INR update: Risk on sentiments, US China trade deal, Inflows continue to support Rupee

There is a general risk on sentiment post the NY session in Friday on the back of reduced concerns on global growth plus increased optimism on US China trade deal. Dow was up 1% while Asian stocks are also up ~0.5% today morning. KRW and CNH have shown appreciation since Friday while dollar has moderately depreciated against G10 as well. This week China macro data on Wednesday will be important along with US retail sales on Thursday.

USDINR 1m NDF is trading 3p right which is softer than last week while other Ems have registered mild gains since Friday evening. On Friday a supreme court decision put on hold a large inflow (of USD 7 bn) that markets were expecting around end April but in spite of this INR negative news, USDINR got sold off after an initial spike. This affirms the presence on inflows and a left side bias for the pair. There are more inflows in the pipeline as per news reports. Low inflation numbers in India would continue to help bond inflows while Crude prices spike remains a risk (although unlikely). To reiterate, I would continue to expect 69.50-68.50 range for the rest of April, which in turn would make me a seller above 69.30 levels. I would expect a left side surprise given the flows, risk on sentiment globally plus the RBI swap auction on 23^rd April which should keep the markets flushed with dollars resulting in intermittent mandatory selling from foreign banks. Near term forwards could again rise before the auction which can be a negative drag on short USDINR bets. CMP 69.29, Range 69.37-69.00.

INR update: Uneventful global wires, Inflows and election focussed action in USDINR

With low volume and surety from the ECB of accommodative monetary policy for longer periods, Euro remains the best DM funding currency, and therefore it would be logical to expect EURUSD to not cross 1.1340 (200 WMA) convincingly. On the other hand from a 3-6 months the pair can be sold near 1.1340 with a possibility of a move towards 1.10 and lower. Not much happening otherwise globally US-China trade standoff should get resolved, perhaps like US-North Korea standoff resolution, wherein markets and US will rejoice and nobody will understand what has really changed. But status quo is not a bad option for risk sentiments.

USDINR 1m NDF is trading further right today at 9p while EM currencies are moderately weaker since yesterday night. The buying since 9AM today morning could have been because of stops plus Nationalized banks buying USDINR in cash to ensure cash tom remains at normal levels before the 23^rd April auction. The major driver for USDINR for the last week and perhaps the next 2 weeks would be inflows which are doing the news rounds. Therefore I would expect USDINR to remain in 69.50-6850 range for most of April. Currently beyond April there doesn’t seem to be a reasonable basis to forecast USDINR levels, but at least in case of an unexpected Modi defeat USDINR would move higher by 4-5 biggies while the move lower could be restricted to 66.5-67 levels only. For today I would look to sell the pair at 69.25-30 levels for a move back to 69 levels. CMP 69.15, Range 69.30-69.00.   

INR update: Near term forwards move higher as dollar liquidity increases

Not much news globally. US China trade deal remains on card while the FOMC minutes and ECB gave further confidence to the fact that DM monetary policy is going to remain accommodative for longer period of time, which is risk positive.

USDINR 1m NDF is trading 6p right as near term forwards are going higher again because of excessive systematic dollars ahead of the RBI swap on 23^rd April. Last month when the same thing happened USDINR got sold. Oil moving higher is mainly because of productions cuts while world demand outlook doesn’t support a higher price forecast. The bond sale/stake sale inflow pipeline for USDINR looks strong for the next 2-4 weeks. Most of these would be done before the May 23^rd election results as the decision makers would not want to run a digital risk on a stake sale / necessary capital raising plan. I would continue to expect 69.50-68.50 range for USDINR for April with a possibility of a surprise on the lower side given the flows pipeline. CMP 69.02, Range 69.15-68.74

INR update: Inflows keep USDINR moderately offered

IMF revised global growth lower on expected lines but this along with renewed trade tensions between the US and EU would keep global risk sentiments slightly negative. Today we have the ECB policy announcement which could finally lead to a break in EURUSD on the lower side below its support zone of 1.1175-1.12, given the recent run of negative data from the EU and trade tensions the ECB could be more accommodative and sooner than what the market expects. US CPI and US FOMC minutes today, on the other hand would give more clarity on the FED’s next rate action.

USDINR 1m NDF is trading 7p right since the last 3 days. The price action yesterday was driven by some inflow. News reports suggests that there could be more bond issuance/stake sale/ FPI related inflows in the pipeline between now and end April which should keep USDINR offered. I would continue to expect a  range of 69.50-68.50 for the rest of April. For the day CMP 69.17, Range 69.25-69.00.

INR update: Neutral risk sentiments and inflows to keep Rupee in range

The outlook on US China trade deal remains positive although the timing remains uncertain with White house indicating that significant work is still pending. This week IMF will revise its global growth outlook (likely lower) while US CPI on Wednesday might give more clarity to rate cut expectations in the US in 2019.  ECB policy on Wednesday would be critical and EURO might break the 1.1174-1.12 support zone ahead of the meeting itself. May accepted that a positive vote from the parliament on a Brexit deal might be difficult to achieve in the near future. Given the confusion around Brexit related politics in the UK, the lack of consensus and delay might ensure that UK ends up staying in the EU.

Brent oil has moved higher on the back of ongoing production cuts plus military clashes in Libya. This makes it seem that the break of 70 in Brent is idiosyncratic and therefore does not suggest an immediate risk to INR. USDINR 1m NDF is trading 7p right while near terms forwards are trading at normal levels in the onshore market. There are a few bond and stake sale related inflows in pipeline which should keep USDINR well offered. A daily close above 69.55 levels should take the pair towards 69.85 levels this week (unlikely though). I would expect USDINR to trade in the range of 69.50-68.50 for most of April. CMP 69.49, Range 69.55-69.30.   

INR update: Rupee to remain in range with a positive bias

Increasingly the noise suggests that US and China will reach a deal to allay the trade war concerns. This is reflected in stock markets for now. Next week IMF would release its global growth forecasts which is likely to be revised lower again (it revised the forecasts lower in January 2019 last) considering recent statements on growth by Laggard. PMI data released this week has been less disappointing that what market would have expected last week, which has perhaps helped in US and German yields bouncing resulting in less talk of a global recession. Oil has moved higher on OPEC production cuts (against US wishes and without Russian cooperation)  and with global growth concerns it is unlikely to sustain above 70 levels (Brent).

With a view of oil remaining below 70 there doesn’t seem to be a visible risk to India’s current account. As compared to March 2019, Apr has seen much lesser FPI flows but I would continue to expect one more round of investments into India in April before May election results. Currently the more interesting aspect of currency markets are near term forwards and not spot. Given the high cash/tom levels it is speculated that RBI would have bought in spot heavily from 68.50 to 69 and received cash tom to normalize the levels from 2p to 0.85p now. INR fix is trading at +1p and USDINR 1m NDF is trading 7p right. I would continue to expect 69.50-68.50 range for the next 10 days. For the day,CMP 69.22, Range  69.43-69.00.

