INR update: Trade war campaign expands to EU; USDINR could see 74 by november end

Trump slapping tariffs on EU imports indicate two things. First, trade war is not getting resolved in the Oct 2019 round of  talks with China because of which Trump is expanding the conflict. Second the long held view that the trade war will end sometime before Nov 2020 elections with a Plaza kind of accord which would result in dollar depreciation against major exporting currencies like CNH and EU has progressed with EU being made part of Trump’s campaign. Trump mentioning repeatedly that dollar is too strong also asserts the theory of a Plaza 2 accord in 2020. The president is trying to make a problem (if it is one) as Top of Mind, which he will solve with dollar depreciation.

So October and subsequent months would be a time of uncertainty in global markets which is symbolic of dollar strength. Trump’s impeachment proceedings will add to uncertainties but this is no way indicative of Trump’s popularity or lack of it. A failed impeachment (most likely outcome) might indicate Trump’s victory and result in higher votes for the incumbent president.

US manufacturing ISM weakens further which is the first sign of a slowdown that’s approaching the world’s largest economy. But relatively the US is still better placed that EU or Japan.  This would weigh on US yields but more so on equities resulting in a risk off sentiment which should ensure that this factor would have limited negative impact on the dollar.

In India, September 2019 recorded the lowest GST collection in 19 months which would weight on fiscal concerns from revenue side. The approaching festive reason would be critical to ascertain if the fiscal concerns alleviate or accentuate from here. Therefore Oct2019 GST collection numbers should now be the focus along with other high frequency indicators. RBI is likely to cut rates tomorrow which is a consensus view. RBI’s comments on fiscal and growth outlook would be more critical.

Given that trade war seems to be heating up again, USDINR should remain well bid and track USDCNH and now EURUSD closely.  Given the lack of BOP concerns a benign oil price should not have positive impact on INR for now. The tax cut euphoria is totally digested in equity price.  Given the backdrop of expected dollar strength, trade war related risk off globally, slowing growth domestically and increasing fiscal slippage possibilities one can expect USDINR to touch 74 by November end. One can go long at current levels with stop at a daily closing below 70.80.

INR udpate: Oil supply concerns alleviate as Geo Political stress remains

Oil

The Saudi regime has swiftly announced that the supplies have been restored; the attack would not impact the production for September as a whole. This swift action was perhaps to help Aramco valuations whose IPO has been a source of anxiety within Saudi Arabia. The energy minister was changed a fortnight back perhaps to expedite this IPO. At the same time Saudi Arabia did not lose the opportunity to squarely blame Iran for the attacks. So we can say for now that the oil supply shock fear is behind us as Brent trades at 64.50 levels. But will the Geo political tension between US and Iran increase; fanned by Saudi Arabia (Iran’s arch enemy) and it’s motive to raise international oil prices before it dilutes its stake in Aramco. On the other hand Trump seems to have recently realized that international tensions are not helping his approval rating and fired his hawkish security advisor; it is unlikely that Trump will do a U turn on Iran within a week. With these factors in the backdrop geo political uncertainties remain.

US-China trade war

Trump said yesterday that US-China trade deal could come one day before the November 2020 elections. The President also stated that if the trade deal comes in his second term it will be much worse for China. These comments indicate that China is playing hard to get realizing Trump’s eagerness to get a deal before next year elections. Next info on this story is due after the first week of October when trade talks are likely to resume.

FOMC

Disruption does not seem to be FED’s motive so a rate cut today is a foregone conclusion. What remains to be seen is where an incremental rate cut chances for November which hovers at 67%  currently moves to post the FOMC. The FED is unlikely to be overtly dovish given that US data is still relatively better (current quarter GDP tracking at 1.8%). The fact that dovishness would indicate a lack of confidence and a self fulfilling prophecy the FED would not want the near term rates to move lower which should underpin the dollar.

US overnight rate spike

US overnight Repo rate traded at 10% yesterday on the back of dollar shortage in the system. The trigger for this was the debt ceiling respite that the US government secured on 1^st August 2019. This enables the US government to borrow more and shore up its cash balances with the FED thereby sucking out liquidity from the system. This balance has increased by almost $180 billion in the last 45 days. Historically these balances can be expected to move towards $400 bn (Currently at $300bn) thereby sucking out another $100 bn from the markets. But the FED can address this by arranging for overnight Repos among other tools; it need not go for a QE to address such liquidity concerns. Therefore at present the chances of this overnight rate spike to spill over to the rest of yield curve looks limited.  

USDINR

CNH and other EM currencies continue to trade weak which should underpin USDINR. FII outflows continue at a steady pace. Geo political uncertainties in the middle east is likely to keep markets tentative if not on the edge. China and US are done wooing each other and it’s unlikely that there will be another round of concession or appreciation bout in CNH before October (if at all). USDINR should stay supported at 71.35 with 71.85 as an immediate possibility. CMP 71.46, Range 71.35-71.65 for the day.   

Regards

Saket Agarwalla

INR update: Oil supply restoration news to drive markets

The attack on Saudi oil reserves comes after Trump fired Bolton (his National Security advisor) who was seen as an overt hawk on US-Iran relations. Observers thought that Trump might be moving towards a deal with Iran which has now become difficult given that Iran has been blamed for the attack by Saudi Arabia. The timing of the attack suggests that the same has been carried out to ensure isolation of Iran from the international energy markets via US sanctions.

Saudi Arabia on the other hand has downplayed the impact asserting that they will restore one third of the lost supply by today itself. One news report suggested that Saudi Arabia will restore 100% of lost supplies by tomorrow (Tuesday). Saudi Arabia’s motive to restore supply as soon as possible is to indicate that its facilities are not vulnerable to geo political tension. This assertion is in turn motivated by getting a better valuation for Aramco it seems.

The disruption in oil supply is the largest the world has seen since the gulf war in 1992. The total disruption is 5% of global oil supplies which commodity experts suggest is significant to take Brent prices towards 70, i.e., if the disruption is sustained.

Therefore at the moment news from Saudi Arabia about restoring oil supplies would determine direction for oil prices and by tomorrow morning the supply shortfall should be clearer. If the supplies are restored then we can expect a pull back in oil towards 64 levels.

Trump on the other hand has become dovish on his international relations outlook last week and it would take some time for him to change his stance on Iran again.

Therefore incoming news would determine the direction of oil prices and risk sentiments globally. USDINR should track oil directly. In the absence of fresh news we could see USDINR heading to 71.30 today while a closing above 71.60 would indicate elevated concerns on account of recent events. 

INR update: Trade war Recess might last through September

Both China and US are paving the way for a more conducive environment to facilitate the October trade talks. Trump’s announcement to delay the increase of 5% incremental tariff on $250 bio of Chinese imports from 1^st Oct to 15^th Oct, further strengthens the argument that Trump is changing his stance on foreign policy across because of his fall in approval ratings over the last 3 months. The fall in approval rating is primarily on account of trade war concerns resulting in recession fears in the US which was reflected in equity markets plus the yield curve inversion. The yield curve 10-2y USTs is mildly upward sloping again with the spread at 7bps. This risk sentiment should now be supported till the conclusion of October trade talks which is still 4 weeks away. Therefore for the time being the markets might stop looking at US-China trade war as a theme, unless there is further development before the expected time frame.

Today the ECB is most likely to cut rates by 10bps but the market will closely watch whether a QE is announced. Quantitative easing can be argued both ways with those in support saying that EU economic weakness warrants incremental liquidity. On the other hand those against say that it signals and facilitates further weakness in business confidence while the data is not bad enough as yet for the ECB to pull that trigger. In case there is no QE or a less dovish surprise then EURUSD can give a bounce towards 1.1084 where I would like to sell the pair for a move lower towards 1.08.

USDINR moved lower overnight along with USDCNH and EM basket. Equity markets across have registered gains on account of the thaw in US-China trade war. Yields have risen across markets although the yields in India rising is also to do with the rising fiscal concerns. Today’s CPI print for India should be read for growth with a higher than 3.3% reading positive for growth and perhaps INR as well. A mildly positive CPI print is unlikely to change the course for RBI which is expected to cut rates by more than 25bps in October. September is seasonally a positive month for INR and now with risk sentiments supporting USDINR can head towards 71.05 in this month. A daily close above 71.45 can again bring 71.65. CMP 71.38, Range 71.45-71.25 for the day.

