INR update: Less forward intervention can drive points significantly lower

US yields came off on the back of developments in Russia investigations where a grand jury was appointed. EU data continues to point at strong growth while US data surprise has also been positive this week, perhaps pointing towards a stronger NFP number. Average earnings would be more important than the headline number as the problem in the US currently is price growth not job growth itself. A print significantly different from 0.3% could move yields quite a bit, making it an interesting Friday evening.

 

The fall in 1y forwards from 295 to 278 in 2 days, shows that Nationalized banks have stopped paying forwards. If that is the case, then increase in MSS limit from Rs. 1 tr to Rs. 2.5 tr could have been a step towards bringing forward levels lower. If RBI would want to discourage speculative selling of USDINR then a lower forwards were desirable and this is a step in that same direction. Currently forwards are at 4.4% pa while interest rate differential is at 5% pa. If forward are not intervened and paid by RBI, then 1 year forward points have the potential to fall significantly below the interest rate differential by 1.5% to 2% (historically seen differences). Therefore if India positive sentiment continues (which is likely), forwards have the potential to go towards 3.5%pa or to 220p with 246 as the first support.

 

USDINR 1m NDF is trading 7.5p left which indicates offshore selling. Nationalized banks bought USDINR yesterday and today after not buying on policy day, strange but that is what it is. EM currencies are trading slightly stronger than yesterday while equities are  flat. CMP 63.67, range 63.71-63.56.

INR update: Headed to 63?

Although Fed speakers yesterday lowered interest rate hike expectations but US yields did not weaken as much as the comments would warrant, this goes to show that the reason for US 10 Y yields hovering around 2.3% is on the back of expected balance sheet reduction and the next big fall in US yields and dollar can come if the FED doesn’t deliver on it in September. It’s a data heavy day in EU and the US along with the BOE.

 

Before the policy, the RBI yesterday allowed INR to appreciate, reasons unknown. There was nothing in the policy that should have affected INR as yields are more or less there only. But post the policy USDINR levels below 63.90 triggered a fresh round of selling and now has pushed the pair in a new price spectrum. Looking at the larger picture USDINR has broken 200 week MA at 64.16 last week, and has gained momentum this week, which should be significant and in my view can take the pair towards 63 in a few months or may be a fortnight or a week. The next big move in USDINR could come if debt limits are increased or USD weakens because of delay in balance sheet reduction in the US.

 

USDINR 1m NDF is trading 7.5p left. Asian currencies are weaker and USDINR is not tracking other EM currencies, otherwise it should have been 64.20 now. I would ignore other EM currencies for today along with equities. USDINR has broken a crucial range and would put participants in a stop sell mode be it the ones who had sold puts or the exporters who didn’t hedge. Nationalized banks are on bids now but as I said RBI allowed appreciation yesterday so it must be for more than 50p. CMP 63.62, Range 63.75-63.45. 

INR update: RBI in focus

Yesterday two pieces of price data in the US came in higher than expectations (Core PCE price index and ISM manufacturing prices), this could be an early signal for July price data to buck the trend of lower than expected inflation and provide a much needed technical correction to the dollar weakness. NFP wage earning on Friday would verify the possibility.

 

Today we have the RBI monetary policy which has been mostly a surprise under the new governor. The market is expecting a 25bps cut with a neutral stance and the same is totally priced in. To me a 25bps cut with a hawkish tone looks illogical. Small portion of the market is also expecting not cut or 50 bps cut. To reiterate I am in the 50 bps cut camp, with a neutral tone for the future, as RBI would not want the market to carry further rate cut expectation given the current and foreseeable high real rates. This could drive USDINR lower to 63.75 but I won’t chase the pair downwards as buying can start given that under such scenario India yields would fall and bottom out. A 50 bps cut could trigger a 15bps fall in 1 year forwards. No cut could drive USDINR to 64.35 where it can be shorted as high real rates story would start playing out in such a scenario, although I strongly don’t have this view.