INR update: Global risk on plus lower forwards suggests INR strength

World equity markets seem to be buoyed by expectations of accommodative stance from major central banks plus the fact that China PMI has shown signs of growth bottoming out in the world’s second largest economy. The slowed growth momentum in the EU and the slowing momentum in the US have been ignored for now or on the contrary has helped price in easy liquidity for 2019 and beyond. Uncertainty related to Brexit continues even though a custom union kind of a deal came very close to a positive vote yesterday. Except a no deal Brexit any consensus (no brexit / another referendum/ some deal brexit) should be GBP positive while bolstering the Euro for a shorter while.

 

In the risk positive global backdrop where liquidity expectations are easing, flows into India should remain positive as each passing day suggest that the Modi led government is gaining an edge on the opposition leading into the Apr-May elections. This accompanied with another announcement by RBI for a $5bn swap window should ensure that forwards continue to move lower. The lower forward costs incentivizes the participants to arrange for funding in USD terms. The lower forward expectations should also make exporters sell sooner than later. Plus the RBI seems to be on a easing cycle with markets expecting a rate cut on Thursday which is also growth positive given the current high real rates. The above mix of risk on sentiment, with positive flow expectations along with lower forwards therefore should keep USDINR well offered in the first half of April at least (making me expect a range of 69.50-68.50 for the next 2 weeks). For the day USDINR 1m NDF is trading 3.5p right while fix is at -0.5. The price action in the last 30 mins suggests some inflow. CMP 69.21, Range 69.35-69.00.

INR update: Geo-Political tensions, Inflows & Intervention keeps range intact

The moves in USDINR will be dependent on sudden headlines and tweets related to Ino-Pak tensions. 4-5 days without incident would signal that the escalation risk is behind us, but in the interim the I would quantify the risk as high. Meanwhile there could be large inflows in pipeline in USDINR which can again take the pair towards 70.95 but sustaining lower than that would be difficult, till the time the geo political tensions are behind us. Price action yesterday indicated heavy intervention by RBI and the same seems to be the case today. In the offshore market also USDINR did not cross 71.23 which indicates possibility of an inflow. USDINR 1m NDF trades 8p right indicating upward risk to the pair. Without a wave of news like yesterday a move higher in USDINR cannot be envisaged. CMP 71.17, Range 70.95-71.50.  

INR update: Further escalation concerns

To summarize my expectation from the escalating geo political tensions between India and Pakistan, I would quote from an article in the Washington post published yesterday.

“If Modi does authorize military strikes, what will Pakistan do?

Pakistani Prime Minister Imran Khan has made promises of his own. On Tuesday, he emphasized, “If you think that if you can carry out any kind of attack on Pakistan, Pakistan will not just think about retaliating, we will retaliate.”

You can read the entire article (link below) which also cites the fact that how leaders commit themselves into actions like retaliation /war basis their speeches and posturing; very similar to how Modi’s posturing made it clear that he would definitely take action against Pakistan for the recent terrorist attack.   

Given the above line of thought I would expect the geo political tensions to escalate further but chances of a full scale war remain remote. In the past any sign of weakness or softness from an elected political leader towards India has resulted in a military coup in Pakistan (1977 Zia ul Haq executed Bhutto after the latter signed the Shimla agreement in 1972 and 1999 after the retreat in the Kargil war Musharaf toppled the democratic government of Nawaz Sharif). Therefore the past makes it unlikely for us to expect that Pakistan would not react.

In the medium term the actions from India increases Modi’s political capital on the back of a wave of Nationalism and boosts his chances to come back to power in the upcoming May elections. Therefore any signs of de-escalation would indicate the beginning of a rally in INR and Indian equities, but I would think we are still some time away from this.

Price action indicates that USDINR was sold aggressively by nationalized banks since morning. Large moves in USDINR remain unlikely and the broad range of 71-71.50 should prevail. Overnight longs would make sense as offshore market can be expected to buy the pair on the back of the concerns. For the day, CMP 71.05, Range 70.95-71.25.

https://www.washingtonpost.com/politics/2019/02/25/after-terrorists-attacked-kashmir-will-india-seek-vengeance-or-de-escalation/?noredirect=on&utm_term=.6627ad9a4e3c

Regards

Saket Agarwalla

INR update: Geo Political tensions and inflows keep Rupee in balance

The ECB minutes show that the next move from the central bank could be accommodative, perhaps in the form of fresh LTROs to provide banks with long term funds. On the other hand the FED which has shrunk its balance sheet by $480 bn in the last 16 months is anticipated to slow down its unwinding sometime in 2019. Thus from an equity perspective, liquidity tightness seems to be slowing down, which should ensure equity gains globally as long as growth does not surprise to the down side, especially in the US. Till now the growth slowdown in the US is on expected lines while EU slowdown has been faster than expected. EURUSD continues to hover around 200 WMA (@1.1336) and therefore it is better to trade range of 1.15-1.13, as prices remain in range more often than otherwise.

 

Momentum in gains of Brent prices seems to have cooled off which indicates that 68.3 as a resistance should hold. Geo political tensions between India and Pakistan is slowly increasing although still remains in the background. Planned inflows over the next 40 days should bring in some offers in USDINR as well keeping the upside limited unless geo political tension truly escalate. CNH pared gains on the back of news that China is considering buying additional $30 bn worth of agricultural products from the US. USDINR 1m NDF is trading 2p right while EM currencies have depreciated overnight. Broadly USDINR should remain in 71.05-71.55 range. For the day CMP 71.18, Range 71.11-71.33.    

INR update: Pledge for stable Yuan leads to Rupee gains

The idea of waiting for Euro breakout confirmation until 22^nd of February weekly close worked as EURUSD is trading back above 200 WMA. In addition to US-China trade tensions now we need to watch the auto tariffs that US might impose on the EU and how the reaction to the same. On the other hand EU data continues to weaken at a faster pace than US data, indicating that the ultimate direction for EURUSD could be lower only.

Oil prices are rising on account of production cuts and possible US sanctions on Iran and Venezuela. A weekly close above 68.30 on the Brent should bring in 70+ levels which could take USDINR towards 72.50. Higher oil along with stronger dollar against the Euro could take USDINR well past 72.50, therefore this is one scenario importers should be worried about in the near future.

CNH appreciated on back of news that US wants China to keep a stable currency. This led to 0.9% appreciation in the Yuan since yesterday and strengthened most of the other EM currencies. USDINR traded near 71.60 yesterday in the offshore markets and since then has appreciated by 0.6%. USDINR 1m NDF is trading 4p right. Brent near 67 levels should keep USDINR well bid. USDINR should continue to trade in the range of 71-71.50. For the day, CMP 71.20, Range 71.15-71.35.  