INR update: US-China seem to be moving closer; Risk sentiment improves

There were 3 positive news yesterday for global risk sentiments. China lifted limits on FII investments into local bonds and stocks which is a positive step as China become more open to overseas investments. Ease of investments has been one of the complains US has with Chinese administration. Yesterday evening Chinese media reported that China might be now ready to make concessions and import more from US to facilitate a trade deal. In the US, Trump fired his National security advisor John Bolton who anecdotally was behind the increased US animosity with Iran, North Korea among other countries. This would indicate that Trump perhaps wants to soften his stance against Iran and other foreign countries wherever US was nearing a military standoff.

Trump’s approval ratings have gradually fallen from 46% (in April 2019) to 39% currently (source news.Gallup,com) primarily on the back of recession and trade war concerns. Perhaps this gradual fall in approval rating has resulted in Trump trying to make a trade deal with China and now firing the hawkish NSA. On the other hand this is the first time China seems to giving ground to the US on the trade war. If this is the case then the market assumption that a US-China trade deal could be a possibility in October looks more palatable (today). Till this landscape changes, risk sentiments should remain supported in the short term.

Since 1^st August, USDINR has moved higher by 4% as compared to a 2% on USDCNH. India 10Y yield at 6.6% shows that markets are now worried about local growth and therefore fiscal slippages. Tomorrow the India CPI print will be critical to read from a growth perspective. Most of the market participants now expect more than 25 bps rate cut in October RBI policy. Broad range for USDINR remains 71.35-72.25 and currently with improving risk sentiments the pair looks like a sell for a move to 71.50 levels by tomorrow. For the day, CMP 71.74, Range 71.80-71.55.

INR update: US economy's relative strength; No hard Brexit for now?

If contraction in US manufacturing ISM on Tuesday (at 49.1) showed that the US is also slowing down, yesterday’s services ISM at 56.4 debunked that interpretation for the economy in general. Therefore the manufacturing slowdown which looks like a global phenomena could be more to do with a slowdown in global trade while the robust services PMI indicates the relatively better shape US economy is in. This makes cutting rates for the FED even more difficult with the markets pricing in a near 100% chance for September FOMC while the economy giving signals of it not being as weak; preventing the FED from ushering in a rate cut cycle. The same doubt does not extend to the European economy (which undoubtedly is on a very weak footing) but the ECB is being careful so as to not signal a weakness in confidence and making recession a self fulfilling prophecy. The ECB meets on 12^th Sep next week where a rate cut is a significant possibility which does not seem priced into EURUSD as yet.

Price action and political developments seem to suggest that the risk of a hurried hard brexit on 31^st October has been averted. The short covering seems to be complete with GBPUSD rallying 4 biggies this week. A weekly close below 1.2287 should make the pair a short again, with a stop above 1.2360 for a move towards 1.21 levels again.

USDINR continues to follow USDCNH and EM basket. Risk sentiments across have improved in the last 2 days. USDINR has moved lower from 72.40 to 71.70 for most of this week and today being a Friday we might see a 38 to 50% retracement of this down move taking the pair back to 72.05. Broad range should be 71.35-72.25 while for the day range could be 72.05-71.65. CMP 71.72.

INR update: Hard brexit chances reduce; HK unrest eases; US-China to talk again!

Taking a step back the main reason for a global risk off recently was US-China trade tensions and not Hong Kong civil unrest. Therefore the reaction to yesterday’s positive news on Hong Kong unrest seems to be overdone. US-China would be talking at a ministerial levels in the first week of October but the fact remains that the two sides are far apart to come to a common ground swiftly and Trump does not get any votes for solving the issue one year before elections. On the other hand China-Iran strategic tie up will result in some reaction from the US which could again spoil risk sentiments. The view on EURUSD remains a sell on the back of last week’s bearish close (below 1.1050) with a stop above a weekly close of 1.1144 for a target of 1.06.

GBPUSD is caught between Brexit news swings. No one can reasonably predict where its headed politically but fundamentally against the dollar cable looks weaker only. A weekly close below 1.1975 will indicate hard brexit expectations crystallizing and a weekly close above 1.23 would indicate that market is expecting that a hard brexit has been avoided.

USDINR rally from August beginning was on the back of a depreciating CNH plus local slowdown concerns. Since 1^st August USDINR has moved higher by 4% as compared to CNH at 2.5% now. Given the local factors it is difficult to say that INR losses is in excess. The view remains of USDINR going higher towards 72.50+ in the next week or so. A daily close below 71.78 will likely bring in 71.50 levels, therefore long USDINR here should be stopped if we are going into a close below 71.78. CMP 71.83, Range for the day 71.78-72.05.

INR update: Trade war escalates further as locally growth slows

US-China trade war appears to be in a headlock but the match continues and so will the risk off sentiments across asset classes globally. US not agreeing to postpone the implementation of fresh tariffs is a sign of further escalation which is reflected in USDCNH today morning. EU and Japan both appear to be slowing down faster (retail sales data) while the US economy continues to show more resilience than expected. The risk off sentiment plus stronger US economy accompanied by hard brexit related anxiety should continue to boost the greenback against G7 and EMs.

Weekly closing in EURUSD last week below 1.1050 (at 1.0989) should take the pair towards 1.06 with support at 1.0860. Similarly a weekly close in GBPUSD below 1.1975 should indicate that hard brexit is a consensus expectation which should result in the pair getting sold for a 3-4% kind of movement.

USDINR continues to follow USDCNH. Local sentiments are negative considering the slowdown in GDP (Apr-June growth came in lower at 5% against expectations of 5.7%). Lower bond yields now reflect lack of growth rather than controlled inflation and might not result in bond inflows as risk of fiscal slippages increase gradually during the year. USDINR should now not go below 71.70 which is a good 50p lower from current levels making it difficult to initiate fresh longs here. 72.30 should support for the day with 72.50 as the next resistance. Range for the week 71.70-72.50++. CMP 71.23, Range for the day 72.00-72.30. I would be more comfortable buying USDINR near 71.85 levels with stop below 71.70 for a move to 72.50. 

INR update: Markets quiet but on alert for fresh jolts

US economic policy uncertainty index which measures policy uncertainty basis newspaper articles in the US rose to 400 levels in August 2019 which was the highest level seen since 2008 GFC. This uncertainty should continue to drive dollar and government bond strength. Overnight Mnuchin claimed that US doesn’t plan to intervene in dollar markets as yet, which is more driven by the Trump administration’s lack of ammunition as allowed by law rather than intent.

PBOC faces the challenge of striking a balance between arm twisting US by driving USDCNH higher  and at the same time ensuring that a weakening Yuan doesn’t result in flight of capital from China. USDCNH is higher at 7.1730 as compared to yesterday afternoon’s 7.16 levels. Indian equities are in the red along with 10Y bond yields which are at 6.57 which is the pre fiscal windfall levels. Till the time there is further and definitive development in US-China trade war, USDINR should trade in 71.35-72.25 range. Market positioning for USDINR is neutral to marginally long (this is basis anecdotal evidence only). For the day, CMP 71.96, Range 71.80-72.25.

INR update: Lack of trade war resolution visibility to keep risk sentiments subdued

Dow closing 1% lower yesterday plus deeper yield curve inversion indicates that risk sentiments remain subdued. US data continues to indicate that there is no significant slowdown fears in the US which would make the FED overtly dovish. Although the FED is on track to cut rates in September and might cut again in November but the overwhelming reason will be trade war uncertainty and not US economy. The risk aversion plus relatively stronger US economy therefore continue to put the greenback on a stronger ground. EURUSD (CMP 1.1085) can now only be sold in case of a daily close below 1.1050 as the medium term view remains of EURUSD heading lower towards 1.06.

Looking at India 10Y government bond yield at 6.56 and equities at -0.3% one can assume that the effect of the RBI transfer to government has been digested in asset prices now. Given the lack of visibility in US-China trade war and no immediate trigger which can bring a resolution, I would continue to expect deterioration in risk sentiments. USDINR should now trade in a range of 71.35 and 72.25 before it breaks higher. Market positioning for USDINR would be largely neutral now after the long unwinding seen yesterday. For the day the Range should be 71.35-71.70 and for medium term I would want to buy near 71.40 levels. CMP 71.62.

INR update: Trump eager to strike a deal; India's windfall fiscal gain; Risk sentiments improve

In a series of volatile comments yesterday what came out was that Trump is very eager to strike a deal with China now. On the other hand, instant Chinese denial of weekend talks indicate that China will continue to act tough till the time they get a trade deal that is favorable to them. Therefore although resolution to the trade war is still not in sight, but both US and China seem closer to a resolution than they seemed yesterday morning. Consequently we have seen Dow rising by 1% yesterday while Asian equities are in the green by around 0.5% today. USDCNH is following the  USDCNY fix continues to indicate the firm Chinese stance on the trade war. Risk sentiments remain off the table but things do not look as bad as they yesterday morning. Euro is picking the properties of JPY and EURUSD has moved lower to 1.11 as risk sentiments improved in the last 24 hours.