 

USDINR 1m NDF is 7.5 p left but EM currencies have depreciated in the last 2 days. USDINR at current levels is trading 20p left to the EM basket (for the last 2 days). Debt inflows continue to find the last remaining limit windows while FIIs seem to be booking profit in equity markets. At some point of time in the next 3 months RBI could increase the debt limits which could be the next trigger for USDINR to head lower towards 63 levels. Otherwise the medium term view remains of range only. In June 2017 RBI net forwards increased by 3.5bn USD on the long side to USD 19.2 bn, indicating the authorities discomfort with INR appreciation from here. CMP 64.11, Range 63.75-64.20.

INR update: Trump's woes weakens USD further

Trump seems to be having real problems, not just politically, but selecting and retaining people also, as he fired his communication director yesterday, who was hired just 10 days ago. Consequently in spite of a stronger housing data print the dollar weakened as EURO closed the month, above 200 week MA. USD Index faces strong support near 91.8 (CMP 92.9) and a break below that on weekly basis, can take the index to 89 levels. Today is a data heavy day with manufacturing PMIs in the EU and US, along with personal income and expenditure in the US. Price data in the US would be critical given the 4 months of weaker prints, and another weak print can drive yields substantially lower.

 

USDINR 1m NDF is trading 8p left, which is the most we have seen in a while. CNH is facing appreciation bias along with EURO gains, which should provide strength to INR as well. EM currencies have mildly appreciated overnight. Markets await RBI tomorrow while nationalized banks continue to aggressively buy USDINR. I would think that a breakout on the lower side is possible today given the USD weakness and policy tomorrow. CMP 64.14, Range 64.18-64.00.

INR update: Rate cut expectations could drive INR appreciation

Inflation concerns in the US continue as the GDP data shows that price index rose lesser than expected while growth numbers weren’t too impressive either. For this kind of inflation numbers coupled with Trump’s inability to push through the healthcare bill, US10Y yields at 2.28% looks a little high, as compared to 1.8% in Oct 2016 before Trump came into power. This is an important data week with major prints everyday from US and EU.

 

RBI announces its monetary policy on Wednesday. I am expecting a 50bps rate cut as against market expectation of 25 bps. The rationale being that real rates in India are currently very high (4%+) while even if we take inflation average of 3% over the next 6 months, the real rates will hover around 3% at current rates. RBI has previously given a guidance of real rates of 1.5%-2% and therefore a 25 bps rate cut does not seem enough. High real rates increase hot money inflow into debt increasing appreciation pressure on the INR which seems to be something that RBI is against as of now. Therefore a higher rate cut will also release the debt inflow pressure on the currency subsequently.

 

USDINR gave a weekly close below 200 week MA for the first time since July 2011. In July 2011 the low was made with an RSI divergence while this time the 200 MA has been broken with considerably more momentum and therefore technically it seems we can see follow through. USDINR 1m NDF is trading 6p left and INR appreciation over the last 2 days seems to be in divergence to other EM currencies showing RBI’s willingness to allow INR appreciation. I would expect INR to appreciate towards 63.75 by Wednesday. For the day, CMP 64.08, Range 64.15-63.91.  

Inflation Projections and actual reading suggests a 50 bps cut

50 bps cut?

RBI affected the last rate cut in Oct 2016 expecting inflation to firm up gradually. Since February 2017 RBI has missed the inflation projection for Jan-Mar 2017 by 60 bps and for Apr-Jun 2017 by more than 2% (see table below). The Q4 FY17 inflation projection in Oct 2016 was 5% which closed at 3.57%. Given this backdrop, one can say that RBI should have cut rates may be in Apr 2017 or Jun 2017 itself. The inflation backdrop also suggests that 25 bps rate cut now is late and not enough. Therefore I would expect that with monsoon risks behind us, the case is ripe for a 50 bps cut on Wednesday 2nd Aug 2017.
 

USDINR view

A 50 bps rate cut would also ensure that debt inflows which is essentially hot money, doesn’t continue to flow in on the expectations of further 25bps rate cut in October 2017. Therefore a 50 bps rate cut would save the trouble of preventing INR appreciation for the RBI. Therefore I expect INR to appreciate into the policy and immediately after, where it could form a bottom till the time debt limits are raised. Target 63.75. CMP 64.15.

 

Needless to say a 50bps cut would be positive for equities and specially banking stocks.

 

On the other hand a 25 bps rate cut is priced in and should not result in large movements in any asset class.

