Wednesday, September 19, 2018 New York : London: India: Tokyo:

Short Term Rupee Outlook



Daily Report :- 08-FEB-2018(Morning)

Buoyed by the significant rise in the US 10-year T-bond yield and US dollar index above the 90.00 mark,the rupee opened the day bit weaker at 64.37. After six consecutive days of fall in the BSE sensex, today the sensex has gained by over 400 points at this point of time which enabled the rupee to recover and now trading in the vicinity of 64.20. A range trading between 64.00 to 64.60 is our forecast till the end of this month. For companies who are keen to enter into option transactions, by taking a view that rupee exchange rate may only depreciate moderately from the current level in the next 6 months period, we recommend 64.40-50 at the entry level(ATMS) for undertaking the option transactions against the import payables of the company. In the next 6 months period, the forward dollar premium translates into 148 paise/USD in absolute terms and a weakness in the rupee exchange rate beyond 66.00 or thereabout is not expected in the specified timeframe. As the market is expecting a 25 bps rate hike in mid-March, the entry level for the suggested option structures may be undertaken in small tranches in relation to the possible weakness in the rupee exchange rate before the FOMC meeting. The exporters can adopt a similar strategy for hedging their receivables over the next 3 to 4 months period by booking of forward sale contracts to enhance their export realization.

The US dollar index crossed the psychological 90 mark on higher US Treasury yields and calmer equity markets with Senate deal to fund the Government underpinning the bullish statement. As a result of dollar’s strength, euro fell into a sideways drift to currently trade at 1.2260. In a stronger dollar environment, commodities were weak.

As US hits record level of output, oil fell to 1-1/2month low. Brent is slightly down at 65.40 after falling more than 3% overnight.


Daily Report :- 07-FEB-2018(Evening)

The trend in the rupee exchange rate is the function of local stock market performance, dollar’s recovery against the majors and the direction of US T-bond yields prior to the mid-March US FOMC meeting. The upside for the rupee is limited to 63.80 supported by Central Bank intervention and its downside capped at 64.80 initially and 65.30 thereafter before the end of the current financial year.

Keeping the above suggested trend, exporters are well advised to sell their medium-term receivables in tranches targeting spot levels between 64.50 to 65.00. The prevailing forward dollar premium in short-term and medium-term maturities will help the exporters to enhance their export realization. Any strength in the rupee exchange rate in the interim period to 63.80-90 should be utilized by the importers to hedge their month-wise payables upto the next 3-month maturities to protect the higher input cost for the entities concerned.

The benchmark BSE sensex ended the day registering a fall of 113 points. The local stock market registered losses of 1882 points for the six straight trading sessions till today, weighed down by a combination of domestic and global factors.

The dollar steadied against a basket of currencies on Wednesday as calm returned to global financial markets with investors partially reversing their rush to safe haven assets and moving back into stocks. The dollar index is currently trading at 89.70 and the benchmark 10-year T-bond yield at 2.76%. Any significant recovery in the US dollar index shall garner the potential to test the downside on the rupee exchange to 64.50 before the end of this week.


Daily Report :- 07-FEB-2018(Morning)

Rupee opened the day at 64.11 and touched an intra-day high of 64.0350 in the early session of trading today as the global stock indices moderately recovered yesterday after four days of mayhem in the global markets. The rupee is currently trading at 64.17 and its bearish sentiment shall continue as the long-term US T-bond yields are rising in the background of the market expecting a 25 bps rate hike by Fed in their mid-March FOMC meeting. The recovery in the US dollar index also influenced a moderate downmove in the rupee exchange rate. Till the end of this month, we expect the rupee to trade in the range between 64.00 to 64.50 with the weaker bias. Though the global stock market meltdown has seen a pause yesterday, the market is not certain about its performance in the near-term period. The local stocks are tracking the trend in the global markets and the direction of the rupee in the above stated range shall be guided by the local stock market performance.

The RBI policy expected to be announced today at 2:00 pm may be moderately hawkish based on inflation expectations in the near future, while a rate cut can be completely ruled out. We do not expect any hike in the rates as well in the current meeting. The comfortable position of forex reserves with the outstanding forward purchase position of about USD 29 billion with Banks will be more than sufficient to curb any sharp weakness in the rupee exchange rate due to any adverse developments in the global markets at a future period.

 The dollar moved higher against the currency basket on Tuesday as US stock markets rebounded after a sharply lower open. US stock markets bounced higher, following two days of heavy losses amid a broad based sell-off in global equities. The dollar index touched a 2-week high of 89.92 overnight and now trading at 89.45.

Though the 10-year sovereign bond yields are trading in the vicinity of 7.60%, the debt inflows during this month was robust at over USD 750 million. The bond-buying by foreign investors has moderated a sharp rise in the bond yields.