RBI has announced a dividend of Rs. 123,000 crore ($17bn) to be given to Indian government. Of this Rs 28k crore was given in Jan 2019 itself which was a part of last financial year for the government. Rs. 90k crore was already budgeted as dividend by the government. So the dividend positive surprise for the government is Rs. 5k crore only. The remaining Rs. 53k crore is a positive one time wind fall gain to government finances. Markets were expecting a number of around Rs. 40k crore to be given to the government over the next 3 years or so. Given this expectation vs outcome the development should support government bonds (yields are down 14bps since yesterday highs), equities and INR for the day at least.

Yesterday morning participants were limit long in USDINR and that confidence has reduced now. Given the development on the fiscal front we can see some further long unwinding in USDINR along with the mild improvement in risk sentiments. Medium term views are risky and dependent on tweets. For the day, CMP 71.80, Range 71.95-71.55.

INR update: Advantage China; Local stimulus not enough against a global tide

China seems to have the upper hand in the US-China trade war for now. Trump seems to have lost the plot and perhaps fears that he will be blamed in case the economy slows down or equities continue to fall. This might prevent him from raking up the trade war rhetoric against the EU for the time being but it is unlikely that he will back out now from the Chinese front. Therefore it seems rational to expect that trade related tensions between US and China should further worsen from here on.

Short EURUSD trade in case of a weekly close below 1.1050 has not been initiated, given that Euro has attracted some safe haven bids on account of intervention fears in USD. Similarly GBP has also failed to give a close below 1.1975 and consequently short GBPUSD trade has not been initiated.

Trump can only intervene in FX markets to the tune of $95 billion which is a small number in a daily $5trillion FX market. For further intervention the FED will have to align with Trump’s political objective which seems difficult. In order for Trump to increase the size of his intervention fund from $95 billion he would need congresses approval which also looks unlikely for now. So intervention in USD will only be verbal and mostly a failure. Although the ultimate settlement of the trade war could be in the form of a Plaza  kind of accord (similar to the one done in 1985) involving FED, PBOC and ECB but we currently seem far away from that eventuality so it is best ignored.

The stimulus package announced by the Indian government is unlikely to reverse the global trend against risk assets.

USDINR failed to give a closing last week above 71.80 but USDCNH trading above 7.16 today opens the door for 72.50 and higher gradually. This week we should see USDINR supported at 71.85 with a target of 72.50. Long trades should be exited in case USDNR trades below 71.64. This calendar year USDINR seems like headed significantly higher than 72.50 but in a world that changes because of 280 character tweets, having longer term views can be very risky. For the day, CMP 72.10, Range 71.95-72.25+.

INR update: Powell likely to be hawkish

Market is eagerly waiting for Powell’s keynote speech today at the Jackson Hole Symposium of central bankers. The market meanwhile has already effectively cut interest rates by 25 basis point for the 18^th September 2019 FOMC. The latest FED speakers tried their best to reduce the rate cut chances for September 2019 but failed. The FED would not want the market’s anxiety of trade war uncertainty to push it into a rate cut cycle earlier than what it anticipates. Therefore Powell would again talk up the economy and would want yields to increase post his speech. His main concern would be the 2 more rate cut chances at 100% and 80% for September and November respectively.

An uptick in yield should support the dollar and risk sentiments temporarily. The strange fact of the argument is that if risk sentiment deteriorates then also dollar gains as yields fall. On the other hand if yields increase due a less dovish FED, then also I would think USD would gain more so against the Euro and GBP. Therefore the only outcome for dollar losses would be a dovish Powell which looks unlikely given the low level of short term yields.

In the near term EURUSD weekly close below 1.1050 (CMP 1.1070) should result in EURUSD heading to 1.06 and lower. IN GBPUSD (CMP 1.2212) a weekly close below 1.1975 should take the pair 5 biggies lower. USDINR weekly close above 71.80 should bring in 72.50. Alternatively on Monday if USDCNH trades above 7.10 then USDINR could see 72.50 next week.

INR update: Less dovish Fed lends support to the greenback

The FOMC minutes showed that the FED is not as perturbed by the trade war as one would have thought in July. The committee members continue to see the economy as reasonably strong and do not want to go on a rate cut cycle mainly because they do not want to signal a slowdown fear to the economy. This should support the dollar as the ECB and BOJ do not have the backing of a similarly strong economy.

On the other hand Trump seems to be shifting focus away from China and onto the FED stating that the FEDs policies are the main problem for the US. The FED is highly unlikely to give in to the President’s pressure and therefore would continue to act as per incoming data. Meanwhile markets factor in 100% probability of a rate cut in September.

USDCNH has inched higher than 7.085 from yesterday’s 7.045 while equities in Asia are in the red. The government’s anticipated stimulus package has not been announced indicating the difficulty in managing fiscal responsibility and growth under the given circumstances. A weekly close above 71.80 should result in 72.50. Announcement of fiscal stimulus can take USDINR towars 71.35 (temporarily only). For the day, CMP 71.72, Range 71.60-71.85.  

INR update: An uncomfortable and temporary pause in trade war to help global dollar strength

Trump had postponed tariff increase on Chinese imports till December 15^th and on 19^th August he has given Huawei another 90 days to continue dealing with American entities. These two actions indicate that for CY2019 he wants the focus to shift away from China. The trade deal with China therefore should happen sometime in 2020 only.

Meanwhile as modern politicians operate Trump has to start a new battle to occupy the mind space of his electorate. That could come in the form of a trade rhetoric against the EU. This trade war possibility, plus increasing growth differential between the US and EU, along with no deal Brexit should make GBPUSD and EURUSD a good sell for the rest of the calendar year. A weekly close in EURUSD below 1.1050 can open the door for sub 1.06 levels. While a weekly close in GBPUSD below 1.1975 can open flood gates for a 5 biggie move lower. Meanwhile the unresolved US-China trade dispute should keep USDCNH grinding higher at the same time.

USDINR primarily follows global dollar strength/weakness above all the other factors. Given the above view of dollar strength plus CNH weakness the visible future for INR does not seem promising. The domestic slowdown should at some point of time start showing in heightened fiscal concerns . A weekly close above 71.80 on USDINR should bring 72.50 in range. CMP 71.57, range 71.45-71.80.

INR update: Trade war and Brexit should continue to weigh on risk sentiments

With USDCNH trading above 7.05 and CNY fixing getting weaker every day the US-China trade war related risk cannot be ignored. Meanwhile China has continued to make aggressive statements on retaliatory tariffs while Trump administration has said that the President is not ready to make a deal as yet. These developments along with hard Brexit related news would indicate that there might be more risk negative news in store which should keep a cap on INR gains.

Domestically the market is abuzz with chatter of a growth stimulating package which can bring temporary relief to equity markets and INR as well. India-Pakistan related geopolitical developments seem to be a tail risk only for now.

Price action suggests that nationalized banks have been buying USDINR aggressively. In the medium term 70.75 should continue to hold while 71.80 can be tested on the higher side. For the day, CMP 71.10, Range 70.95-71.25.

INR update: Trade talks to resume; Risk sentiments to remain supported

US delayed tariffs on select imports from China till Dec 15^th plus they agreed to resume talks in 2 weeks time. For Trump to retrace yesterday and give ground to China would not have been easy. Headlines said that China and US will talk again in 2 weeks over phone. Now for 2 weeks at least Trump would not touch the trade war topic and at the same time we could see China ensuring that Yuan moves towards or below the 7 handle to facilitate talks.

While there is no consistent trend to a politician’s mind, it seems that the next two weeks or slightly more can be good for risk sentiments. This time leading to the talks between US and China should see both parties maintaining market calm and positivity. Plus the risk off move that we have seen in the last 10 days would be reversed leading to a decent rally in risk assets over the next fortnight.

USDINR should overall follow USDCNH. A move towards 70.55 this week should not be a surprise now considering the Yuan move plus squaring of long positions.

What next for Trump on US-China trade war?

