and the failure of dollar index to reclaim 95.50 levels (in spite of splendid US data), makes me think that the dollar index might have made a high for September quarter.  A weekly close in dollar index below 94 would confirm a downward view in the dollar index.

 

If the view on dollar index is on the verge of changing then the view on INR has to follow. In spite of CNH depreciation INR has been well protected at 69 levels. The last 15 days was a period when NDF 1 month was trading 10 p right as compared to onshore and in spite of that we did not see runaway depreciation in INR (yes I would have expected more). Also once the trade sanctions have kicked in today CNH could stabilize taking volatility in USD Asia lower. A daily close above 69.10 would open the door for 69.73 while a daily close below 68.25 could indicate a sharp move down towards 67 figure levels. CMP 68.86, Range 68.70-69.05.    

INR update: India-US inflation differential set to widen; could keep INR under pressure

ECB comments to ensure that market prices a rate hike in September 2019 rather than Dec 2019 is a guidance before time and therefore would have limited impact. Trump’s asking for lower oil prices should ensure that Brent remains capped at 80 levels. The first act of Trade war ends tomorrow with US and Chinese sanctions kicking in. Unless the Dow closes below 24k on a weekly basis, we cannot say that a global risk off environment has kicked in. Although the 10-2 curve continues to flatten and projects an approaching slowdown in the US economy. US services ISM and FED minutes will be crucial today.

 

The increase in MSP by government is likely to take inflation in India towards 5.6% by March 2019. Over the medium term one of the driving factors for USDINR has been the inflation differential between India and US. Generally when Indian inflation as compared to US goes lower we see INR appreciation. Basis one year inflation projections by the FED and economist’s revised projections after yesterday’s MSP increase, the inflation differential between India and US is likely to head towards 3.5% from the current ~2% levels. This could mean that over the next 6-12 months USDINR stays on an upward trajectory.

 

USDINR has reflected the movement in USDCNH over the last week with lesser beta. The uptrend in USDCNH is still intact although the sharp down move from 6.73 to 6.61 creates uncertainty for short term trades. I would think that USDCNH would restart its upward move towards 6.7 again.  USDINR 1m NDF is trading at 29p which shows only mild offshore buying pressure while Nifty continues to trade in a small range. I would continue to expect INR depreciation in the short term with high chances of 70 levels in July. CMP 68.82, Range 68.74-68.95.

INR update: Data shows robust US growth as Trade War Looms

News of political concerns in Germany abating drove Euro higher and Tech stocks in the US helped risk sentiments in the NY session. Equity markets seem to be holding on (except in China) in spite of the trade concerns. Rumors suggested that Trump is preparing to pull out of WTO. This US administration seems to be delivering on all its promises so that might be the next step in the ongoing trade war and an announcement to that effect can happen as early as 4th July. US growth continues to be robust as reflected by the manufacturing ISM while Euro zone PMI continues to fall (although still at a healthy level of 55). Today EU retail sales will be important to ascertain if the slowness in economic activity in EU has extended into the summer as well.

CNH continues to be focus and with Hang Seng and Shanghai stock exchanges falling, it will be prudent to expect a fall in risk assets all across as we approach the trade tariff deadline of 6th July. A weekly close in CNH above 6.7 would perhaps open the door for a round 7. USDINR 1m NDF is trading at 35p as compared to 27p on shore, this indicates similar buying pressure like yesterday. EM currencies continue to gradually depreciate. Asian equities are flat except for Chinese equities which continue to register big losses. India 10Y bonds are stable at 7.89% and INR does not seem to creating a panic in bond or equities. This would mean that RBI would not be too worried with 69 plus levels. Specially after Mr. Goyal asserted that depreciation in INR is because of exogenous factors. The view remains of 70 in July. CMP 68.89, Range 68.80-69.20.

INR update: Trade War rhetoric to drive markets this week

As we approach 6th July the trade sanctions related concerns in the market would increase. The most likely scenario is a last minute deal with Trump announcing victory although he would be retreating, having said that there is no news of any current negotiations between US and China. On the other hand German political tensions between Merkel and her interior minister on the issue of migration would keep Euro on the back foot for the time being. Meanwhile the 10-2y yield spread in the US continues to narrow indicating a possible inversion in the medium term.  So the base case for the week is of weakness in risk assets with dollar strength across except JPY.