INR update: Higher Brent and geo political factors to weigh on Rupee

Price action suggests that EURUSD should break lower but it will continue to test as there is no runaway trends currently. US-China trade talk chatter indicated towards a positive outcome as White house said that an MOU could be released before the 1^st March deadline.  Equities in the US have had a stellar start to 2019 which is primarily on accord of a dovish FED and a developing view that the FED might announce a slowdown in balance sheet unwinding sometime during the current year.

Brent oil prices rose on the back of US-China trade talks and US sanctions related chatter on Venezuela and Iran. With global growth slowing and Saudi Arabia out of US favor, Brent should find it difficult to sustain above 68.3 levels. USDINR 1m NDF is now trading 6p right on the back of increased geo-political risk between India-Pakistan and Brent oil prices gains. Overnight EM currencies had strengthened but the same did not reflect on INR given gains in crude prices. With India bond yields rising higher, the optimism of further rate cuts seems to totally digested. USDINR should find it difficult to sustain below 71.20 now with a possibility of 71.85 this week. CMP 71.45, Range 71.35-71.60.

INR update: US slows and Oil gains; Rupee back in range

Weaker retail sales in the US has led to GDP estimates being revised to 1.5% from 2.7% a week back (by Atlanta FED for Dec qrtr). With EU and US both slowing down, the view of a slowing global economy is gaining ratification. Oil has gained on the back of further production cuts chatter, but global demand outlook doesn’t support a view of a runaway rally. The NOPEC bill (which would prosecute OPEC members for cartelizing and rigging oil prices) is unlikely to get favor in the US congress, and thus far has had limited market impact. Today the FED will suck out liquidity to the tune of $23 bn which is one of the reason for sustained dollar strength this week. EURUSD continues to trade below 200WMA (1.1334, CMP 1.1285) and a weekly close today will provide more conviction to a view of further losses in the pair (but I would wait another week before confirming a breakout).

USDINR 1m NDF is now trading 7p right indicating increased offshore demand. Broad dollar strength is not supportive of INR gains while the expectation of inflows have withered down. India 10 Y yield have inched up again showing signs of fiscal worries. Oil above 65 will start reflecting on INR if the price levels sustain. The attacks in Kashmir will make participants think of a possible retaliation by India, which should again cap INR gains. Lined up inflows should ensure that USDINR does not run up far above 71.50. I would revert to the view of broader range of 71 and 71.50. For the day CMP 71.25, Range 71.15-71.45.

INR update: Inflows drive USDINR lower

EURUSD 200 WMA is at 1.1333 (CMP 1.1276). A break of 200 WMA essentially means 4 year price levels breaking and it technically signals a further large move down. Looking at Euro area data release the chances of it bouncing from the current levels look slim although from a trading perspective it is prudent to wait till 22^nd Feb (2 weekly closes) before we confirm the break out. The chances of a runaway move immediately looks low as US data surprise is also in the negative. The developing breakout in EURUSD also challenges the view of a weaker USD this year on back of a dovish FED. US-China trade talks is the nearest big event from a market perspective.

USDINR 1m NDF is trading 5 p right. Price action suggests that some inflow is going through. News reports suggest that certain telecom and divestment related investments are resulting in USDINR getting sold off. Global queues should have driven USDINR higher (USD strength and firm oil prices). But in spite of that if USDINR has gotten sold it confirms supply of dollars for the time being. Broader range of 71-71.50 should continue to hold but temporary break to 70.85 is possible given the inflow. CMP 70.99, Range 70.85-71.20.

INR update: US-China trade talks to guide market direction

US-China trade talks could keep markets on the edge this week although commentary doesn’t suggest any quick resolution to the differences between the two countries. US-Korea talks and another US government shutdown do not seem to be very relevant for the markets at present. Italian growth concerns have pushed its 10 year yield from 2.55% to 3% in February itself, which is reflecting in EURO’s inability to make gains over the dollar in spite of a dovish FED. This week has a host of inflation prints from India, US, EU and China. But the global growth tide has turned and rate hikes are ruled out, making growth data more important than inflation, for which we have the EU GDP and US retail sales on Thursday.

 

USDINR 1m NDF is trading 6p right indicating moderate buying pressure on the pair. EM currencies have depreciated moderately since Friday as dollar registers strength and risk sentiment remains muted. Oil has given up its recent gains on the back of growth concerns helping INR. RBI’s rate cuts and expectations of another cut in April perhaps have resulted in some debt inflow over the last couple of days, although the same looks unsustainable. Overall range of 71-71.50 to hold. For the day CMP 71.24, Range 71.15-71.45.

INR update: Expect range of 71 and 71.50 for some time

BOE revised UK growth forecast lower for 2019 (from 1.7% to 1.2%) while incoming EU data continues to create worries. This accompanied with swinging outlook on the US-China trade deal did not help risk assets yesterday. Overall global growth slowdown in 2019 seems to be market’s base case with US-China trade deal as the unknown variable. Today a weekly close for EURUSD below 1.1330 (unlikely) can start a fresh down move taking the pair below 1.12, but then prices remain in range more often.

RBI cut rates against 75% market expectations of no cut. Fiscal and monetary policy are both pro growth while the only worries are the bond supply and political uncertainty. USDINR 1m NDF is 5p right while EM currencies have depreciated on the back of moderate risk off tone. Both 70.80 and 71.80 can be reasoned out currently and therefore I would expect USDINR to stay in the range of 71 and 71.50 for some time. Price action suggests presence of RBI on both sides in case of large intraday moves. CMP 71.32, Range 71.42-71.10.

INR update: Correlation between Rates and INR

While it seems that RBI is not going to hike or cut tomorrow, one of the point which always remain contentious is whether INR appreciates or depreciates in response to movement in interest rates.

Contradictory to traditional currency/interest rate correlation, USDINR reacts to interest rates moves more from a growth and capital account perspective, as INR is not freely convertible to make good of rate related arbitrage. A rate hike often follows worries of rising inflation and is generally seen as a move to curtail growth. While a rate cut is seen as growth positive helping equity and bond market valuation and thereby attracting capital inflows.

Empirical evidence also suggests the above observation (chart below). In the early 2000s when rates in India came off sharply, INR appreciated led by robust growth and capital inflows. As rates were increased from 2005 and growth started peaking out we again saw INR losing till 2009. The period from 2009 to 2011 saw USDINR coming off from the crisis peaks and the central bank supporting growth through aggressive rate cuts like elsewhere globally. Post 2011 was a period when India’s twin deficit started raising its head and 2013 saw interest rate confusion or policy missteps due to taper tantrum in the US. During this period INR continued to depreciate sharply while rates remained near the same. Post 2014, in spite of robust capital inflows and stable growth, RBI stepped up its currency intervention / management and ensured that INR does not appreciate too much while REPO rate was cut from 7.5% to 6%. Then the latest run up in USDINR to 74 in 2018 coincided with rate hikes.

Therefore the takeaway for me is that a dovish RBI is supportive of INR gains and vice versa.