It has been a week that Yuan broke 7 levels without any concrete reaction from Trump administration (naming China currency manipulator was at most cosmetic). The options and their viability for the administration to reply to China or to divert public attention from the US-China trade war are as follows:

1.      Treasury intervention in FX markets: Trump administration can intervene in the FX markets through the $100 bn US government stabilization fund. The fund size is too small to make any impact in global currency markets. China has far more firepower (USD 3 trillion) and independence than US government and FED put together for FX intervention. For intervention of more than $100 bn Trump would need Congress’s approval which might be difficult to obtain given the increasing domestic reservation against Trump’s rhetoric on the trade war.

2.      FED cutting rates: The FED would want to maintain its independence and therefore it is unlikely to deviate from a rational monetary policy track based solely on Trump’s coaxing.

3.      Iran: Trump can take on Iran in the strait of Hormuz but to what end / political victory remains uncertain. Therefore this seems a no go option given military involvement and the empirical evidence of no action against North Korea.

4.      Increase trade rhetoric: Trump can increase its trade rhetoric on EU / slam additional tariff on China.

  

Of all the options above it seems that the lowest hanging fruit is to increase the trade dispute rhetoric against the EU or increase tariffs on Chinese goods. This would help Trump garner more support for a future dollar devaluation domestically. The increasing trade dispute concern would also reflect in the yield curve pushing the FED to cut and therefore keeping the dollar muted.

Therefore Trump administration would most likely step up the trade war roiling risk sentiments further. Driving USDCNH and USDINR higher. With this thought USDINR looks like a good buy at the current 70.75 levels for a move to 71.50 next week. The fact that intervention looks like a difficult option for Trump a sudden dollar slide looks like a smaller possibility in the near future.  

INR update: Trade war to drag on keeping risk sentiments muted

In spite of the last shot being played by the Trump administration in the trade war (labeling China as a currency manipulator), the ineffectiveness of the action ensures that the ball is still in Trump’s court. Trump seems to be scrambling for options pushing the FED to cut rates aggressively or intervene in the dollar market. Both these options seem to have been turned down by the US Fed and Cabinet respectively. Between the two options the Fed is less likely to give in while currency intervention might be more under Trump’s control.

Trump would want to raise the trade rhetoric with EU as well, before going in for currency devaluation/intervention. Therefore trade war should worsen before it gets better. End of August Jackson hole might be the catalyst for the FED to become more dovish than it was in the last FOMC, which in turn could result in a fall in dollar against the majors at least.

USDINR is largely tracking USDCNH plus nationalized banks are protecting a runway INR depreciation by selling dollars at the current levels. USDINR 1m NDF is 10p right showing that buying pressure would have taken USDINR well above 71 if it was not for nationalized bank selling. I would think that Kashmir related geo-political tensions are still to be factored in dollar rupee pricing. Overnight longs are recommended. USDINR should continue trending higher till the Jackson hole (22-24^th August) going towards 71.80 levels. CMP 70.83, Range for the day 70.65-70.95.

INR update: Yuan depreciates; Trade war turning into a currency war

China seems to have reacted with a change of policy taking USDCNH well beyond 7 (CMP 7.077). China till now had a very accommodative and non provocative approach in the trade war which seems to have changed. Now it is Trump’s turn to react or retract, the latter looks unlikely though. Given the situation we can expect a 5-10% depreciation in CNH from 6.95 levels taking the pair to 7.3-7.5 levels.

Yuan depreciation is also accompanied with Kashmir related uncertainties plus intermittent news of disturbance in Hong Kong. All these should heighten the risk off sentiments locally taking USDINR to higher levels (immediate target 70.80+).

The risk to this view (Long USDINR) is that CNH depreciation gives Trump the chance and argument to depreciate the dollar also. Therefore the trade war is now becoming a currency war.

At 68.75 (30^th July), I was expecting USDINR to head higher towards 69.50 in the first fortnight of August while maintaining a view of 67 by September end. This was based on the premise that China will continue to prevent 7 levels on USDCNH, which has been proved wrong. Therefore the view of 67 by September on USDINR has been proved incorrect.

INR update: Trump hits back with tariffs, CNH nears the red line of 7

Trump had tweeted that China is unlikely to close a deal before Nov 2020 elections. This along with yesterdays 10% tariff announcement on $300 bn of Chinese imports show that Trump is finding it difficult to get the terms he wants from the Chinese. Therefore it is likely that Trump would now start a new battle and most likely that would be a trade war with EU. If PBOC prevents USDCNH from crossing 6.98 as it has been till now then within a few days markets will start ignoring the US president again.

The negative dollar repercussion of the tariffs is that markets have started factoring a 96% chance of a second rate cut by FED in September. A 3^rd rate cut in December is now 77% likely. These chances were at 62% and 40% yesterday morning. If the elevated rate cut chances persist then dollar index will eventually break lower as markets will get more convinced that a rate cut cycle has started.

Therefore the arguments are evenly balanced on both sides of dollar weakness and strength. I believe China will again be able to control CNH at 6.98 and within a week the markets would start ignoring the trade war threats.

Although on 30^th July at 68.75 I had expected 69.30 to be seen and then after the FOMC I was of the view that 69.50 is likely, I would continue to  hold on to the view of 67 by September end. I would want to revisit this view after RBI policy next week by which time the heightened trade war tensions would also have alleviated.

USDINR CMP 69.28, Range 69.20-69.40 for the day. Overnight longs are suggested for the time being given NFP and heightened trade war tensions.

INR update: Less dovish FED to keep USD supported; INR to draw strength from easier global financial conditions

Historically dollar weakness starts 3-6 months after the first rate cut of the FED interest rate cycle. This is precisely for what happened yesterday, which is the FED calling this rate cut as mid cycle adjustment and not a change in trajectory of rates per say. If economic growth follows cycles then US growth does seem to have peaked in 2018 and therefore the next rate movement by the FED should again be a cut. But will the next move happen in 2019 or 2020 remains debatable for now. This debate should provide support to the dollar index for the next couple of months ensuring that it does not break its 200 WMA at 96 (CMP 98.8). The view that Trump will push for a weaker dollar remains but again the timing of the same remains uncertain.  

On the other hand the ECB is now much more dovish than the FED. The EU has bigger growth worries than the US plus UK is threatening to go for a hard Brexit. All these factors might bring in further dollar strength against Euro and GBP specially. GBP remains a sell on upticks as markets push UK to tone down its stance of a hard Brexit.

The fact that US has ended its balance sheet shrinking endeavor and delivered the first rate cut of the cycle (still a may be), is something that should ensure that structurally INR will not weaken against the dollar because of global factors (for now global growth and politics makes me assume that oil is not breaking higher).

Locally the inflow pipeline for INR still looks promising specially till September. RBI should cut on the 7^th August and apart from the rate cut the RBI could be more dovish than markets anticipates. To reiterate a rate cut in India is generally INR positive given debt inflows and rate cut been seen as growth supportive. Therefore I have a view of dollar strength (against G7) and view of inflows in USDINR which should keep USDINR in range making a breakout in either direction unlikely.

Given the inflows and INR supportive global financial conditions, I would persist with my view of 67 till September but with a possibility of seeing 69.50 in August. Today we have seen nationalized banks selling at 69.15. Looking at CNH and overall dollar strength we could see USDINR heading to 69.30 today. For the day CMP 68.08, Range 69-69.30.

INR update: 67 by September but possible uptick in August

Trump administration’s flip flop on dollar intervention indicates that they are itching to do something on that front. It could be a ploy to push FED to be more dovish than it would otherwise be. But these comments were followed by Trump’s comment that China might not settle the trade dispute till after November 2020 US elections. This indicates US’s growing frustration with China on the trade deal which can push the US to act unilaterally which is possible only in the case of currency intervention (verbal or otherwise). All in all there is no reasonable basis to predict this unless it actually happens but the chances of the same are not ignorable currently.

Weaker economic outlook, dovish ECB and no deal Brexit is pushing EURUSD lower. On the other hand markets could likely hammer GBPUSD to new lows to prevent the new Prime Minister from pushing through with a politically motivated no deal Brexit. The FOMC would be the most critical event this week followed by beginning of the month data and then potential sharp reactions from President Trump.

If there were a business confidence index for India, it would definitely be deep in the negative territory currently. This is getting reflected in the FPI outflows from the equity market in July (more than $2bn). This benign economic outlook plus low inflation should make RBI more dovish than market anticipates currently (market expects a 25bps rate cut) for the 7^th August RBI policy. Contrary to general economic theory INR appreciates  around RBI cuts, because of debt flows plus the fact that rate cuts are seen as growth supportive.

Seasonality is a global phenomena and dollar index generally strengthens in August. For INR August consequently is the 2^nd most negative month after May. On the other hand September is normally a very positive month for rupee.