 

USDINR 1m NDF is trading at 30p while CNH continues to depreciate (6.648). Other EM currencies have mildly depreciated since Friday. Equities in Asia seem to be pricing in a moderate to major concern over trade sanctions. At 9 AM we saw aggressive offers but since then USDINR has been bought by nationalized banks. Looking at CNH and trade sanctions deadline on 6th July, USDINR should continue to depreciate during the week towards 69 again. CMP 68.45, Range 68.40-68.60.  

INR Update: Relief rally in risk could be short lived

The move in Yuan suggests that China is weaponising it’s currency in the trade war. In case of Yuan depreciation, all EMs will follow therefore any relief rally in EMs should be short lived in the absence of a sharp reversal in USDCNH (weekly close below 6.60 will be critical). In the EU summit, member states reached a deal on migration which was being looked as a threat to Merkel’s government and to the EU itself in the longer run. This news drove EURUSD higher in the Asian session.

 

USDINR 1m NDF has come lower to 29p indicating reduced buying pressure since yesterday. Yuan and KRW have appreciated since yesterday along with other EM currencies. Oil continues to trade above 77 with FII outflows remaining at elevated levels. The down move in USDINR today could extend to 68.25 levels which should be short lived and a quarter end related move only. Equities in Asia are in the green supporting risk. I would expect to see 70 on USDINR in July unless CNH stops depreciating. For today CMP 68.56, Range 68.70-68.25.

INR update: Dollar strength takes INR to 69; Further depreciation likely

Trump administration blew hot and cold moving the markets both ways yesterday evening. Point is that the trade concerns continue while investment sanctions would have abated for the time being. US with its differential growth and foot stepping approach seems like the clear winner with US dollar appreciating against all currencies including JPY. I would expect to see 96 on the DXY now (CMP 95.22).

 

The fact that INR has depreciated along with other EM currencies would make RBI less worried and therefore gradual and coordinated depreciation of the currency will be allowed. REER arguments would now kick in with experts arguing that this correction of INR overvaluation was long due.  Daily close above 69.25 plus continued dollar strength would lead to markets expecting 72 and new levels, giving them courage to build new longs. Therefore such a close could bring in 70 pretty fast.

 

USDINR 1m NDF is 36p right indicating increased buying pressure since yesterday. EM currencies specifically CNH has depreciated considerably over the last 2 weeks. CNH has been well correlated to EURUSD and at the same time it will give RBI the comfort to allow INR depreciation. We can see mild selloff in Indian equities and bonds because of INR depreciation. CMP 69.05, Range 68.86-69.25.

INR update: Yuan continues its losses driving other EMs

Markets are in a mild risk off mode till now, if the Dow breaks 24000 (200 DMA) and gives a weekly close lower then we can be in for a large down move. Over the last few years any market participant would have learned that it does not pay to be equity bear, therefore the 200DMA is more of an opportunity to buy Risk for now, unless a breakout is confirmed. Potentially the reason could be a U turn by US on the trade/investment sanctions on China and Europe. Trump could easily do this and shift focus to Iran as his new punching bag. FED speakers and data would not be consequential for now as trade news is at the forefront.

 

USDCNH continues to drive Asian EM currency losses while the fragile EMs (TRY, ZAR, MXN, BRL) are relatively more stable. USDINR 1m NDF is trading at 34p which shows increased offshore buying since yesterdays 28p. India 10Y yield has increased again to 7.87 as FIIs continue to pull out consistently from debt and equities. A break of 68.90 and daily close could lead to panic buying in the pair and therefore I would expect RBI to prevent the move. The move is unlikely to happen without dollar index crossing 96 levels. Today also we are seeing intervention like price action although other factors continue to work against INR. CNH needs to be watched closely for further direction in INR. A daily close above 68.45 should quickly show 68.90 the next day. During the day RBI would ensure that runaway depreciation doesn’t happen. CMP 68.55, Range 68.60-68.40.

INR update: Yuan continues to depreciate amid trade/investment sactions chatter

The fact that major economies don’t bomb each other anymore like 1940s has a lot to do with trade and investment linkages. And if these dependencies are removed then we would go a full circle but that is perhaps decades away, and hopefully never.