Although tomorrow rate action looks unlikely given arguments on both sides, it seems that RBI will tend to be more dovish. This should ensure that the up moves in USDINR remains limited to the top already created at 71.80 while the chances of seeing 71 again increases significantly.  

INR update: Higher oil, Budget, CNH drive USDINR higher

More than the strong January NFP print, it was the US PMI numbers which led to dollar strength in the NY session on Friday. Although ISM was better than expected (in contrast to a disappointing December print)it won’t change the outlook of an approaching slowdown in the US which has been acknowledged by the FED. Therefore I would keep my trades in the direction of the major trend which should be of a slowly and gradually weakening dollar. Consequently a daily close for EURUSD below 1.1392 (55DMA, CMP 1.1440) and for USDJPY above 110 (CMP 109.8), looks unlikely.

USDCNH move higher today morning has driven buying in USDINR, driving NDF 1m 8p right. Budget was on expected lines and has given rise to the usual questions about assumptions. Higher gross and net borrowing number for FY20, have made bond markets look beyond fiscal as a percentage of GDP, and consequently driven 10Y yields higher by 20bps. Overall I think the budget and its impact are behind us now. The movement in CNH today morning seems idiosyncratic given the lunar holiday and contradicting positive noise on US-China trade talks. The fact oil prices moved higher by 2$ has also contributed in USDINR opening at 71.60. I am still weary to trade a breakout in USDINR and don’t expect a big move higher unless Gsecs see a further selloff. CMP 71.67, Range 71.50-71.85.    

INR update: Strong revised GDP indicates India's commitment to numbers

 

According to the revised GDP numbers India grew by 8.2% in the year of demonetization (FY17) better than previously reported 7.1%, and accelerated from FY16’s 8% (revised). This indicates that today’s budgets will also have very good numbers in spite of whatever sops are given to whosoever.

 

The changed interest rate outlook in the US indicates growth concerns and perhaps puts the dollar on a moderate weakness path for 2019. With growth outlook becoming softer, the twin deficits of the US (fiscal and current) should come into focus.

 

Today’s’ budget has been the main reason why participants have not sold USDINR on the above development. Once the budget is digested in price then given dollar weakness, equity risk sentiments, stable oil prices and lower domestic inflation, the short term outlook should become INR bullish. Commentary suggests that if FY20 fiscal deficit is maintained within 3.5% then it should not be a shock to the markets, which should easily be achieved given the revised GDP numbers. Given the government’s commitment to keep numbers strong (like the GDP numbers above), the budget should not be a negative surprise. Therefore on the back of an outlook of gradual dollar weakness, I would want to sell USDINR between 71.30-71.45. CMP 71.15, Range 71.30 (71.45) – 70.80.

FOMC: End of rate hiking cycle?

The ECB recently was less dovish than the data warranted, perhaps to ensure that the outlook remains robust. The FED on the other hand seems to have become much softer than many anticipated. The FED clearly says today that the case for further rate hikes have weakened. While FED fund rates are the primary monetary policy tool, Powell asserted that adjustments to balance sheet reduction could be warranted as well. It’s a clear indication that the FED expects inflation to be muted from here on. With 2 year yields falling from 2.59 to 2.53 currently, it effectively signals that as far as market expectations are concerned it does not see a hike happening in the next 2 years, which in turn increases the chances of a yield curve inversion in case of weaker growth.  

The FOMC is certainly dollar negative (for 2019 I would think), positive for equities and other risk assets. One of the biggest risks to equities a year back was the shrinking liquidity guidance which seems to have been taken back by the FED today. All EM currencies have appreciated with USDINR trading at 70.85 currently in the offshore markets.

INR update: Budget concerns to prevent INR gains

USDINR went higher from yesterday’s 71.10 levels to 71.45 in the NDF markets on the back of higher oil prices (61.55 as compared to 60 levels yesterday). Globally mild dollar weakness is keeping EM currencies moderately appreciated while the dynamics in USDINR is different given oil and approaching budget. Broad range for USDINR is 70.90-71.45 and RBI seems to be protecting this range. We should head towards 71.50 given budget related position covering. A break of 71.50 (trading for 1 hour) can be called a breakout. CMP 71.33, Range 71.25-71.50.

INR update: Gradual rhetoric suggests a dovish FED

Incremental views on the FED perhaps taking its foot of the gas pedal (WSJ article on the FED not running down its balance sheet) took dollar lower. The ECB on Thursday was not as dovish as data would have made us assume which ensured that EURUSD did not bINR update: Gradual rhetoric suggests a dovish FED

Incremental views on the FED perhaps taking its foot of the gas pedal (WSJ article on the FED not running down its balance sheet) took dollar lower. The ECB on Thursday was not as dovish as data would have made us assume which ensured that EURUSD did not break lower than 200WMA at 1.1325. I would expect dollar index to gradually move lower given the falling rate hike expectations plus a potential resolution of trade conflicts between US and China. This would ensure that USDJPY stays below 110 (not withstanding risk sentiments) and EURUSD stays higher than 1.1325.

Price action  clearly suggests that RBI is uncomfortable below 71. The best chance of breaking below 71 was last week, we have the budget this Friday which should ensure that participants would not want to run short USDINR at least till clarity emerges. Other EM currencies have appreciated on the back of dollar weakness but USDINR trades in a narrow band guided by the central bank (perhaps). Range till Friday should remain 70.90-71.45, while for the day, CMP 71.13, Range 71.00-71.25.

Regards

Saket Agarwalla move lower given the falling rate hike expectations plus a potential resolution of trade conflicts between US and China. This would ensure that USDJPY stays below 110 (not withstanding risk sentiments) and EURUSD stays higher than 1.1325.

Price action  clearly suggests that RBI is uncomfortable below 71. The best chance of breaking below 71 was last week, we have the budget this Friday which should ensure that participants would not want to run short USDINR at least till clarity emerges. Other EM currencies have appreciated on the back of dollar weakness but USDINR trades in a narrow band guided by the central bank (perhaps). Range till Friday should remain 70.90-71.45, while for the day, CMP 71.13, Range 71.00-71.25.

INR update: Growth risks cool off Brent helping INR

Concerns of global growth slowdown was exacerbated by US existing home sales data which showed the sharpest decline in 3 years. German Zew indicated that people are growingly concerned about the current health of the economy although the outlook was less pessimistic than before. These clouds have led to a correction in equities although in currency markets participants are finding it difficult to ascertain as to which country will be more affected. Declining Japanese trade surplus data prevented JPY from appreciating in this risk off environment.

INR NDF 1m is trading 1.5p left today as compared to 2p right yesterday morning. Brent price movement from 63 to 61.5 has led to a small INR gain overnight. Other EM currencies are also trading a tad strong. INR bond yields are not moving higher anymore as market expectation for farm package moved from above Rs. 2 lakh crore (USD 28bn) to below Rs. 1 lakh crore of incremental expenditure. Given the sharp and isolated depreciation of INR in January because of local factors, I would think that USDINR should remain in 71.45-70.90 range before 1^st February budget. Visibility beyond the budget is difficult at this moment, but I would expect USDINR to remain in a range of 72.50-69.50 till May 2019. For the day, CMP 71.24, Range 71.15-71.40.