Given the current dollar strength, seasonality and equity outflows, I would think a move up to 69.30 is possible in the next 2 weeks, which could be a good opportunity to create shorts. Therefore I am revising my near term outlook from an unlikely close above 68.95 to a possibility of 69.30 in the next 2 weeks. I would continue to hold the view that by September end we would see USDINR headed to 67 primarily driven by a weaker outlook on dollar (Trump’s threat and dovish FED) plus the strong inflow pipeline for USDINR.   

Regards

Saket Agarwalla

INR update: ECB today, then FOMC and US-China trade negotiation to drive markets

Looking at the Fed fund rate along with the dollar index since 1971, it seems that dollar starts falling well after the fed fund rate has peaked or 3-6 months after the first rate cut. The reason could be that the market is always unsure if the first rate cut is an insurance cut or the start of a new cycle of cuts, as is the case this time. Therefore the factor to watch out for now is the near term yield curve which would make it clear whether the FED is going to cut for a third time in 2019 itself. Rate cut chances for 31st July is 100% (therefore it is a foregone conclusion) with a 20% chance of a 50 bps cut. For September 2019 market is factoring in a 75% chance of a second rate cut. While a 3rd rate cut is only 60% probable by November 2019. In the near term if the chances of a 50bps rate cut for July increase or the 3rd rate cut for 2019 become 75%+ probable, the markets would be more convinced of a series of rate cuts coming our way which could result in a dollar sell off.

The complication here is that EURO is similarly placed with the ECB monetary policy due today. The chance of a 10bps rate cut today is 50% while the probability of another 10% rate cut by Dec2019 is only 60%. Therefore if the ECB makes rate cuts more likely and sustainable, then in spite of the FED also easing we could see EURUSD moving lower in the near term as expectations are set for rest of 2019.

USDINR has been held in a tight range like USDCNH. Nationalized banks continue to buy aggressively. Last week market chatter suggested a defense outflow while this week it is accompanied with equity outflows. At the same time bond issuance inflows are also in the pipeline and perhaps continuing in the background. The economic guidance accompanying corporate results, generally is the most accurate estimate of future growth. The guidance given by FMCG companies specially is not very encouraging which at some point of time would result in fiscal concerns matching the ongoing equity concerns.

USDINR has not broken 68.30 but at the same time fails to follow through on the upward momentum. My view of 67 on USDINR by September end remains given the inflow pipeline plus the view of dollar weakness. Next week US-China start face to face negotiations on the trade dispute which could result in CNH gains and the same could be mirrored on INR.

INR update: IMF says dollar overvalued; DM central banks seen easing

The IMF says that the US dollar is overvalued by 12% while Euro and Yuan are fairly valued. This should give fodder to Trump’s demands of a stronger Euro and Yuan against the dollar. US data has been better than expected in July but not significant enough (Bloomberg data surprise index is still at -0.3) to rule out a 3^rd rate cut in 2019 itself. The yield curve shows a 90% chance of ECB also cutting its rate in September 2019 by another 10bps to -0.5%. The FED in addition to two cuts by September 2019 is expected to tweak its asset purchase program also in order to support a slowing economy. Therefore basis economic data and central bank stance only the USD is unlikely to get support, unless the US data surprise index moves into positive territory that is diametrically against expected lines.

USDINR was bought aggressively by nationalized banks yesterday while rumors of a bond outflow was also doing the rounds. A daily close above 68.85 can drive the pair higher. USDCNH is back below 6.88 while Brent has also retraced below 65  again. Medium term view of 67 by September remains on the back of a softer dollar and large inflow pipeline. A daily close above 68.95 should call for stops on this view. CMP 68.80, Range 68.90-68.68.   

INR update: Dollar index likely to continue in range; Inflows should help INR break 68.30

Dollar index continues to move sideways, a weekly close below 96 should signal the start of a downtrend, but it could be some time (perhaps not before 24^th August Jackson hole) before that happens. Chinese retails sales and GDP data yesterday calmed fears of a higher than expected slowdown in China.

USDINR continues to trade in a tight range as debt inflows (both FPI and corporate borrowings) seem to be absorbed by nationalized banks. India 10y bonds have rallied by 35 bps to 6.36% now since the budget and there could be some more room left for the rally to continue. Indian equity markets continue to show resilience in spite of slowing growth. The trade balance of $15bn deficit was near expected lines. The medium term view remains of USDINR heading towards 67 by September end. A daily close above 68.95 should call for stops on this view. CMP 68.55, range for the day 68.68-68.40. We could see 68.30 breaking this week as news reports suggest a quite a few inflows in the near term.

INR update: FED is focussed on slowing growth

Powell confirmed the need for rate cuts and told us that the US growth slowdown (in the shadow of a trade war) is the FED’s focus and not US labor market specifically. July rate cut chances are at almost 100% now with September rate cut chances at 75%. The watch now is for the 3^rd rate cut where market is pricing in a chance of 58%.

Slowing US and global growth, softer FED and trade war are the three themes driving the market. The markets COULD at some point start selling the USD when trade war rhetoric rises, which would be a diametric change from the market reaction till now. This is still an expectation only, basis Trump’s last couple of comments directly demanding a weaker USD accusing China and EU of currency manipulation. Larger view remains of a softer USD.

Brent has moved higher this week from 64 to 67 but market is not following small moves in Brent now. Market assumes that Brent is going to stay in and around $65, till such time that this assumption is broken with a breakout Brent could be ignored for short term USDINR movements. Empirically it seems that not many participants are sitting short USDINR therefore I would think that short USDINR is still not a crowded trade. As expected for the last fortnight 68.30 target has been achieved. On the other hand nationalized banks seem to buying USDINR aggressively here, therefore this might not be a good level to create fresh shorts. A convincing break of 68.30 should lead to stop sells on the pair. Otherwise one could get around 68.45-50 to create fresh shorts. The larger view till September 2019 remains of 67. CMP 68.35, Range 68.50-68.25.

INR update: Powell could at most be less dovish; Dollar gains to be temporary

US services ISM of 55+ and manufacturing ISM of 51+, notwithstanding the US GDP is coming off (latest forecast of 1.3% growth for the current quarter). The turning economic cycle plus headwinds from the trade war will ensure that the FED continues its rate cut rhetoric. Currently market is unanimous in its expectation of a rate cut in July and September. The 3^rd rate cut by Dec 2019 is highly likely with a 45% chance in market pricing.

Today Powell testifies in front of the congress at 7-30PM IST where it is highly unlikely that he would take the July and September rate cuts off the table. At the same time he doesn’t gain much by increasing the chances for a third rate cut so much in advance. Therefore he might be less dovish resulting in a mild and temporary uptick in yields and therefore the dollar.

USDINR continues to be driven by nationalized banks action on both sides. Price action continues to show dominance of selling pressure on the pair. The larger view remains of USDINR heading to 67 by September end. For the week the range should be 68.85-68.30. For the day CMP 68.58, Range 68.68-68.45.  

INR update: USDINR headed to 67 by end September?

Since Friday morning we have two new pieces of meaningful information. The first being that the government intends to focus on fiscal discipline much more stringently than anticipated earlier (FY 20 fiscal deficit targeted at 3.3% against Thursday’s expectations of 3.4%). Second is that the government is going to raise around $10bn in the second half of the financial year through foreign currency bonds. First factor ensures that overall supply of India government bonds is going to be on the lesser side which should ensure high FPI inflows in the next 3 months into Indian Gsec markets considering the high real rates. Second factor will ensure that the domestic money markets will have $10bn of additional appetite to buy bonds plus dollar inflows of the said amount. Even if RBI sterilizes these dollar inflows then the central bank’s appetite to buy dollar from the market on a daily basis would reduce, in either case both these news are positive for bonds and INR.

Considering the above development plus the view of continued dollar weakness on account of a slowing US economy and  a dovish FED. This accompanied with the view that the trade war will ultimately result in the US pushing for a weaker greenback should ensure a strong INR for the next 3-6 months. The view on oil remains that it should remain capped at 70 with a potential to break lower given the slowing global economy.

Given the above broad factors I would think that by September end USDINR is headed to 66.85-67 levels. Meanwhile nationalized banks would continue to buy aggressively slowing the pace of INR gains. Given the high forwards, shorting USDINR looks like a very attractive trade plus not a crowded one as yet. My stop would be a daily close above 69.20 for a medium term trade. CMP 68.59, Range for the week 68.85-68.10, Range for the day 68.67-68.30. 