 

The question in currency markets is whether increasing trade sanctions are going to benefit the dollar or otherwise. For other asset classes the answer is much simpler even though gold has not been showing its safe haven properties off late. Purely from trade/investment sanctions play I would think given the fact the equities will lose their attractiveness we will see a run to safe havens in currencies leading to gains in USD against most DM and all EM currencies. In this environment why I would not favor the Euro is because of the uncertainty in French and German politics along with Brexit related concerns, all of which would keep the attractiveness of Euro as a reserve currency, to low. Only once the markets are clear about the trajectory of these sanctions (whether they are for real or just posturing for negotiations) will they look at other factors like a potentially inverted US yield curve or a slowdown/recovery in EU.

 

Yuan seems to be factoring in a major impact from the trade sanctions chatter which should keep other EM currencies and INR under pressure. USDINR 1m NDF is trading at 28p indicating higher offshore buying pressure since yesterday. Oil, most EM currencies and FII flows do not help INR’s cause either. Nationalized banks have been seen selling USDINR at 68.20 levels. Medium term range for USDINR is 67.80-68.50. CMP 68.20, Range 68.14-68.45.

INR update: Trade Sanctions on EU and Losses on Yuan

The oil deal of increasing production by 1m bpd was priced in and consequently we saw oil and other assets moving against expectations post the announcement. Trump has targeted the EU with new trade sanctions which shows that the US President is going to the take the trade war to its conclusion with most of its major trading partners. . This would mean that equity markets would continue to remain sideways while the dollar could remain well bid except against JPY and other safe haven currencies. This week  major new could be the political developments in Europe related to Merkel’s efforts to maintain her coalition or the EU summit on Thursday and Friday where we could hear about Brexit and the political developments in France. These could continue to weight on EURO which has found it difficult to edge higher than 1.1650 levels.

 

Offshore buying pressure in USDINR is muted as per 1m NDF. Other EM currencies have depreciated since Friday night (except TRY which gained because of Erdogan coming back to power).  CNH has depreciated sharply to 6.54 (0.5%) along with KRW. Oil trading above 74 with equities trading flat does not bode well for INR. While the international factors remain INR negative the quarter end seasonality and some expected inflows could support the local currency. I would expect USDINR to trade in the range of 67.80-68.50 in the medium term. This week my bias would be for INR depreciation. CMP 68.10, Range 68.00-68.25.

INR update: All eyes on Vienna

Murmurs that the US is considering restarting talks with China has put trade sanction concerns on the back burner even though equities still seem to be factoring in the long term impact of such measures. Italy appointed two anti EU politicians into key finance roles which led to increase in Italian yields and should continue to weigh on the Euro. US 10-2Y spread is at 35 bps and at the same time German 10Y yields have fallen to 34bps from 62bps a month back. This makes it confusing whether currencies will look at the interest rate differential or the steepness of the curve for US and Germany. In the short term I think the yield difference favours the USD over EURO while in the medium term the flattening US yield curve will prevent dollar from appreciating further. Gains on the USD therefore should be capped at 96 (CMP 94.80).

 

Oil prices suggest that markets are pricing in a significant increase in oil production at the OPEC meeting today (~ 1 mio bpd). Consequently USDINR has come down to 67.82 levels. Considering Iran’s souring relationship with the US, it is unlikely to cooperate with Saudi Arabia, so the base case could be of a disappointment. USDINR NDF 1m has come down to 26p from 32p yesterday morning while other EM currencies have appreciated from yesterday, even though CNH and KRW are at similar levels. I would expect USDINR to take support at 67.80 for most of the day. Oil prices can move in the second half as we start hearing from Vienna leaving the range wide for the pair for the day. CMP 67.83, Range 67.63-68.20.  

INR update: FED and ECB comments confirm divergence

The markets are assuming that all hurdles to risk will somehow and eventually be averted. Basis this assumption a couple of days of silence on trade sanctions has led the market back to a pro risk mode. The only constant is that dollar strength continues. ECB’s Nowotny reasserted that they want a weaker Euro giving the reason of rate divergence. While Villaroy (ECB governing council member) seemed to suggest that the first rate hike might come well after 2019 summers. In the short term I would expect EURUSD to head to 1.1451. Powell continued with the FED’s gradual rate hike comments suggesting that the neutral rate would be around 3%. This rate hike rhetoric can lead to a inverted yield curve, which can be a hurdle for a strengthening dollar from here. DXY is at 95.23 and the target could be 95.89/96.01. For dollar index to go higher than 96 there has to be further development on trade sanctions or rate divergence. GBP failed to rally in spite of May winning the vote in the parliament which indicates the strong dollar view from here in the short term.