INR update: Global growth forecasts cut; India fiscal slippage concerns alleviate

The IMF cut its global growth forecasts by 20 bps to 3.5% citing trade and Brexit related uncertainties. Given that both US and EU are moving into headwinds as far as growth is concerned, it is expected that both ECB and FED will tilt towards the dovish side in their respective rate outlooks. This should keep EURUSD in a range, which should make a weekly close before 200 WMA at 1.1325 very unlikely. On the other hand JPY could gain against the dollar given the relative improvement in Japanese outlook vis-à-vis the US making USDJPY unsustainable above 110.20 (55WMA) levels. Brexit related uncertainty could weigh on GBP but GBP gains could be also strong in times of positive news, making Cable highly unpredictable.

Oil gave up gains on the back of lower growth outlook. 1m NDF is trading 2p right as compared to 3p right yesterday morning. The fiscal concern for a populist budget in India ahead of central elections is fully priced into bonds and currency. Yesterday we saw some amount of positives getting priced into the fiscal outlook with reports suggesting that the fiscal dole out would be under Rs. 1 lakh crore only. I would expect yesterday’s high of 71.50 to be not breached this week while a test of 71 looks likely. For the day, CMP 71.32, Range 71.40-71.15.  

INR update: Fiscal slippage, improving trade deficit to keep Rupee in balance

The FED speak continues to be dovish while the US government shutdown has been ignored by the markets for now. Dollar index should continue to drift lower with 95.3 as a crucial support (Currently at 96). With concerns of a global slowdown and assurances by Saudi Arabia of further production cuts, oil looks balanced at 60 levels. Technically, the run up in oil prices seem to have lost momentum for now.

 

The sentiment for INR seems to be primarily driven by concerns on fiscal slippage. Indian assets do not seem to be in favor currently given the upcoming elections resulting in FPI outflows on a daily basis. On the other hand expectations of a rate cut and lower trade deficit numbers are the arguments in favor of the Rupee, which should ensure that USDINR’s higher run would be lower than market expectations (which ranges from 71.50-72.50) in the current move. Given that oil prices have a lagged impact, the maximum gains in trade deficit could be recorded in January. This, along with the news of oil companies drawing down on ECBs recently could curtail buying in USDINR. Given balancing arguments for INR, for the medium term, I would continue to expect price to be in more traded zones, rather than breaking out into less traded area of 71.50+. For the day, CMP 71.04, Range 71.15-70.85.

INR update: CNH gains and USD weakness

The noise from US-China trade talks is positive (USDCNH below 6.75) while the FED seems to be talking cohesively signaling a wait and watch 2019, which is positive for equity markets. Market expects US CPI to print below 2% today which if true, could lead to further dollar weakness. Given the disappointments in ISM and softer crude prices, a softer CPI looks more likely. US shutdown should start creating some concerns from a USD weakness and risk perspective which would keep equity markets sideways for now.

 

Brent is creating only mild concerns on INR as 70.50 top remains intact (closing basis). INR NDF 1m and 1y have become 1p and 30p right which indicates moderate USDINR buying, also because of fiscal slippage concerns. News of oil companies drawing down ECBs would shave off oil buying demand from the market in the coming days while India CPI and Trade number should be further supportive of INR gains. The outflow that we saw from Monday seems to have gotten over sometime yesterday, most of the commentary suggested that it was defense related. Medium term range should be 70.50-69.50. Friday could see a reversal of the up move seen during the day, CMP 70.41, Range 70.50-70.28.

INR update: Thoughts on RBI's MTM gains and its effect on Rupee

As per the last annual report, the RBI had Rs. 7 Lakh crore of currency and gold revaluation (CGRA) gains  on its balance sheet. Assuming a nominal growth of 12% pa and a constant FX Reserves to GDP ratio, in 5 years India’s FX reserves would be $700 bn. Assuming that USDINR is at Rs. 80 in 5 years the total gains in RBI balance sheet would be close to Rs. 13 Lakh crores or $185 bn. These gains are like high return savings of the economy, the fruits of which the country cannot enjoy. Therefore these gains have been a point of contention for the government in the last 3 years and I would think that given the recent developments at the regulator’s level there could have been a few agreements to prevent this build up of CGRA gains in the RBI’s balance sheet. These agreements could have been:

1) Restricting the intervention capability of the RBI in the FX market (which is visible in the increased volatility in the last two months).

2) Capping the FX reserves to GDP ratio of the RBI

The above is a speculation on my part, but seems logical given that the root cause of the problem is RBI’s increasing FX reserve along with a depreciating Rupee. The effect of this could be increased volatility in USDINR (which we have seen recently) plus increased INR gains in times of inflows (which RBI didn’t allow since 2014).

Consensus view of short USDINR got negated yesterday morning as we are back in the 69.50-70.50 range. Price action yesterday indicated stops while the price action today morning suggests some outflow. EM currencies have depreciated mildly since yesterday. Middle of the range a 25 paisa move either ways is very easily justifiable. Over the medium term I would think INR would gain towards 68.80 levels. CMP 70.06, Range 70.25-69.80.

INR update: Slowing but Growing US & Dovish FED, good for Rupee

NFP is a lagging indicator while ISM (or PMI) is a confidence indicator which should reflect more of the future. Therefore between the strong US NFP and the weak ISM print last week I would give more importance to the ISM number. Today’s services ISM therefore becomes very important to understand where the US economy is heading over the next 2-3 months. The slowdown in the US is not a surprise as the same was built into the FED forecasts, but the financial market and political reaction to the same, has led the FED to back off significantly which has resulted in lower US rates, than one would have imagined one month back. US is likely to grow in the range of 2-2.5% this year with a likely less hawkish FED which should be positive or neutral for equities. US-China trade talks will create volatility in risk assets but the ultimate result should be pro risk only (given Trump’s history of always striking a beautiful deal). Given this backdrop it looks like USD weakness and positive/neutral risk is the most logical view to have for the visible future.

 

Oil at 53 or 57 is the same and therefore the extract is that oil is in favor of India’s BOP. Given the above view of weak USD and positive/neutral risk, USDINR looks headed lower. India’s fiscal overshoot and political concerns should slow the pace of rupee appreciation but are unlikely to stop the gains. A break below 68.80 would be difficult but when it happens 67.50 can be expected. A daily close above 69.56 should again bring 70 on the other hand. CMP 69.32, Range 69.45-69.15.