INR update: Trump's comments indicate that US wants a weaker Dollar

 President Trump’s latest comments (accusing EU and China of currency manipulation) seem to be laying ground for a forced currency revaluation for China and EU which is consistent with the theory, that the ultimate outcome of the trade war between US and China (and EU ultimately) would be an agreement to depreciate the USD against Yuan and Euro. After the 2013 EU fiscal crisis Euro was devalued by the ECB through interest rate cuts and blatant comments on the currency taking the single currency from 1.4 to 1.05 levels. Now with Trump threatening EU and China with tariffs the EU would not mind returning the favor to help the US president win the November 2020 reelections. The big unanswered question for this outlook is when would this happen, for which I would think that the ultimate resolution is still a few months to a year away. But the markets will start seeing through the eventuality sooner than later. Weakening US economic print and softer FED stance will also help the soft dollar outlook.

USDINR continues to trade in its new range of 68.80-69.20 with clearly selling pressure on the lower side outweighing bids. Nationalized banks continue to buy USDINR aggressively near 68.80 levels and for them to allow further appreciation we would need a fall in USD or oil prices. Medium term view continues to remain of 69.20 and 68.30. For the day CMP 68.86, Range 68.80-69.10.

INR update: Range prevails as nationalized banks continue to buy

Chinese, Indian and Korean data releases suggests that  emerging markets in Asia are struggling for growth but the impact on their respective currency is made difficult to comprehend with a slowing US economy and ongoing trade war. ECB and FED seem to be tilting more and more towards easier monetary policy. Overall given the dovish DM central banks and trade war I would continue to expect a weakening dollar in the medium term (3-6 months). This week US Services ISM, EZ retail sales and NFP would be critical for global currencies.

USDINR continues to see heavy intervention by nationalized banks and therefore in the short term 68.90-69.20 range should prevail unless crude oil or CNH moves substantially. I would continue to expect limited but further INR appreciation, a break of 68.80 should bring in 68.30. Today there seems to be an inflow which is getting absorbed by nationalized bank buying. For the day CMP 68.98, Range 69.10-68.85.    

INR update: Russia-Saudi agree on oil prodution, G20 meet leads CNH and INR gains

Saudi Arabia and Russia agreed on the sidelines of G20 before the OPEC+ meet today, to continue the production cuts in order to keep a lid on the abundant supplies. The timing of the announcement (i.e., along with G20) seems to suggest that the US is also in agreement to this and therefore the view that oil prices should not go above 70 continues to hold (given Trump’s open criticism for higher oil prices). US economic surprise index has dipped significantly in June taking with it the GDP forecast to 1.5% for June quarter. This developing reality of a slowing US should continue to get priced in US yields and therefore the dollar.

The US-China announcement was in line with market expectations although concession to Chinese firm Huawei are being dubbed as a significant positive development.   

Higher oil prices, nationalized bank’s buying of USDINR and 68.80 support should prevent further and immediate INR appreciation. As I had expected last Monday USDINR has trended lower breaking the 69.30-69.80 range but further appreciation would happen only because of CNH or growth positive developments locally. US-China trade dispute should drag on so I would not expect much from CNH in the near term. Locally one can expect a breather to the liquidity issues of NBFCs and with budget on this Friday there are possibilities of certain pro growth announcements as well. For the week we should see 69.20 before USIDNR breaks 68.80 convincingly, medium term target is 68.30. For the day, CMP 68.90, Range 69.05-68.75.

INR update: G20, Opec meet, budget to drive USDINR in the near term

Trump had announced the US-Mexico-Canada trade deal on October 1^st 2018 just before the November 2018 midterm elections. Therefore there might not be any political upside for Trump to resolve the China trade dispute in a hurry and consequently I would not expect any big positive outcomes from the G20 meet. The marginally positive developments could be a hold on tariff (already priced in) plus a confirmation that talks between US and China would begin again to finalized the agreement. The US-China trade deal would likely drag on for another 6-12 months and could eventually bring in the EU as well into the controversy, as without a big bang deal Trump would not be able to get the eyeballs he needs to win the November 2020 reelection.

Meanwhile the local markets for the next week should remain focused on the 5^th July budget which should likely bring in some growth supportive measures. The Opec and Opec+ meets on 1^st and 2^nd July should only result in a softer oil price as that’s what Mr. Trump wants and currently it seems that Saudi Arabia is completely in agreement with the Trump administration (after Iran sanctions). On the other hand anecdotal evidence suggests a few capital account inflows could be in pipeline locally which could keep USDINR well offered. Overall the range of 69.30-69.80 has shifted lower to 69.10-69.60 this week. I would expect this range also to break on the lower side as INR catches up with other asset classes / factors. CMP 69.29, range 69.40-69.10.    

INR update: US-China to resume talks, Jalan committee report postponed

Chinese media reports suggest that US and China agreed to resume high level talks ahead of Trump-Xi meet on Saturday on the sidelines of G20. Apart from this US seems to be focusing its attention on Iran now with fresh sanctions against its supreme leader. Not much news on economic front overnight as market continues to guess the outcome of the G20 meet over the weekend.

The Jalan Committee on RBI’s capital will now submit its report after budget next month only. Therefore USDINR is likely to remain in the broad range of 69.30-69.80 for some more time. A risk to the range view could be unexpected volatility after the G20 this weekend. Today we are witnessing aggressive buying by nationalized banks and commodity importers. For the day, CMP 69.33, Range 69.25-69.45.  

              

INR update: Rupee appreciation is overdue; Jalan committee report could be the trigger

In the last 1 month India has seen a confirmation that political certainty is going to stay for at least another 5 years. The dollar Index has lost 2% from 98 to 96 levels. All emerging marker currencies have appreciated around 3% in the same period while Rupee has been in the same range with a lagging appreciation of 1% compared from 70.50 levels. In the same period Oil has moved lower from 73 levels to 65 levels currently.  Nifty has moved higher from 11,200 to 11,700 levels. India bond yields have fallen with a dovish RBI, political certainty and dovish global central banks.

All the above factors should have resulted in another 1-2% rupee appreciation but the same has not happened because anecdotally RBI has been buying USDINR aggressively in the same period. The reason for the increased intervention could be to keep USDINR propped up ahead of the Jalan committee decision which can give the government a fiscal relief (either on the balance sheet or P&L) of around Rs. 3 lakh cr (estmates only). The Jalan committee  decision is due by latest July 1^st week. I would expect that once this fiscal bonus is delivered to the government Rupee should reflect all the above factors and register its overdue gains. I would expect that RBI’s capital transfer to the government will not have a negative impact on India country rating given that market has been informed of the same for almost 6 months now and the concerns around the same has been absorbed in price. For the next month I would expect USDINR to move lower with 70 as a good resistance and potential to appreciate to 68.30-68.80 levels.

Resignation of Mr. Viral Acharya and higher Brent prices could bring in some more bids than offers today. For the day 69.57, Range 69.76-69.40.   

INR update: Risk sentments improve with dovish Draghi and potential Xi-Trump meet

Dovish comments from the ECB pushed the Euro lower while news headlines that Xi and Trump might meet at the G20 raised the possibility of a solution to the trade dispute. Both these news have led to a temporary and moderate improvement in an otherwise muted risk environment in global markets. Today we have the FOMC where the FED has enough reasons to be dovish (slowing US growth and trade war concerns) but since its accommodative stance is priced in, the FED might want to check such expectations and might deliver a mild surprise, by being less dovish than the conditions warrant. This can lead to the dollar index rising towards 98 levels  by tomorrow (CMP 97.6).

USDINR has been kept in range by nationalized bank action on both sides. Rising chatter about the RBI using some of its capital to exhaust government debt (in some form or the other) should result in India bond yields going lower which could attract debt inflows. The pair should continue to trade in 69.30-69.90 range for some time unless USDCNH breaks out either side (most likely lower). For the day CMP 69.65, Range 69.50-69.75.

INR update: Range prevails as views remain muted

While last week’s retail sales in the US painted a rosy picture for the world’s largest economy, other data prints (like Empire state manufacturing survey yesterday and lower GDP growth expectations for the current quarter) show that the US economy is slowing down. For the FOMC decision tomorrow, markets see only a 20% chance of a rate cut while the expectations for July FOMC rate cut is at 80%. Therefore it seems rate action tomorrow is highly unlikely and the task at FED’s hand is to tinker with July rate cut expectations only. There is no advantage to the FED to increase the July rate cut chances beyond 80%, rather it would want to keep the door open with market expectations around 60% only and therefore we could see a marginally less dovish FOMC tomorrow. But overall given the slowing economy and recent FED speak July rate cut should remain the base case.

