Friday, December 15, 2017 New York : London: India: Tokyo:

Short Term Rupee Outlook

 

SHORT TERM RUPEE OUTLOOK

Daily Report :- 16-Nov-2017(Evening)

Due to sharp rise of 346 points in the BSE sensex, the rupee touched an intra-day high of 65.1350 and it rebounded to end the day a tad weaker at 65.33. The movement in the rupee exchange rate today repeated the exchange rate movements seen yesterday. We feel the trading range between 65.10 to 66.00 shall continue till the end of this month with a neutral bias.

G-sec yields opened lower, in line with lower global rates as well as weaker oil prices following the bearish IEA report. Though volumes were decent, markets remained with a small range for much of the day. The 10-year benchmark yield was quoted at 7.05% at the end of the day. Volumes were good on the day and showed selling by foreign Banks while mutual funds bought.

Liquidity conditions were steady. CP/CD yields were mostly in the same band, while corporate bond yields were flat despite higher G-sec yields.

The dollar index rose on the back of good CPI data. US October CPI inflation came in 2% Y-O-Y as expected with core CPI inflation at 1.8%. Markets have priced in a December rate hike, but weak pricing of 2018 hikes continues to represent upside risks for funding costs as well as the US dollar. US stocks and junk bonds which had rallied on hopes of tax cuts and prospects of a solid economic growth extended their losses further dampening dollar sentiment. Any boost to the currency from positive US consumer inflation and retail sales data was not strong enough to ease concerns on the currency.

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Daily Report :- 16-Nov-2017(Morning)

Rupee opened the day at 65.28 and the dollar demand from importers and corporates took the rupee lower to trade in the vicinity of 65.35 at this point of time. The FPI equity inflows remained robust at about USD 2 billion and the dollar selling by foreign Banks in the afternoon session yesterday took the rupee higher to test 65.1550. This was only a temporary move and the rupee is expected to maintain its range trading between 65.30 to 66.00 with a neutral bias. Any exchange rate movement above or near the above suggested range should be utilized by the importers and exporters to hedge their exposures appropriately. The FPI debt flows remained negative at over USD 200 million and one can possibly expect the debt outflows to increase over a period of time to exert pressure on the rupee exchange rate. The rise in the dollar index however disallowed the rupee to weaken significantly within the above range.

After three consecutive days of fall in the BSE sensex, the benchmark index is now trading higher at over 200 points. The movement in the BSE sensex on both the sides has only little impact on the rupee. With the BSE sensex trading at near the current levels, rupee may find resistance at 65.20 and 65.10 and support at 65.40 and 65.60 thereafter. With the prevailing higher forward dollar premium for 3 to 6 months maturities, we strongly advise the exporters to sell their medium-term receivables at various spot target levels between 65.30 to 65.60 to benefit from higher export realization.

The dollar turned positive against a basket of currencies after the reports on inflation and retail sales topped forecast reinforcing expectations for a December rate hike. The US dollar index is now trading a little higher at 93.80 after a low of 93.30 seen on Wednesday. The performance of the US dollar index and the path of US T-bond yields shall determine the direction in the rupee exchange rate till the commencement of the FOMC meeting on December 12-13.

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Daily Report :- 15-Nov-2017(Evening)

Rupee ended the day a lot firmer at 65.22 near to the lower end of the trading range between 65.10 to 66.00. The anticipated increase in Fed rate by 25 bps in December and the status-quo on interest rates by RBI could influence the rupee to trade on a weaker undertone against the dollar within the above suggested range. The decision from the exporters and importers to hedge their exposures within the above range at the opportune time shall provide value-addition to exposure management. The rupee’s support level at 65.50 was tested twice this week but the Central Bank intervention curtailed the currency’s fall beyond that level atleast for the time being. With the expected 25 bps Fed rate hike in December followed by highlighting of encouraging outlook on the US economy, the dollar is set to gain against the major currencies and the rupee will gradually weaken toward 66 level before the end of December 2017.

With the increase in trade gap seen in October 2017, due to negative export growth in that month implies the CAD to end higher than 1.5% of GDP in the current financial year. However, heavy stock of forward maturities will keep the BOP on a healthy surplus sending support to the rupee to remain broadly stable.

During this month till date, the BSE sensex fell by 453 pints but the FPI equity inflow was positive at over USD 1.5 billion. In the August 2017 till date period, the BSE sensex had gained by 246 points and the net equity outflow in the corresponding period was over USD 1.8 billion which implies that stock investments from domestic investors and mutual funds far outweighed the equity outflows.

The forwards continue to rule firm across the maturities. The possible hike in USD interest rates and the stable INR interest rates has widened and the interest rate differential between US dollar and rupee which led to a firm trend in the forward market. The 6-month forward dollar premium was quoted at 4.50% per annum at the end of the day.