INR update: Election results could guide Rupee today

 

A new governor has been placed so the panic that was created by the resignation of Mr. Patel can now be ignored. Therefore the reason for RBI to sell aggressively like yesterday does not perhaps exist today. On the other hand the fact that the ruling party has lost in state elections resulted in almost large FPI outflow yesterday and could be the reason for further weakness in INR. NDF 1 m is 6.5p right while 1 year is almost 50p right which indicates substantial offshore buying pressure. Oil looks weaker as prices are still trading in the 60-61 range in spite of the production cuts last week, but markets are not looking at that currently. We can expect more negative news on US-China trade talks or on Brexit which can in general hurt risk sentiments. CMP 72.12, Range 71.95-72.45. I would wait till end of this week to form a medium term view.

INR update: Like in October 2018, RBI defends Rupee

1m NDF is 4.5p right and 1y NDF is 38p right which is the highest I have noted in the last 2 months. USDINR has ironically moved lower from 72.45 to 720 levels. In October when EM currencies were sliding, RBI was expected to hike rates as the most obvious (but debatable) solution to support INR. RBI did not hike rates and immediately we saw RBI selling big in the USDINR market to back its decision of no rate hikes. I would think that today too after the RBI governor’s resignation, the selling has been done by RBI to alleviate market panic. INR has appreciated in spite of a very INR negative development of the ruling party loosing in 5 state elections. EM currencies have not appreciated either to help the Rupee. US-China friction should also help the view of Rupee weakness otherwise.

 

Therefore sentiment for Rupee should remain negative for some time, although RBI will support the local currency aggressively during the day. With half a day remaining, the downside could be significant for USDINR, but for now looks like 71.75,71.50 could be levels where RBI selling could pause. Overnight longs would make sense from a trading risk reward perspective. CMP 71.85

INR update: Like in October 2018, RBI defends Rupee

1m NDF is 4.5p right and 1y NDF is 38p right which is the highest I have noted in the last 2 months. USDINR has ironically moved lower from 72.45 to 720 levels. In October when EM currencies were sliding, RBI was expected to hike rates as the most obvious (but debatable) solution to support INR. RBI did not hike rates and immediately we saw RBI selling big in the USDINR market to back its decision of no rate hikes. I would think that today too after the RBI governor’s resignation, the selling has been done by RBI to alleviate market panic. INR has appreciated in spite of a very INR negative development of the ruling party loosing in 5 state elections. EM currencies have not appreciated either to help the Rupee. US-China friction should also help the view of Rupee weakness otherwise.

 

Therefore sentiment for Rupee should remain negative for some time, although RBI will support the local currency aggressively during the day. With half a day remaining, the downside could be significant for USDINR, but for now looks like 71.75,71.50 could be levels where RBI selling could pause. Overnight longs would make sense from a trading risk reward perspective. CMP 71.85

INR update: Oil production cuts? Trade Truce?

According to reports, oil production cuts might not be so easy to achieve as Saudi Arabia and Russia want to distribute production cuts across all members while the other members argue that production cuts should be first taken by countries who have increased production in the near past (Saudi and Russia among a few others). Thus like any major economic collaboration event the outcome of the OPEC meeting remains uncertain driving oil prices and with it INR.

 

Like North Korea discussions, it remains unclear as to what really was discussed between China and the US, and whether the meeting was a success. To top it Mr. Trump’s tweet that he is a “tariff man” hinted that the Trade truce might have been a wrong reading, but then no one can be sure either ways. This uncertainty along with the never ending and unpredictable Brexit headlines led to the USD gaining against other currencies and specially EMs.

 

RBI has no reason to raise rates given the benign inflation prints. At the same time the central bank has to anchor to its “calibrated tightening” stance for a few months before it can consider rate cuts making the announcement today a non event from a rate action perspective. Our economist team does expect that from a liquidity perspective it might want to allay tightness concerns and at the same time the inflation forecasts might be revised downwards, helping bond yields come down further.

 

USDINR 1m NDF is 2p right while 1y is 18p right which indicates moderate buying pressure. Brent below 61 is driving INR along with news of some inflow of $ 500 mio. On the other hand EM currency losses overnight will keep the buying pressure on USDINR in the second half. The price action in Rupee since Friday afternoon also hinted that there was a large outflow which seems to be absent today. With opposite forces making different arguments, view is which one you pick. Medium term I would expect USDINR to face stiff resistance at 70.90 and 71.30 as the major trend should remain lower for USDINR. For the day downside could be limited, CMP 70.60, Range 70.50-70.90.

INR update: Trade truce to boost risk sentiments

As Trump had done before with other world leaders, he concluded the meeting with China’s Xi on a high note and both countries have agreed to work on their trade issues resulting in a truce of 90days. The result has been supportive of risk sentiments with higher equities and stronger EM currencies. This is a crucial week for G7 with US and EU PMI and employment data setting direction for further FED speak and growth differential between the US and rest of the world.

 

Oil is 5% higher but the broad trend is still lower. OPEC meeting from Thursday needs to be watched for any large cuts in production. USDINR 1m NDF is trading 1p left while 1y is 17p right indicating reduced offshore selling pressure. EM currencies have appreciated on the back of trade truce including TRY, ZAR and IDR (these were trading in tandem with INR for whole of November). Given the broader current context of lower oil and stronger risk sentiments I would expect USDINR to move lower with the window of 70.15-70.30 acting as a strong resistance. Medium term view on USDINR could be difficult to conceive given the state election results next week while other than that the construct remains positive for INR. RBI policy on Wednesday, could be a non event with the central bank likely to be on hold. For the day CMP 70.00, Range 70.10-69.80.

INR update: Dollar weakness to provide momentum to Rupee

 

The FED had been shifting its stance from overtly hawkish to less hawkish as the US growth seems to be peaking (from its unsustainable 4% levels). Yesterday’s Powell’s comments that current rates are near neutral rates seem to have been influenced by EU growth concerns plus recent crude price fall. The comments have led to a sharp selloff in USD across the board and has helped risk sentiments with the DOW closing 2.5% higher.

 

INR has been closely tracking TRY, ZAR and IDR in November and since yesterday all 3 of these currencies have appreciated by 1-1.5%. INR 1m NDF is trading just 1.5p left as compared to 5p left yesterday indicating reduced selling pressure in offshore market. Technically USDINR looks headed to 69.40 but with Trump-Xi meet and local state election results we can see some volatility. I would expect Trump-Xi meet to have a positive impact on INR therefore until next week we could see 69.40 on the Rupee. Crude is lower by ~2$ since yesterday on the basis of higher inventory in the US. CMP 70.12, Range 70.20-69.80.

INR update: Trump-Xi meet awaited

I would think that Trump-Xi meet should result in positive headlines supporting risk sentiments, this is going by the recent history of Trump claiming victory after all his trade discussions (NK, Canada, Mexico). Dow seems to be factoring a positive outcome as well. Any major revision (although unlikely) to US GDP today could move markets in the US session.