Currently USDINR prices are driven by RBI action plus CNH moves. RBI wants USDINR to stay range bound for now and therefore at 69.80 levels from a near term perspective USDINR should not be bought. There is no news to suggest that US-China trade dispute is coming to an end immediately but what is clear is that China has not weaponized its currency  and has shown more sanity than its adversary. I would continue to believe in the theory that the ultimate result of US-China trade dispute will be a strong CNH as a concession to the US. For the day, CMP 69.80, Range 69.90-69.60.

INR update: Is a weaker USD the most likely outcome of the trade war?

It is widely said that The US-China trade dispute is quite similar to the 1980s US-Japan trade dispute. In the 1980s the dispute resulted in the Plaza accord of September 1985 after which the dollar depreciated by ~50% against major world currencies.

Come to think of it, the US-China or a potential US-EU trade dispute cannot result in China or EU agreeing to export less or import more as these are controlled by market forces. On the other hand tariffs will hurt US consumption, world trade and therefore global growth. Therefore the only adjustable piece (or the lowest hanging fruit) in the hands of governments would be currency adjustments, apart from softer policies like better Chinese market access, security of IP rights and easier business ownership in China.

Basis which it would be fair to think that over the next year we can see the broad USD weakness led by CNH. Euro will have to register gains as well while INR would also follow suit along with the likes of JPY. Although whenever trade war concerns have heightened USD has registered gains, finally the reverse should happen, i.e., other countries would agree to appreciate their currencies against USD. This is not to suggest that a weaker USD would result in a lower CAD for the US, but at least it will be a good victory for Trump before next November elections. Trying to predict when this would happen is trying to guess what politicians would do next, but a weaker USD seems to be the only outcome that the US can feasibly get from the ongoing trade war.

The Indian rupee will track the global currencies and specially CNH and therefore should correspondingly register sharp appreciation as well during the next 1 year. A break of 98.5 on the dollar index on a monthly basis should conclude that the above view has failed.

On the other hand the fact that US (under Trump) has distanced itself from Iran and has allied with Saudi Arabia again, will ensure that oil prices stay under $70 levels (as desired by US leadership currently) till this political equation changes. This would mean one less concern for INR from a CAD perspective.

Meanwhile in the short term USDINR has been held in tight range of 69.20 and 69.50 by nationalized banks activity on both sides. News of bond inflows have resulted in some selling pressure for the pair today while bids from nationalized banks has kept further appreciation in check. Currently USDINR should trade in the empirical RBI defined range of 69.20-69.50. Negative news (domestic growth and credit concerns or trade war related) can at max take USDINR to 70.53 in the medium term.

INR update: Trade deadlock, Repercussions of Iran sanctions, Growth, credit & Political concerns domestically, to drive USDINR higher

The US China trade war intensified and now a solution looks some time away (perhaps till G20 meet in June). US sanctions on Iran would not be without a reaction either, the first signs of which are the attacks on Saudi oil tankers in Iranian controlled strait of Hormuz. This could be a coordinated move by China and Iran who share a common adversary.

Domestically the narrative seems to be more and more convincing that a growth slowdown is for real. On the other hand the 9 consecutive days of fall in Nifty seems to suggest that markets are not confident of continued political stability. What has not got enough headline is the deteriorating credit environment. All these factors might paint a good picture for inflation (something that has not been a problem since 2014) but it would certainly hurt credit and consequently growth.

INR will continue to follow CNH along with other EM currencies. Risk off might not bring Brent lower because of growing tensions in strait of Hormuz. NDF 1m is trading 13p right. Nats had sold USDINR yesterday and today morning also. But their conviction to protect INR in spite of a slide in CNH will be lower than last week. We have 4 days before 19^th May evening exit polls are released. The global recipe plus the emerging domestic slowdown story could take USDINR above 71 before Friday. I don’t see a reasonable basis to form expectations about next week.

INR update: US-China trade deal uncertainty continues, CNH and Chinese stocks give positive queues

To state the obvious, Trump’s picking on Chinese trade imbalance is first a political move rather than an economic policy step. Trump has portrayed an image of himself as a shrewd businessman president who gets the deal he wants. This plus his history of successful trade deals (Canada & Mexico)  or talks with NK indicate, that Trump would not want to lose this spat. He doesn’t win by increasing tariff and making goods more expensive. Trump wins by messaging that he has struck a deal and the Chinese have bent the knee. To this effect I would expect a positive outcome in the ongoing standoff with either the higher trade tariff getting postponed (although technically in effect now) or China agreeing to import additional x billion dollar of goods every year in y years. The idea would be to kick the can down the lane and portray victory domestically for Trump. This would make me believe that global risk sentiments next week should be much better than they have been in the last few days.

Nationalized banks have been selling USDINR aggressively to prevent a runaway move in USDINR. Dollar rupee for now is mirroring the moves in USDCNH, which is not moving higher today as it did yesterday. Shanghai stock markets are up by 1% indicating positive trade deal expectations perhaps. USDINR 1m NDF is trading 10p right indicating offshore buying pressure. EM currencies have been stable since yesterday afternoon or have registered mild appreciation. From a risk reward basis I would think USDINR should consolidate in 69.95-70.25 range before it starts moving lower again next week, subject to a risk positive outcome in US-China trade deal. CMP 69.95, Range 69.80-70.25.

INR update: Trade war risks abate, EU data holds, Inflows dominate price action in Rupee

With no retaliation from China, the duty imposed by Trump on Chinese import has become blunt in terms of market impact, as participants seem convinced that the move was more of a negotiating tactic rather than a policy step. The Chinese have shown tenacity and have refused to get provoked which has continued to help risk sentiments. EU data has shown mild resilience which has prevented the Euro from convincingly breaking 1.1150 levels, but I guess it is a matter of time before a down trend starts in EURUSD.  

USDINR 1m NDF is trading 5.5p right as compared to 6-7p yesterday morning. Equities in Asia are flat to mildly positive while EM currencies have also registered moderate gains since yesterday evening. Oil price seems to have been controlled by OPEC under the US demands post the Iran sanctions. Price action in USDINR everyday suggests some chunky inflows going through. Anecdotal evidence suggests a continued eagerness to complete capital account transactions before India election results. CMP 69.35, Range 69.35-69.20. Medium term it looks like USDINR would break towards 68.30 levels again in view of the capital account inflows and abating risks to Rupee (like oil and trade war).

INR update: Less dovish FED, slowing global manufacturing, Less volatile oil gives no clear direction for Rupee

The FED was clearly less dovish in ruling out any reason for a rate cut in 2019 which was negative for risk sentiments, as markets were expecting incremental dovish statements as a counter to slowing global growth. With US manufacturing ISM slowing down below expectations accompanied with less than consensus China PMIs, global manufacturing clearly seems to be decelerating. The next critical pieces of information would be EU inflation, NFP and services ISM tomorrow.

USDINR 1m NDF is trading 6p right which is less than the deviation on Tuesday. Oil continues to hover around 72 levels with the upward momentum waning after Trump’s tweets last weekend. USDINR seems to be driven by some inflow which drove it lower on Tuesday. Today’s price action suggests some selling as well. Given oil at 72 and EM currencies like USDKRW and USDCNH at elevated levels, I would have expected USDINR to move higher. CMP 69.56, Range 69.38-69.90.

INR update: Oil price volatility to drive USDINR in the near term

With US continuing to grow above consensus while EU and China continue to disappoint, the dollar should remain on a stronger footing. On the other hand weak inflation dynamics in the US GDP data should reinforce the belief that the FED is likely to remain patient. First week of the month will see bunched up data releases everyday from the EU and US, recent data suggests that the next few days might provide the perfect story for EURUSD to break below 1.10.

USDINR 1m NDF continues to trade 7p right (same as last week). CNH and KRW exude weakness on account of dollar strength and higher oil prices. Oil prices should continue to be volatile with supply concerns driving the prices higher while Trump’s demands could keep a lid on the price, keeping the market’s guessing. Main drivers for USDINR for the time being should be oil followed by other EM currencies. The pipeline for inflows seem to be dry for now while as we near election results on 23^rd May, we could see partial unwinding/de-risking of the equity portfolios. May historically has been a negative month for equities and INR except for the election years of 2009 and 2014, both of which provided a stable government. CMP 69.77, Range 69.72-69.95.

