18th March 2019

INR likely to open around 69

Rupee continues its strength as domestic and global factors continue to be benign. Adding to positivity, the trade deficit for February came in at 9.5 billion USD, as against the usual trend of 14-15 billion. Oil imports fell by 2.5 billion month-on-month, but the non-oil component also fell, thus making this one of the lowest trade deficit prints in the past two years. This number could help further Rupee appreciation.

The Dollar is mildly weak, with EUR trading around 1.1320 and JPY at 111.50. GBP is holding well, around 1.33 levels, as the UK parliament voted to ask for an extension of the March 29th Brexit deadline. On the macro-front, this week has the FOMC decision due on Wednesday night India time. While the expectation is that the dovishness would continue, the market would expect a re-iteration of the same stance and hope to gauge the latest Fed thinking from the Powell press conference.

INR is clearly in a zone where all factors are pointing to a continued appreciation. 68.85 is a very critical level, as it is the previous all-time high and a convincing breach can potentially open up a large move. Hopes of flows and seemingly positive election opinion polls are helping the Rupee in the short term. For now, it is advantage INR.

19th March 2019

INR likely to open around 68.60

The Rupee continues its appreciation trend as flows continue to pick up. March has seen almost INR 27000 crore (around 4 billion) flows into debt and equity segments.  Globally, the Dollar is mildly weak ahead of Fed meeting. EUR is trading at 1.1340 and JPY is at 111.30. FOMC statement and press conference are due tomorrow.

While USDINR has broken through some crucial supports, the move from here is unclear as most of the positive news is now built into the level. Surging flows are indicating a clear expectation of a Modi win. In our view, the next leg of the move could be a bit volatile and one cannot discount a possibility of a rebound in USDINR as elections approach. While opinion polls suggest 270+ seats for NDA, it is not yet a slam-dunk for BJP going by the recent state elections. That uncertainty can creep into INR closer to elections.

20th March 2019

INR likely to open around 69

USDINR saw a large reversal yesterday and gained 60 paise after being down to 68.35 level. While a reversal was always on the cards, given the large and quick move from 71.50 to 68.35, the ferocity of the recovery was a bit surprising. INR had tried three times to break the all-time high zone –  band of 68.30 to 69.20 during its previous moves and hence this is now a very large support band for USDINR.

Today’s FOMC statement is important in that the market is expecting a completely dovish Fed and any indication of hawkishness would be seen very negatively. Especially important is the dot plot, which shows the FOMC members’ rate projections over 2019 and 2020. If the dot plot continues to indicate a 2 rate hike scenario in 2019, the market would take it that Fed dovishness might be short-lived. Given that the market positioning is very tilted, Powell has to make all the right moves to ensure they project enough caution. The Dollar is mildly weak, with EUR trading at 1.1350 and USDJPY at 111.60.

It would be interesting to watch whether INR would again try and regain some strength today and this immediate behavior could determine the short term outlook.

22nd March 2019

INR likely to open around 68.70

The FOMC decision on Wednesday turned out to be more dovish than what market expected. The Fed completely caved in to market’s demands and surprised the most dovish of estimates in that they have announced that the balance sheet reduction would be tapered off and would stop by September 2019. The ‘dot plots’, which show the FOMC member expectations of the future fed funds rate, were slashed lower. In January, the ‘dot plot’ showed an expectation of 2 hikes while the current plot shows no hike in 2019. It is surprising that in a 2 month period, they can swing completely to the dovish side and makes one wonder if the Fed is expecting a significant slowdown in the economy, not currently seen by the market. But it is more likely in our view that the Fed is looking at the market level as one of the key guiding variables in their policy and don’t want a sharp crack in markets at any cost. At this rate, if there is a slowdown in the economy and a crash in markets, we can expect another round of QE soon.

Another aspect of the FOMC decision is the announcement that they would move out of the MBS securities in their balance sheet into treasuries, by reinvesting the MBS maturity proceeds into treasuries. Hence the US treasury demand from the Fed would increase, helping finance some of the US fiscal deficit and keeping US yields low.

The Dollar crashed against most currencies on Wednesday but regained some ground yesterday. EUR is trading at 1.1370 and USDJPY is at 110.80. GBP crashed below 1.32 on news that May’s future as the PM hangs in the balance as most party members feel that the Brexit negotiations have been an embarrassment. Brent continues to hover around 67.75 level, as oil is torn between supply reduction on one hand and the lack of positive news on US-China talks on the other hand.

On the domestic front, the election cycle is well underway as BJP announced their candidate list. April can see some INR volatility, as election season picks up steam. Currently, there are expectations of continued flows (including the Arcelor flow). There is some concern in the market around the RBI’s FX swap auction as a tool to manage INR liquidity, that continued use of this tool has the potential to suck out USD liquidity if flows don’t materialise as expected. In all, while dovish Fed can provide good support to INR, domestic factors can play spoilsport.

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