 

USDINR 1m NDF is trading at 32p as against onshore’s 23p indicating offshore buying pressure on the pair. Yuan trades near 6.5 while KRW is facing resistance at 1110 levels. Other EM currencies have mildly appreciated over the last couple of days with improvement in risk but CNH and KRW have an overriding effect on USDINR for intraday movements. Price action suggests that nationalized banks sold aggressively at 68.20 levels. FII outflows from debt and equities continue. A break of 68.27 could bring in 68.40 otherwise it could be a quiet day with a narrow range. CMP 68.21, Range 68.10-68.25.

INR update: Trade tensions could keep risk assets under pressure

The world now realizes that Trump intends to deliver on his trade sanction promises and we can soon see China also rattling its sabre with more than just counter tariffs. In this environment risk assets are unlikely to continue their dream run. Euro should have limited upside for now and tomorrow after Sintra conference (where Draghi, Powell and Koruda speak) we can see EURUSD breaking 1.1550 and heading lower. First target remains 1.1451. USDJPY should also remain capped around 110.20-110.50 levels with yields falling and risk not supporting. A good dollar neutral trade could be short EURJPY at 128 levels.

 

USDINR 1m NDF is trading at 35p from yesterdays 30p which is 11p right as compared to onshore. EM currencies are largely flat except for ZAR, since yesterday. Equities in Asia look under moderate selling pressure given the trade tensions. FIIs have now withdrawn more than $5b this year from Indian debt and this can accelerate because of INR depreciation. Since morning foreign banks have been on bids along with commodity importers. Medium term range remains 67.80-68.50. CMP 68.10, Range 68.00-68.25

INR update: Trade sanctions reflecting on currencies

The ensuing trade war between the US and China could result in a weaker Yuan and negative equities for the time being. Similarly it seems the decline in Euro could continue as the rate divergence increases and perhaps this also is related to the trade war. On Wednesday Powell, Draghi and Kuroda speak in a panel discussion in Sintra, which would be crucial specially to ascertain what Draghi’s stance is, in an international forum. Opec meeting over the coming weekend could result in an increase in oil production (although opposed by Iran and perhaps 2 others) which in turn is driving oil prices lower.

 

USDINR 1m NDF is trading at 30p pr 7p right. Other EM currencies and specially CNH and KRW have depreciated since Friday on the back of the trade sanctions. Oil prices and inward flow expectations are helping INR for the day as it opened at 68.15 and got sold off to 68 levels. The government and RBI seem to be concerned about depreciating INR as is evident from the revised FII guidelines released on Friday and aggressive intervention in the market. On Friday evening USDINR went higher than 68.40 in the offshore market. Between supportive CAD and inflows on one side and weakening EMs on the other, global currency trends should prevail. The medium term range has now shifted to 67.80-68.46. CMP 68, Range 67.87-68.20.

INR update: ECB surprisingly becomes overtly dovish

Back in August 2016 Jackson Hole, the central bankers decided that it was time to push yields higher by exiting monetary policy stimulus gradually. From there on yields rose as the major central bankers changed their tone supported by growth, inflation and US fiscal stimulus. Yesterday’s ECB seems to have broken that coordination between FED, BOJ and ECB. As the FED turned hawkish the ECB has been overtly dovish creating a divergence which cannot immediately narrow.

 

Seems like recent EU data and the new Italian government has spooked the ECB or perhaps in another interesting theory the trade war between the US and EU is manifesting into a currency war. ECB took out all rate hike expectations in the next 1 year as it asserted that interest rates would remain same till the summer of 2019. Then the way Draghi spoke was very similar to 2015 when the entire purpose of the monetary policy press conference was to hammer the Euro. Yesterday’s price action will make a lot of strategic Euro bulls change their stance and I would think that we could see Euro heading towards 1.1451 and perhaps even lower before it finds a bottom. On the other hand the 10-2 year spread in the US bond market has slipped to its lowest since 2007 at 37 bps. This indicates waning confidence in sustainability of inflation and sustained rate hikes. This for now should indicate limited upside for USDJPY.