INR update: Mnuchin reignites currency manipulation rhetoric

Stronger Durable goods order led to mild uptick in USD index. Mnuchin comments on currency manipulators led to EM currency depreciation (because of implications on trade agreements) and controlled the dollar strength against JPY. Certain global banks have revised their US GDP forecast (due today), to 3%+ while the consensus is 2.6%. This could indicate a higher than expected print which could send US yields higher along with the dollar index.

 

Mnuchin’s comments on currency manipulators strengthens the belief that RBI would not want to breach the 2% of GDP mark for FX intervention, watched by the US, as one of the parameters to qualify a country as a currency manipulator or to put in on the watch list. RBI’s intervention till now would be near USD35 bn for the CY2017 leaving it with another ~$8-10bn for the rest of the 5 months. Therefore another month of large inflows like March 2017 or CNH and KRW appreciation might make the RBI allow INR appreciation.

 

USDINR 1m NDF is trading just 3p left which indicates offshore buying pressure. According to the overnight movement in other EM currencies USDINR could be 64.35 today. Overall sellers will line up at any upticks while nobody seems to be buying the pair. I will continue to expect 63.75 ahead of the RBI announcement on Wednesday. CMP 64.22, Range 64.30-64.15.

Crosses Intra day trades

The below are the trades I am looking at today. The 2^nd table shows the status of the last day trades.

Dollar Index			CMP	93.3			Risk Reward ratio
Strong weekly downward trend. Strong support zone is 91.8-92.2.
EURUSD			CMP	1.1743
Strong weekly uptrend.  200 week resistance at 1.18
Supports	1.1605	1.1694	1.1662
Resistances	1.18
SELL	EURUSD	1.1824	Stop	1.1866	TP at	1.1726	2.3
Buy	EURUSD	1.1696	Stop at	1.1664	TP at	1.1764	2.1
GBPUSD			CMP	1.314
Weekly upward trend has lost momentum
Supports	1.2872
Resistances	1.3233	1.3043	1.3077	1.3056
Buy	GBPUSD	1.3081	Stop at	1.3039	TP at	1.3154	1.7
USDJPY			CMP	111
Downtrend. Looking for 24% retracement to initiate fresh shorts
Supports	109.61
Resistances	112.18	111.65	111.81	111.23	111.7	111.39
SELL	USDJPY	111.34	Stop	111.76	TP at	110.26	2.6
AUDUSD			CMP	0.8052
Uptrend. Critical levels broken, weekly close above 0.80 will propel the pair to 0.83
Supports	0.7725	0.7925	0.8009	0.797
Resistances	0.8268
Buy	AUDUSD	0.8026	Stop	0.7956	TP at	0.8144	1.7

Dollar Index			CMP	93.92			Risk Reward ratio	Trade Remarks	PNL
Bearish weekly close, can take USD lower to 92
EURUSD			CMP	1.1652
Increased momentum could warrant correction to 1.1585
Supports	1.14	1.1527	1.1581
Resistances	1.1775	1.1796	1.1654	1.1685
SELL	EURUSD	1.1674	Stop	1.1706	TP at	1.1616	1.8	SL	-32.0
Buy	EURUSD	1.1586	Stop at	1.1554	TP at	1.1644	1.8	NA
GBPUSD			CMP	1.3026
Weekly upward trend has lost momentum
Supports	1.2856	1.3	1.289	1.2966
Resistances	1.3233	1.313
Buy	GBPUSD	1.2976	Stop at	1.2944	TP at	1.3026	1.6	NA
SELL	GBPUSD	1.3054	Stop	1.3081	TP at	1.3006	1.8	SL	-27.0
USDJPY			CMP	111
Downtrend. Looking for 24% retracement to initiate fresh shorts
Supports	109.61
Resistances	111.81	111.65	111.23	111.41	112.02
SELL	USDJPY	111.44	Stop	111.86	TP at	110.46	2.3	SL	-42.0
AUDUSD			CMP	0.7941
Daily charts showing reversal
Supports	0.768	0.7829	0.7786	0.7886
Resistances	0.8008	0.7932	0.7992
SELL	AUDUSD	0.7964	Stop	0.7996	TP at	0.7916	1.5	SL	-30