Daily Report :- 06-FEB-2018(Evening)

After remaining broadly steady from the beginning of the current financial year, the rupee started to move gradually lower on the back of internal and external factors which culminated into a downmove in the exchange rate. Rupee started to weaken from 1-2-2018 as the Budget imposed tax on LTCG and hinted about the fiscal slippage. Fiscal slippage is considered to be a vital factor for the international rating agencies to defer any rating upgrade of the country which is negative for the home currency. The forthcoming financial year can be expected to be more volatile as compared with the quiet conditions prevailed in the market in the previous two years. The Fed rate hike fears now expected to have four rate hikes in 2018 increases the chance of a rate hike in mid-March US FOMC meeting. If the rate hike in March 2018 materializes, rupee exchange rate can be expected to test the resistance at 65.10-30 or better.

 In the last four days, the BSE sensex continuously fell and the aggregate fall was 1769 points(4.92% loss). The Finance Ministry officials are indicating their view that a slump in local market reflects global market sell-off. The Finance Secretary maintained the view the local markets are mimicking global weakness but the Government will look into the matter and decide what to do. India VIX increased further raising 32.11% to 21.2075 indicating too much volatility going ahead.

The dollar rose against a basket of currencies as the US bond market sell-off leveled off after the 10-year US T-bond yield hit a 4-year peak of 2.89% on Friday on worries that the Federal Reserve might raise interest rates faster to counter signs of wage pressures.

As the rupee exchange rate is showing signs of its weakness over a shorter timeframe, the paying interest emerged in the swap market to take the forward dollar premia sharply higher across the maturities. The 3-month forward dollar premium was quoted at 5.01% per annum. The forward market differential between the 3-month and 12-month maturities has widened to about 52 bps as of now, demonstrating a sharp inversion at the far-end of the forward curve.


Daily Report :- 06-FEB-2018(Morning)

Rupee opened the day at 64.34 a lot weaker from its previous day’s close at 64.07, triggered by a sharp fall in global equities. In the early session of trading today, the benchmark BSE sensex fell by 1250 points which made the rupee to move lower and tested the 64.40 level so far in the day. Following the crash in the Dow Jones index by 1500 points, all the asian stocks are trading in the red at this point of time. The recovery in the dollar index to 89.55 today also influenced the strong downmove in the rupee exchange rate. If the global equities continue to fall in the next 1 or 2 days, we can see continuation of sharp fall in the BSE sensex which could usurp downmove in the rupee exchange rate to test the next resistance at 64.80 before the end of this month. Our forecast that the rupee exchange rate will trade between 64.00 to 65.00 till the end if this month is still valid. In the event, the Federal Reserve Bank hike their key rates by 25 bps in the mid-March FOMC meeting, we can see a sharp pull down in the rupee to 65.50 level before any recovery can be seen on strong intervention  from RBI.

Investors have started pulling out of emerging markets with the biggest slump in portfolio flows since the 2016 US Presidential election. Among the asian countries, South Korea, Indonesia and Thailand have seen the biggest outflows and most of those withdrawals have been concentrated in equities while bonds have been hit less hard. All equities fell 2 to 6% today after US equities fell overnight.

The dollar rose against a basket of major currencies as investors cheered bullish economic data pointing out to underline strength in the US economy. The forex markets worldwide was once again dominated by the risk of higher inflation that sent equities in free fall and bond yields higher. The dollar is well supported by ISM non-manufacturing data for January which showed an uptick to 59.9 beating expectations of 56.5. Also supporting the dollar was a slump in the pound.


Daily Report :- 05-FEB-2018(Evening)

From the beginning of January 2018 till date, rupee had depreciated by about 0.25%. The fiscal slippage and tax on LTCG announced in the Budget shall possibly lead to a rupee depreciation of 2% or above(in absolute terms) in the current quarter. The expected range trading between 64.00 to 65.00 upto the end of March 2018 can be effectively utilized by the exporters and importers to ensure add-on value to the exposures. The huge portfolio inflows of USD 30.7 billion received in CY 2017 may not get repeated in CY 2018 and the expected lower quantum of capital inflows can take the rupee to test a low of 65.50 plus before the end of December 2018. The short-term USD interest rates and long-term T-bond yields are rapidly rising to sufficiently indicate a minimum of three rate hikes in 2018. If the Fed hikes the rate by 25 bps in mid-March 2018 the dollar index can retreat to the extent of over 2% or more from the current level of89.00. In the event of a rise in US dollar against major currencies and the rise in long-term US T-bond yields in the aftermath of the possible March rate hike, the domestic currency’s weakness to the 65.00 level can be much quicker than one can expect.

The US payrolls report showed wages growing at their fastest pace in more than 8-1/2 years and fuelling inflation expectations.  US January non-farm payrolls were at 220k versus 180k expected. The unemployment rate held steady at 4.1% as expected. Faster economic growth in US boosted by global growth and Trump tax cuts made 3 to 4 rate hikes likely in 2018. Markets believe that inflation was finally headed in the right direction again and that the rise in yields may be a delayed reaction. The 10-year US T-bond yield touched a 4-year high of 2.89% today. The US dollar index was trading higher at 89.02 after testing the 3-year low of 88.25 on 25-1-2018.

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