 

USDINR 1m NDF is 5p left consistently indicating stability in sentiments in offshore markets. Today being expiry the price in the first half is driven by fix related unwinding of arbitrage positions between futures/ndf and otc markets. FPI flows and crude price have been supportive of INR gains in November while 10Y yields have moved lower with liquidity conditions easing. In the medium term 70.60-71.20 break (daily close) should result in fresh direction, my thought is that it should break lower. For today, CMP 70.66, Range 70.55-70.85.

INR update: Crude downtrend could take Rupee towards 70

 

Oil has moved surprisingly fast reemphasizing that it is an international politics driven asset class, as neither demand nor supply has changed so much to warrant a 32% drop from its October beginning peak. Euro zone economic activity weakening was confirmed by PMI data while US PMI flash also printed lower than consensus but still reads much better than EUs. Given this backdrop and the surprise fall in oil it is likely that ECB now surprises on the dovish side. Today we have ECB’s Praet speaking again which can verify the assumption. Trump has followed a trend of terming his meeting with other leaders as positive therefore I would expect risk to be supported after Trump and Xi meet during G20.

 

USDINR 1m NDF remains 4p left like it has been in the last 4 rupees INR appreciation, which shows that the down move has been led by exporter selling or importers not buying. Typically capital account inflows result in large selling in NDF leading 1m NDF to 15p left which has not been the case till now. Crude is in a downtrend and the next important levels are 57 and 50 (CMP 59.70), a monthly close below 60 should result in further down move which is positive for the Rupee. Crude fall related risk off (in India at least) is sometime away and can be ignored at the moment. EM currencies are not moving in tandem with Rupee except ZAR, TRY and IDR. The fact that RBI has not bought aggressively suggests that INR appreciation is the preferred trajectory for the authorities currently. During the day USDINR should track small moves in Brent while the larger move is still lower. Medium term USDINR should now trade between 70.18-70.70 while for the day CMP 70.52, Range 70.60-70.25.

INR update: Limited Rupee gains likely

The US economy is showing very early and non conclusive signs of peaking out (Retail sales revision and housing data yesterday while for a couple of months the ISM data is coming off from the unsustainable 60 levels), this perhaps has led the Fed to review its overtly hawkish outlook which was visible in Powell’s comments on Friday. Nevertheless the Fed is on track for the Dec rate hike. On the other hand EU and Japan have conclusively shown data which suggests a marked slowdown in the respective economies, therefore if broad dollar weakness against DM currencies, has to gather steam, then I would think it is still some time away. On the other hand talk of US-China trade deal has ensured that USDCNH stays well below 6.95 and going by Trump’s administration’s record of ultimately solving the problems it creates (NK, Mexico, Turkey and Canada), they are likely to announce that they have struck a “magnificent and beautiful” deal with China, helping risk in EM countries.

The balance of power in the oil triad has shifted away from Saudi Arabia since the killing of the Saudi journalist in Turkey, ensuring that oil moves in the direction of US’s desire, i.e., lower. Having said that it is unlikely that oil would be allowed to sustain below 60 levels which create risks for leveraged commodity companies plus puts US alliances with oil producing countries at risk (like it happened under Obama after 2014).

On 14^th November I had expected INR to head towards 71.50 when it was at 72.14, the target has been achieved. Market seems to be taking the Dec 11^th election risk in its stride and focusing on the positives created by the fall in oil prices. FPI inflows have marginally picked up ensuring support to the Rupee. Market participants are now talking about levels of 70-71 by end of this calendar year which is resulting in exporter selling. For another fortnight Rupee should trade strong albeit for RBI buying to boost up its reserves again. USDINR 1m NDF is 5p left (4p left yesterday). The more fragile EM currencies (TRY, ZAR, BRL, RUB) have significantly appreciated  (10-15%) in the last 2 months which indicates that there could be more downside for USDINR as well. In the near term RBI buying would check the pace of Rupee appreciation while in the medium term state election results will remain a question mark. Medium term range for the Rupee now should be 71.75-70.70. For the day, CMP 71.38, Range 71.45-71.10.

INR update: Oil fall accelerates amid global growth concerns

Global growth concerns are weighing on equities making today’s EU GDP and IIP data very critical for risk sentiments and the Euro. A negative surprise in this can decisively break the 200 WMA in EURUSD at 1.1310 taking the pair towards 1.10 while a positive surprise can make the 200 WMA a medium term bottom. Given Praet’s dovish comments yesterday the chances of a negative surprise looks more likely.

The pace of fall in oil prices is increasing which shows that the bottom can still be some distance away. USDINR 1m NDF is trading 4.5p left while other EM currencies have not appreciated as much (except CNH). Fall in EURUSD should on an intraday basis affect the Rupee (and vice versa). Looking at the price action since morning it seems that USDINR might head towards 72.20 again before it gets sold off. Last time when Brent was at 65 levels (March 2018) USDINR was at 65.5 levels, although it is not a one to one comparison but most of the negativity in Rupee this year was on account of higher trade deficit, and therefore if other factors support the downside for USDINR pair could be significant. Medium term range now shifts to 72.40-71.50; CMP 72.14, Range 72.20-71.90.

INR update: Rupee likely to follow crude and high real rate

The markets seem to be focusing on country specific concerns like US trade tensions with China, lack of a Brexit deal and US earnings topping out. This has resulted in dollar strength across other DM currencies while equities have got sold off. Crude trades below 70  on demand related concerns plus the fact that the earlier supply cut threats from Saudi Arabia have been taken back.

INR is likely to follow crude oil plus the fact that the CPI print is much below the target of 4%. The result is a sustained high real rate for the Indian economy with reasonable fiscal hygiene which should attract debt investments with the caveat of approaching political risks (state election results on 11^th Dec). USDINR 1m NDF is trading marginally left while other EM currencies have mildly appreciated today morning. CMP 72.57, Range 72.65-72.45. Medium term range for USDINR should be 72.25-73.

INR update: US-China trade deal surprise results in risk on

Two days back Trump threatened to place more tariffs on China in December while headlines now indicate that a trade deal between the US and China is likely. Likewise risk swings like a pendulum with CNH leading the way from 6.98 to 6.90 now. While it’s easy to follow the trend in a fundamental driven market, in the current scenario the next headline could be very different.

The market has totally ignored the RBI-Gov spat and it is likely that there will be no action till the RBI board meeting on 19^th November. With the global risk on move USDINR 1m NDF is trading 3p left while EM currencies are trading strong. I would still think that the RBI will behave conservatively and would want to rebuild its reserves (it has spent ~$50 bn of reserves since February18) therefore I would expect limited downside. Having said that the momentum is lower and therefore it is not advisable to buy USDINR immediately. If the pair closes below 72.70 today than there could be room for further down move and a close above 73 should reaffirm my assumptions. CMP 72.91.