INR update: Oil Politics, Euro gaining momentum, US GDP to be watched

Today the US GDP data could push EURUSD below 1.10 mark given the recent build up in downward momentum. Most DM central banks are turning dovish and a stronger US GDP data can have its maximum impact on EURO. Saudi Arabia will likely cooperate with the US to ensure that oil supply concerns does not result in higher oil prices. The US Iran nuclear deal in 2015 was the major reason the two long term allies (US and Iran) developed their differences, which led Saudi to cooperate with Russia. Now with the US pulling out of the nuclear deal and reinstating sanction on Iran, there is nothing that Saudi would like more. Therefore Saudi is likely to pay heed to the US demand of lower oil prices with sufficient supply. Technically a break of 71.8 calls for 78 levels which can be due to Iran’s counter measures, but a runaway move looks unlikely in spite of reduced supply because of the international politics involved.

USDINR 1m NDF is trading 8p right while CNH has mildly appreciated since yesterday although KRW continues to exhibit weakness. This accompanied with dollar strength and higher oil prices does not bode well for INR. It seems that there are no major inflows in pipeline for USDINR in the next 2 weeks. 70.18/20 was a major resistance which has been broken yesterday and today again, which makes it a convincing break. USDINR could head towards 70.88 levels in the next fortnight with downside limited to 69.85. CMP 70.17, Range 70.10-70.35.

INR update: Delayed inflows, USD strength and higher Brent to weigh

German IFO data continued to paint a gloomier picture for the EU which along with BOC’s dovish outlook led to dollar strength. If at all anything then the BOJ also tilted towards an aggressive monetary easing stance although there were no surprises there. A weekly close on EURUSD below 1.1150 should call for 1.10 and lower. The recent downward momentum in EURUSD points to a higher possibility of the pair finally breaking out of the range this week. The first estimate of US GDP growth in March quarter is expected to be at 2.2% while the current quarters expectations are at 2.8%. This reflects the growing contrast between the US and other DMs which should continue to boost the USD.

USDINR 1m NDF is trading 7.5p right while EM currencies have depreciated overnight on the back of dollar strength and higher oil prices. The inflows in USDINR seems to have been largely done. The only expected inflow in the next week could be the ongoing rights issue of a telecom operator which also according to some chatter has been completed. Other inflows seem to have been completed or have been delayed due to various reasons. Given this backdrop of reduced inflow expectation, higher oil prices and a breakout in range for USDINR, the pair seems to be headed to 70.35-70.50 next week. CMP 70.02, range 69.95-70.25.

INR update: Relative US outperformance, RBI swap auction, while Rupee waits for clarity on flows

Surprise negative consumer confidence data from the EU accompanied by contrasting positive data from the US led EURUSD marginally lower and kept USD well bid. Strong equity performance on the back of better than expected earnings in the US also helped risk sentiment and consequently USD against the other G10 currencies. Today Germany’s IFO survey would be important for the Euro. A break of 1.1150 on the euro should bring in 1.10 levels fairly quickly now.

The RBI swap window saw a much higher than expected cut off at 6.40% while markets yesterday was trading at 6.22%. The higher number of bids perhaps indicates there is significant paying interest left in the market. RBI recognizes the liquidity shortage in the market because of which it announced the OMO of 25k crores yesterday to be conducted in May. Its second objective of bringing the FX implied cost lower has been less than partially achieved as 3 year Mifor trades at ~6.55% as compared to 6.82% before the first auction was announced. This liquidity shortage plus higher 3 year forwards should make RBI announce further swap auctions in the near future, which only would calm the 3 year forward levels.  

USDINR 1m NDF is trading 4p right while other EM currencies have mildly depreciated on the back of USD strength overnight. Oil rally has slowed down on the back of comments suggesting that Saudi Arabia would step up production to make up for the reduced supply. Overall oil supply fears are likely to linger on for some time with counter threats from Iran. Pipeline for USDINR inflows continues to look strong according to news reports. Today NCLT decision in a steel majors debt resolution would be critical to INR. Price action in the last 40 minutes shows some aggressive offers at higher levels. CMP 69.85, Range 69.95-69.60.

INR update: Iran sanctions to push Brent higher, RBI swap auction, while inflows continue

If the US could not do anything to North Korea it was because of NK’s nuclear arsenal. On the other hand Iran’s main deterrent is its control over the strait of Hormuz which enables it to protect its regime against a US-Saudi enabled topple. Now with the US sanctions back in effect Iran would threaten closing the strait of Hormuz which in turn will create supply fears for oil globally. Break of 72.80 in Brent, technically also signals 78 levels in the next 1-2 months.

News reports of sale of a packaging companies stake to a US PE again proves that decision makers want to close their stake sale / capital raising / borrowing plans before the 23^rd May election results. The story in USDINR remains the same, Brent is pointing towards a higher level for USDINR while inflows and intervention keep Rupee losses in check. Today we have the RBI swap auction because of which price action during the day could be a bit unpredictable. Looking at the selling in USDINR yesterday it seems that 69.87 should hold for the day, while further gains in Brent can take it beyond 70 levels towards 70.30. On the other hand Brent prices would ensure that USDINR would be unable to go below 69.30 levels in the next fortnight. CMP 69.59, Range 69.87-69.30.  

INR update: Brent surges, RBI swap window, Inflow pipeline to keep markets guessing

A Washington Post report suggested that the US will this week withdraw all sanction waivers from Iran with a target of zero oil exports from the country. This has driven Brent to 74 levels on account of reduced supply fears. US retail sales last week alleviated concerns of a sharp slowdown in growth there which helped the dollar register gains against the Euro. EURUSD has continued to trade below 200 WMA at 1.1340 and fresh set of week data from the monetary union or any signs of further pessimism from the ECB should lead to a large move lower in the pair.

USDINR has given a gap up opening at 69.75 on account of the jump in Brent prices. Dates of large telecom operators rights issue confirms that companies would want to get done with capital raising / stake sale/ large borrowing plans before the May 23^rd election results. Corporate India seems to be lining up to raise dollar funds.

Tomorrow we have the RBI swap window where the Mifor has already got paid and is trading at 6.1% currently as compared to last cut off of 5.95%. This could mean that relatively lesser number of players might be interested in paying Mifor for 3 years which could result in dollar selling from participants who have gathered dollar funds ahead of the swap auction. Tomorrow NCLT will pass a critical order on Arcelor Mittal’s takeover of Essar Steel, this could again result in expectations of large inflow or disappointment depending on the judgment. Overall given the inflow pipeline a runaway move in USDINR looks unlikely unless Brent continues to run higher. Last week after the break of 69.60, the next expected level was 69.85 which has been seen today morning. In the last 30 minutes we suppose that nationalized banks have sold USDINR above 69.80 levels. Given this backdrop I would expect USDINR to remain capped at 70 levels for the next 15 days. CMP 69.85, Range 69.95-69.60.

INR update: Improving Chinese data plus US China trade deal hopes drive sentiments

Chinese data (GDP, IIP) released yesterday added to the optimism around the dragon economy after its surprise export growth last week. US Beige Book reading does not change the luke warm outlook on the US economy although the real information would be the retail sales print later during the day. US retail sales would set the risk sentiments either way for the markets.

USDINR 1m NDF is trading 5p right while CNH has appreciated on the back of hopes that US-China trade deal could be sealed by as early as next month. The inflow expectations are digested while the real price action is awaited. The break of 69.50 on Tuesday is convincing and this should now take the pair towards 69.85 levels, the risk to this view is one of the talked about inflows hitting the markets. CMP 69.45, Range 69.37-69.69.

INR update: Positives priced into Rupee and Nifty, India & China export growth surprises

FED’s Evans made dovish comments stating that inflation should be allowed to remain above 2% for certain periods to counter the impact of stubbornly lower inflation. With dollar index stuck in a range, most of the other G10 pairs have also followed suit. German Zew survey would be watched today although EURUSD has been pretty resilient to any sort of information of late.

Oil is trading around 71 levels while EM currencies have mildly lost since yesterday evening. USDINR 1m NDF is trading 5p right while price action in the last 1 hour has been confusing. Fix is trading positive today. The inflow pipeline is priced in USDINR as the market now awaits actual selling as and when it happens. Nifty trades at all time high indicating the optimism that markets have priced in for the elections. Export in March 2019 were the best ever, this accompanied with China positive export surprise indicates that global demand is not as negative as earlier envisaged. Half an hour of trading above 69.60 today would confirm a breakout of my expected range for April of 69.50-68.50, this could then take the pair towards 69.90, on the other hand failure to break would take the pair sharply lower towards 69.25/30 levels again. CMP 69.55, Range 69.60-69.30.

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.