 

Euro has in the recent past shown a strong correlation with CNH and therefore a selloff in Euro would at the least prevent any INR appreciation. USDINR 1m NDF has shifted to 10p right from around 6p yesterday while TRY, ZAR, MXN, KRW continue to depreciate. FIIs continue to pull out significant but not huge sums every day. With the break of 67.80 the new range shifts to 67.80-68.50 as we would continue to see Euro weakness and EMs losing out. CMP 67.90, Range 67.80-68.10.  

INR update: Hawkish FOMC but yields fail to rise

Mostly a hawkish FOMC but the 10Y yield failed to rise above 3% while the 10-2 spread narrowed, and as a result the dollar perhaps lost its second last chance (in the current up move) to register further gains. The last opportunity comes today, if the ECB turns out to be dovish and does not talk about APP then we could see Euro heading lower. On the other hand Euro gains post the ECB would suggest that we can see a sharp move lower in the dollar index.

 

USDINR 1m NDF has moved lower to 27p from 30p yesterday. EM currencies have been trading flat since post the FOMC yesterday. Equity markets seem moderately concerned with the FED dot plot of 2 more rate hikes in 2018. Market chatter is about a large investment into an Indian Bank to the tune of USD 2.5 bn dollars but the timing of the inflow remains uncertain. CMP 67.58, Range 67.65-67.45.

INR update: Will the FED step up the heat? Probably not

Market reports suggesting the FED will hold a press conference after every FOMC indicated that the FED might be turning more hawkish, which in turn gave a mild boost to the dollar. Yesterday US CPI was as per expectations with YOY core at 2.2% while the headline read at 2.8%. Consequently a hawkish FED is priced in already with a 25bps hike. It is only if the FED surprises with incremental steps (like higher dot plots) that we would see a further boost to yields and DXY, otherwise we could see a moderate selloff in USD post the meeting, as the long dollar positions get cut. I would think given the cool off in EU and Japanese growth, the FED would want to wait before it decides to (if at all) increase its tightening pace (either in terms of forward guidance, hikes and balance sheet reduction).

 

USDINR 1m NDF is trading 5p right while EM currencies (specially the new fragile ones) got sold off since yesterday night. Equity markets continue to look resilient even though FIIs continue to pull out money from India. Oil prices have cooled off since yesterday and international news suggests that talks of production hikes should keep the price below 80 for now. The selloff in Indian bonds and INR seems to have lost momentum for the time being. The broad range I see is 67.85-66.85 which could continue for a few weeks considering that we have seen a trending market in April and May. CMP 67.60, Range 67.65-67.45.

INR update: Trump-Kim meeting continues; Presscon at 1-30PM IST

There are speculations that Trump-Kim meeting is fixed, i.e., the terms are pre agreed. On the other hand the fact that the meeting has lasted without Trump walking out indicates that Kim is compliant. Trump would want to showcase this as his biggest achievement as a world leader and therefore the announcement should be more prolific than actual agreement, perhaps therefore leading to a risk positive environment post the press conference at 1-30PM IST. We have the US CPI today at 6PM which would be significant.

USDINR 1m NDF is trading 5p right while EM currencies have mildly depreciated since yesterday. KRW is trading stronger than yesterday which should be the key indicator for the day. Equity markets continue to register mild gains indicating the global pro risk environment. Today the Indian CPI would be critical for bond yields and therefore INR going forward. Liquidity is thin because of a unavailability of reuters D2 platform for USDINR trading. CMP 67.44, 67.50-68.28.

INR update: Eventful week ahead with US-NK summit, FOMC, ECB and BOJ

It’s an eventful week with US-NK talks, FOMC, ECB and BOJ. Although it’s very difficult for anyone to say what will come out from the US-NK summit but I would think that the fact that both are talking perhaps means that the terms are broadly agreed and the result could be pro risk. FOMC would raise rates while what needs to be seen is if the committee would end up indicating 4 rate hikes in 2018 (I would expect that it would, given the continued strong data print in the US). For the ECB meeting, it seems last week’s hawkish comments from Praet were not in sync with recent EU data or the uncertainty arising from a new anti-establishment government in Italy. Both these factors could ensure that the ECB doesn’t announce any reduction in its asset purchases and perhaps would fail to give any concrete guidance also as to when it would do the same. Therefore, I expect a dovish ECB for now and they would want to wait till July before taking the first step towards changing their stance. BOJ should also continue with its purchase programs and yield curve control without any noticeable change in its tone. The resultant impact could be incremental dollar strength against G7 currencies and positive equities. US CPI on Tuesday needs to be watched as well.

