25th March 2019

INR likely to open around 69.10

The Dollar is stronger against most risk currencies such as EUR and AUD but is weak against JPY as risk aversion hit US markets on Friday. Friday saw a yield curve inversion where the 10y Treasury yield fell below the 3m rate, the first time since 2007. Historically, an yield curve inversion has predicted a high chance of a recession within the next 1-1.5 years. With concerns of global growth also high, Fed’s cautious stance has shifted the focus to slowing growth firmly. EUR is trading at 1.1290 and JPY is at 109.80. Brent crashed in consonance with the risk aversion theme, trading now at 66.15.

The US special counsel’s investigation on the Trump-Russia collusion concluded with no evidence of any collusion. This is quite positive for Trump, but markets took little note of it as recession concerns dominated. There has been no significant news on the China talks, and the market continues to hope for a deal. It seems that the FOMC caution has started to contribute to a narrative of a possible US recession and it is up to the Fed speakers to provide some relief with their remarks. Traders have already started pricing in rate cuts in the US next year and if curve inversion deepens, the Fed might have to oblige the market or risk a shock.

On the domestic front, the RBI FX swap auction for 5 billion USD is slated for tomorrow. MIFOR and forward premia have crashed significantly post this announcement aided by further remarks from the RBI governor that the market has taken to this new liquidity management tool well. This is a good time to lock in the long term hedge cost of ECB hedges. For INR, it is now a toss-up between easy money Fed policy and the risk aversion due to recession considerations. For now, both are well balanced and domestic factors (elections) could dominate.

26th March 2019

INR likely to open around 69.00

EURUSD is trading back at 1.1320 and USDJPY is above 110.00. Yield curve inversion continues to dominate the US markets, which ended fairly flat after a lot of volatility. The end of Mueller probe into Trump does not seem to have much impact on markets.

The Fed seems to have unwittingly set off recession fears with their ultra-dovish stance. The market is now pricing in around 60% probability of a rate cut by the September meeting. If the Fed tries to walk back the dovish tone and keep rates unchanged, markets would throw another tantrum, and it seems the September period is shaping up to be another volatile phase for global markets.

INR continues to meander along, waiting for the RBI swap auction today. Banks would bid for the forward premium payable to the RBI and it seems that they would bid at lower than the current market. If so, one can expect a bit more downside to MIFOR. If MIFOR and forward premium continue to stay low in expectation of further auctions, there is a possibility of arbitrage flows into India as INR investments on a fully hedged basis now can give around 1% better returns than a comparable USD investment.  It would be interesting to watch how INR behaves in the next few days in light of this auction and the fiscal year-end.

27th March 2019

INR likely to open around 69.05

The Dollar regained some strength, with EUR trading at 1.1265 and USDJPY at 110.55. While US markets have stabilised a bit, the yield curve continues to be inverted. Whenever there is an interplay of yields and equities, sudden technical buying/selling from correlation and momentum algorithms can potentially cause a bit of volatility.

On the domestic front, the RBI FX swap auction went smoothly, with 16 billion worth of bids. The cut-off rate was 3.76% annualised, around 15 bp lower than the market. Given the success of the auction, there are expectations that RBI could continue to use this tool for managing liquidity and hence, forward premia are likely to be subdued. INR seems to have stabilised in a new zone and it is now a balance between risk aversion due to recession fears and the Fed dovishness, with the domestic elections being the swing element.

28th March 2019

INR likely to open around 69.10

The Dollar continues to hold on despite falling US bond yields, but US equity markets are jittery around the recession possibility. EUR is trading at 1.1250 and JPY is stronger at 110.15, as risk aversion continues to hold sway. Some emerging market currencies such as Turkish Lira and Brazilian Real have been seeing some depreciation over the past few days, but INR is strong on hopes of a favourable flow situation. Continued crash in the US yield curve could expose markets to sharp swings due to algorithmic strategies.

The positives and negatives for INR seem to be in balance in the short term, but medium term (5-6 months) risks are increasing for the global markets and the Rupee. The US Fed has ensured a complete dovish shift in market expectations, and if they don’t follow suit with a rate cut by September, there could be a bout of risk aversion, hurting INR. For now, INR is trading in a tight zone and a semblance of direction can be evident probably in the next financial year.

29th March 2019

INR likely to open around 69.10/20

Yesterday saw some large unusual swings in the Rupee market. While Rupee spot was range bound till the last 30 minutes, it seems a large customer buy trade in the year-end illiquid market led to a surge in USDINR towards 69.40 level at the close. Also, the tom/spot premium surged to almost 25 paise yesterday due to a host of factors (i.e. buying value tom was cheaper by 25 paise than buying spot). Year-end INR liquidity tends to be tight, reflecting in higher cash/tom/spot premium. Further, the RBI FX swap auction had attracted a total bid amount of 16 billion, meaning that there could have been excess Dollars floating around. Banks wanted to get out of Dollar funding positions in the year-end, by converting into INR funds through FX swaps. Finally, there were large importer positions for the year end which got rolled over into April, thus negating demand for USD funding.

The Dollar is strong globally as US yields settled a bit higher. EUR is trading at 1.1230, USDJPY at 110.80 and GBP is down to 1.3060 level as UK parliament fails to agree on the way forward. There were some positive comments from US officials on China talks, and that led to an Oil move towards 67.50 on Brent.

INR could be volatile today also due to illiquidity as no bank generally is keen to take any trading position during this time. The first few days of April can give a hint on the possible direction of the Rupee as elections approach.