FX Outlook and Hedge Strategies: 15th March 2023

The current state of the markets is very uncertain.

At present, we believe that the effects of the SVB bank fallout will stabilize and that the Federal Reserve will maintain a focus on inflation, albeit with much less hawkishness than previously anticipated. While it is still some time before we might expect more busts and the onset of a recession, it is possible that the USD/INR exchange rate will remain stable in the short term and move towards the 84-85-86 range only in the medium term.

Even in the event of a so called positive scenario where the Fed cuts rates and the dollar weakens, such a step can only be taken after a major upheaval that justifies a change in stance. The chaos resulting from such an upheaval would have a significant impact on emerging market currencies including INR, potentially causing a significant dent taking it towards 85. So either way, whether Fed hikes or cuts, we see USDINR moving towards 84.00-85.00.

Given the current uncertain state of the markets, it is crucial to closely monitor the situation and be prepared to quickly adjust one’s stance as necessary. We are keeping a close watch on the level of 82.50, looking for any signs of breach and sustained movement. We are also closely monitoring Credit Suisse and other weak financial institutions in the US and Europe.

Therefore, we recommend a medium to high hedge ratio for your imports, and options may be considered if permitted by your company policy. As for exports, we suggest an overall low to medium hedge ratio, but a high hedge ratio for short-term exports. In regards to the EUR, we recommend hedging exports at 88.00, 89.00, and 90.00 in small quantities, while also keeping a close eye on any policy convergence or divergence with the USD. The real estate fallout happening across Europe, as well as the SVB fallout, will likely reduce the hawkishness of some of the ECB members.