INR update: RBI-Gov spat reports could take USDINR higher

If Section7 has been invoked to overrule the RBI then perhaps it will be safe to infer, that morally the RBI governor will find it difficult to continue. This would not be taken kindly by foreign investors and USDINR could move towards 75. Also comments have shown that the government was more worried about the Rupee fall than the RBI which believed the Rupee fall to be moderate till the beginning of October. Therefore till the issue is resolved RBI might not aggressively defend the Rupee either. This coupled with dollar strength and Indian political uncertainty should result in higher capital outflows from India. The risk is intermittent intervention by RBI and the issue between the government and RBI getting resolved, which would take some time.

USDINR 1m NDF was trading 3p left yesterday and today it is 1p right. Other EMs would not matter much in the current situation and would only affect the pace of move. CMP 74.05, Range 73.95-74.30.

INR update: Dollar breaks higher; Rupee trades resilient

In spite of the fact that Draghi made the right noises for the Euro, EURUSD broke 1.14 convincingly with the next major support at 1.1316 and 1.1297 (200 wma and last low). Similarly the dollar index has convincingly broken 200WMA and looks headed to 97 where it will face the last high resistance (CMP 96.6). Equity markets continue to register large intraday fluctuations although the weekly trend still points towards further losses. Today the most critical piece of information will be the US GDP for 3^rd quarter and a surprise above 3.3% can result in further dollar gains.

CNH and other EM currencies have weakened overnight as dollar strengthened. Crude oil continues to trade lower around 76 levels. USDINR 1m NDF is trading flat in spite of the weakness in other Asian currencies. Price action since morning is similar to what has happened this week which is showing more offers than bids in USDINR. Over the last 2 days FPIs seem to have invested significantly in Indian debt while outflows continue from equities. Medium term range for USDINR should remain 73.25-73.75 with dollar strength likely to prevent more INR gains. CMP 73.36, Range 73.32-73.50.

INR update: Oil breaks lower helping Rupee gains

Equities trade weak and US yields came off. Oil also slipped along with equities plus the fact that Saudi Arabia assured the market of adequate supply. Today morning Asian equities are in the positive on the back of US stock recovery towards the end. EM currencies have appreciated since yesterday night. USDINR 1m NDF is trading at 2.5p right as compared to 4p right yesterday. Weakness in oil prices will give more confidence to RBI only if the price sustains here, so currently I would think that RBI would want to rebuild reserves at 73.20 levels, medium term range should be 73.25-73.75. CMP 73.27, Range 73.10-73.35.

INR update: Saudi journalist's murder unlikely to snowball, USDINR to stay ranged for now

A bit of political background on USA and Saudi Arabia. Historically US has been responsible for supporting the Saudi family and creating a state under them which makes the two regimes close allies. The alliance became even deeper once Iran distanced itself from the US in the 1970s and since then, US has benefitted from the Saudi ambition of becoming the only super power in the middle east. More recently the Obama administration tried to take a more neutral approach to its middle east policy by striking a deal with Iran and slowly distancing itself from the Saudi family. The result was that when Obama visited the Saudi family’s country last time as President, the Saudi king did not even come to the Airport which is generally a protocol. But it seems that President Trump has gone back to square one with clear allegiance to the Saudi family. He has revoked the Iran deal, allowed Saudi Arabia to again determine international oil prices (and this time with Russia) and consequently this has resulted in warmer relations between the two powers. With the history and the current administration’s preference for the Saudi family it is highly unlikely that the Saudi journalists murder in Turkey will snowball into anything that can affect economic stability in the middle east.

Dollar index continues to hover around its 200 week moving average and to reiterate, I believe that a convincing break higher before the midterm elections is unlikely. Similarly I would expect EURUSD to trade in the broad range of 1.1450 and 1.1750. The confidence in the Euro range increases given the fact that latest comments and rating downgrade indicate that the Italian fiscal deficit related uncertainty might be coming to an end now. USDINR 1m NDF is trading 7p right as compared to 4 p yesterday, this is on the back of mild depreciation in CNH and KRW along with other EM currencies. Equity markets lack upward momentum while selling pressure has abated for now. In the absence of convincing dollar strength and sub 80 oil price, policy makers might not be comfortable with USDINR trading near 74 levels, therefore the broad range of 73.75-73.25 should continue to hold with bulk of price action happening in that corridor. CMP 73.81, Range 73.86-73.60.

INR update: RBI intervention could result in tighter range

The bounce in EURUSD on Friday ensured a closing above 1.15 and USD index closing below 200 week moving average  again, indicates that Euro stays in the range of 1.1450 and 1.1750 for now. The dollar index could break higher only when it is clearer that the incumbent Republicans retain both the houses in the November mid terms. Till then the dollar index could stay in established price ranges even though the US 10Y is at 3.2% on the back of the latest tax cuts for middle income groups in the US.

The RBI sold $5.1bn in the week following its monetary policy where it surprised the markets by retaining benchmark rates. This shows that action resulted in commitment to ensure that Rupee doesn’t depreciate further on the back of the monetary policy decision. The move has helped drive away reckless USDINR longs from the market. On the other hand the sharp sell side intervention will also ensure that RBI would buy aggressively at lower levels like 73 to 73.25 as the erosion in Reserves for this year has already been significant above $40bn. This should result in USDINR trading in a narrow and well defined range of 73.25-73.75 until global dollar or oil cues provide new insights.

USDINR 1m NDF is trading 4p left like Friday while FPI outflows have abated. Oil trades below 80 levels while other EM currencies have mildly appreciated since Friday. Indian equities continue to exhibit selling pressure as they pared early gains. CMP 73.25, Range 73.20-73.40.

Buyers credit scam started the slide in Rupee; Merchant buying is coming off now

• -        The above chart shows the net purchases of FX by Indian merchants from banks on a daily basis in USD mn, 20 day moving average (source RBI website).
• -        The long run average for this is USD 256 mn (since 2010). Since the exports and imports in 2011 were virtually at the current levels, there is no need to adjust this level to current date for comparison purposes.
• -        This doesn’t include interbank purchase or sale.
• -        The data clearly shows that net purchase of merchants increased as soon as the buyers credit scam broke out (Feb 2018) and buyers credit availability became scares. Subsequently RBI disallowed buyers credit altogether.
• -        This move up in USDINR further accentuated the increasing trade deficit fears. The trade deficit fears gained momentum because of increasing oil prices.
• -        The buying by merchants seems to have peaked in May 2017 but has far from normalized even now. Although the per day average is coming down but it is resulting in incremental buying of $150 mn per day above the long run average of $256 bn per day.
• -        Therefore even a decreasing average is leading to higher USDINR as it continues to put demand pressure on the pair.
• -        The below data suggests that merchants have net bought ~$35 bn extra in the last 7 months.
• -        This data is till Aug 2018 and it indicates that the average per day of buying is moving lower. September data when available should corroborate the same
• -        Going by this decreasing trend, if external factors (like dollar weakness) supports then USDINR might move lower towards 73 before pre election uncertainty kicks in.

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.