USDINR 1m NDF is trading 4-5p right while other EM currencies have appreciated since Friday morning. The upward momentum in USDINR has faded since the beginning of June. A close above 67.80 would indicate further up move towards 68.5 while a close below 66.85 could put further INR appreciation pressure. Till then we can expect the range of 66.85-67.80 to continue. CMP 67.36, Range 67.30-67.50.

INR update: Markets turning towards dollar strength

US10Y has convincingly broken 3.05% (now at 3.1%) with 10-2 spread at 51bps+. This is a dollar positive setup and a weekly closing on the dollar index above 93.43 should clear the way for 95.15.

 

USDINR 1m NDF has cooled off to around 9p right now as compared to 12p right yesterday. EM currencies continue to appreciate since day before yesterday evening led by TRY, MXN, ZAR and RUB. Oil trading at 79+ levels continues to put pressure on India 10Y yields (7.932%). Along with EM currencies, BJP forming the government perhaps is also keep INR stable for the time being. FIIs continue to pull out money from Indian assets (although not in huge sums). Price action seems to suggest intermittent selling by RBI. Medium term view remains of INR weakness. CMP 67.63, Range 67.55-67.80.

INR update: US yields break out as curve steepens

Yesterday was a critical day as far as the dollar story is concerned. US10Y yields sustained above 3.05% while 10-2 spread broadened to 49bps currently from a low of 42bps 2days back. This is something that a structural dollar bear like me did not expect and therefore if I get a weekly close confirming the same, I would bite the bullet and change my view to medium term dollar strength. The reason for this change in market sentiment perhaps is the fact that US growth continues while Europe and Japan have showed continued signs of weakness.

 

If dollar strength starts when USDINR is at ~68 then by the time dollar index reaches 95+ (CMP 93.25) levels, INR could easily hit new lows (but let’s wait for the weekly close). USDINR 1m NDF is trading 13p right while all EM currencies have appreciated since yesterday 7-30PM IST. Equity markets are now showing signs of rising US yields. RBI intervened aggressively with intent for the first time in this up move, bringing down USDINR from 68.13 to 67.80, but one can only wonder if the intent has come a tad late. India 10Y yield show no signs of respite (we can expect more aggressive OMO purchase announcements). USDINR volatility is likely to go up but it should be traded looking at overall dollar strength/weakness plus oil prices. Since RBI has shown conviction today USDINR might find it difficult to go higher than 67.95 today while other factors might keep it higher than 67.75. CMP 67.81, Range 67.75-67.95. I would want to go overnight long looking at US yields.

INR update: BJP emerges with clear majority

US Bond yields are higher at 3.02% which has resulted in mild dollar strength since yesterday. A weekly close in US10Y yields above 3.05% along with 10-2 spread above 50bps (unlikely) could change the lower dollar index view. EU GDP and US retail sales will be the two important pieces of information along with FED speak.

 

BJP’s has won a clear majority in Karnataka against all expectations which has taken Nifty higher by 1%. Rupee and bond markets both ignored the news which started INR appreciation in March 2017, i.e., of continued political stability in India. A daily closing today below 67.45 would indicate some relief to the up move that we have seen. Nationalized banks have been buying USDINR aggressively at dips (67.55) which is surprising while they also sell the pair at higher levels leaving other participants confused regarding their policy objective (perhaps deliberate!). Not that volatility has been contained either. I would still expect the electoral outcome to reflect in Rupee by EOD although the dip needs to be bought given the rising bond yields. CMP 67.53, Range 67.70-67.20.  

INR update: If BJP wins 100 seats in Karnataka INR can head to 66.50 temporarily

One year before the union elections the policy makers would want to ensure that panic does not set in the economy. A possible cause for the panic could be INR depreciating beyond 68.90 or 10 y going above 8%. To avoid this a BJP victory in Karnataka could be the catalyst for the central banks to sell USDINR more aggressively and bring it lower. 

 

How does this fit in the RBI's monetary policy objective? If anything the RBI is worried about inflation going higher in 2018. The BJP would not like to make the mistake of UPA which allowed inflation to go out of control and subsequently got voted out. Therefore it would make sense for the RBI to use such opportunities to sell USDINR (or at least allow INR appreciation) and give the absorbed liquidity back to the system through OMO purchases, thereby controlling yields also.

 

Dollar strength or weakness always plays a pivotal role in deciding where INR goes. Dollar index has failed to give a close above 92.57 levels in the last 2 weeks perhaps indicating that the correction up is over. Complimenting this EURUSD failed to close below 1.1936 in spite of making a low of 1.1820. Therefore the current dollar weakness will also support INR appreciation in the short term if the election results fall in place for the incumbent central government. Other EM currencies have also appreciated more that INR in the last couple of days and my comparable index shows INR at 66.75 according to current EM currency levels. For the day CMP 67.25, Range 67.31-67.11.

 

Caveat: this view is tactical only as the current account pressure on INR does not change because of the election results neither would FIIs start putting money into India. At most the FII outflows might decrease for the time being.

INR update: US CPI to be watched for today

Today Carney is expected to be dovish given his recent comments. GBPUSD if it closes the week above 1.3550, then the pair could be in for a sharp up move and vice versa. US CPI today could surprise on the higher side (consensus 0.3% mom) given the increasing pressure on the labour market which could take the dollar index higher with Euro expected to be the primary loser in G10 in case of further dollar strength.

 

USDINR 1m NDF is trading 7p right as compared to 8p yesterday. EM currencies have mildly appreciated since yesterday along with dollar index’s mild cool off. Equity market have registered gains (against what I expected) overnight. FPI flows continue to be substantially in the negative while India 10y is back at 7.75%. Medium term outlook of INR remains that of depreciation towards 68 but today  might not be the day it breaches 67.50. CMP 67.39, Range 67.50-67.25.

INR update: Expecting further but temporary dollar strength

The move in dollar index is largely related to one sided positioning of dollar shorts as the yield curve largely remains where it was with 10-2 spread staying below 50 bps. In this case, EURO longs continue to be large at $18b (4th May) and with 1.1936 breaking convincingly, a further break of 1.18 and could open the door for  1.1554. Meanwhile the positioning for other majors (GBP, JPY and AUD) are near neutral and therefore I would expect bulk of dollar strength against Euro. Similarly the dollar index can now move to 93.6 a break of which can show 94.20. I would not abandon the view of a structurally weaker dollar as yet as the rising US fiscal deficit story seems stronger than the unexplained short term moves meanwhile in the larger picture the move till 94.20 should seem like a correction of the move from 103.82 to 88.25. Meanwhile as expected Trump continues to deliver on his promises without much reaction from the markets.

 

USDINR 1m NDF is trading 8 p right while debt outflows continue at a more than comfortable pace. Oil trades above 76.5 which would ensure that INR remains under pressure. The reversal in INR will come along with dollar index which could itself move higher by another 1% before moving lower. Therefore in the medium term USDINR looks like it is headed to 68. Recent RBI intervention and policy measures indicate that the policy makers do not want INR to depreciate beyond the other EM currencies spectrum while rupee weakness in tandem with dollar strength has been accepted. Equity markets will find it difficult to rise from here (in the near term) given the scrapping of Iran deal. CMP 67.35, Range 67.27-67.53.

INR update: RBI uncomfortable above 67 for now

The excessive EURO long positioning of the market has resulted in a sharp decline in EURUSD before today’s FOMC. A break of 1.1936 could bring in 1.1550 (although unlikely). US10Y has failed to comprehensively break 3% while 10-2 spread is still hovering below 50 bps only. Both these would suggest that dollar strength could have limited momentum after today’s FOMC. I would look at 92.56 on dollar index and 1.1936 on EURUSD on weekly close basis, as crucial levels to ascertain further direction for the dollar. Fresh EU data in the new month will also be critical to ascertain if the negative data surprise of the last 2 months has come to an end or is continues.

 

RBI measures to attract more short term investments in government/corporate bonds plus to allow higher cost ECBs, is likely to affect yields (if at all) rather than rupee. One year before next year elections short term debt investments would come in only on a currency hedged basis (for arbitrage purposes). Therefore the impact of these measures is unlikely to result in major inflows on spot. Since I am looking at 92.56 as a strong resistance on dollar index I would expect 67 to hold on USDINR. On the other hand RBI’s Friday announcement shows concern on depreciating INR in the policy circles, therefore RBI should increase intervention if INR depreciates further. The move up would only happen if dollar index breaks this level and moves to 93.5/95.15, in which case RBI would also stand aside. For the day CMP 66.77, Range 66.70-66.95.