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Daily Report :- 15-Nov-2017(Morning)

Rupee opened the day at 65.42 mostly unchanged from its previous day’s close. The moderate weakness in the dollar against other currencies overseas supported the rupee. However a lower opening of the domestic equities and a widening trade deficit to a almost 3-year high limited some of the gains. The sentiment on the rupee remained downbeat after trade deficit widened to its highest in nearly 3-years in October. A recent release of manufacturing growth, retail inflation and trade gap position does not encourage a recovery in the rupee exchange rate beyond 65.30 in the immediate term. We expect to see a range between 65.00 to 66.00 to continue till the end of this month. The outcome of the US FOMC meeting in the middle of December and the US interest rate outlook will guide the direction of the rupee exchange rate in the short-term. At this point of time, we see the downside risk in the rupee limited to 66.00 and its upside firmly capped near 65.00 level.

Merchandise exports for October fell 1.12% from a year earlier to USD 23.1 billion, dropping for the first time since August 2016. The significant drop in October exports has widened the trade deficit to USD 14.02 billion in October from USD 8.98 billion in September. The widening of the trade deficit in the coming months shall lead to an expansion in current account deficit to over 1.50% of GDP in the current financial year. The higher the current account deficit and the position of fiscal deficit could lead to a weakening in the domestic currency toward the anticipated support level at 66.00 and lower thereafter.

Global cues remained somber with most of the regional peers trading in red at this point of time as concern grows that stocks have become expansive amid uncertainty about USD tax reform. The benchmark BSE sensex is trading lower by about 75 points at this point of time.

The dollar traded lower against a basket of currencies pressured by a surge in the euro to 3-week highs following better than expected economic growth data from Germany while upbeat US wholesale inflation data failed to stem losses in the greenback. The 10-year T-bond is currently trading lower at 2.36%.

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Daily Report :- 14-Nov-2017(Evening)

Rupee tested an intra-day low of 65.5350 before ending the day a little higher at 65.4250. The rupee exchange rate which tested a high of 64.60 exactly a week ago, could not sustain its strength due to Central Bank intervention and huge dollar buying from Banks and corporates besides buying interest from offshore market. The weakness in the rupee exchange rate past the 65.30 mark sufficiently signaled that the home currency may gradually fall to the 66.00 level before the end of this month and moderate recovery can be seen thereafter on exporter sales and Central Bank intervention on the sale side.

The 10-year G-sec yield opened the day higher at 6.97% in line with global benchmarks though the higher level led to some early buying by PSU Banks given weaker oil prices. The higher CPI inflation may result in maintaining status-quo on rates by RBI and the 10-yer sovereign bond yield jumped to a high of 7.05% today. From the middle of October till date, the 10-year bond yield soared higher by 32 bps.

The sharp paying interest from PSU Banks on behalf of the Central Bank to roll-over the maturing forward purchase contracts for far forward maturities specifically for 6 month tenor have lifted the 6-month forward dollar premium to end the day at 4.49% per annum. We expect the forward dollar premia to range between 4.25% to 4.75% across the maturities as the swap book maintained by RBI requires periodical rollover on the paying side in the forward market.

The dollar got support from higher US Treasury yields and the dollar index is remaining steady at 94.25. The dollar is getting support from US yields but the currency did not go higher, perhaps the co-relation between the yields and the dollar is breaking down. With the Fed expected to hike rates in December, the dollar could go higher. The yield on 2-year US T-note scaled to a 9-year peak on Monday as the yield curve resumed its flattening and investors priced in  a 25 bps interest rate hike by the Fed next month.

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Daily Report :- 14-Nov-2017(Morning)

The rupee opened the day at 65.33 and the FPI debt outflows and negative start at the BSE sensex spurred the dollar buying interest and the rupee touched an intra-day low of 65.54 so far in the day. With the dollar demand picking up from oil refiners and corporates, we feel the 65.50 support will be breached most possibly in a day or two to test the support at 65.80-66.00 level. After seeing the recovery in the rupee to 64.60/70 at the beginning of this month, the importers remained on the sidelines by taking a view that the rupee exchange rate shall remain stable with the top-end of the range not exceeding 65.30. After seeing the level of 65.50 support being tested yesterday and today, some of the importers may rush in for cover and combined with the dollar buying from foreign Banks to meet the FPI debt outflows, the possibility of the rupee weakness to 66.00 level before the end of this month seems to be certain. As the forward dollar premia is ruling firm across the tenor, we strongly recommend the exporters to sell their medium-term receivables targeting a spot level of 65.80 or lower.

India’s October CPI inflation was at 3.58% most pronounced by increase in prices of food and beverages as fuel inflation also rose. The higher October inflation numbers coupled with higher fuel inflation in November is unlikely to allow the RBI to cut rates in December, even if growth concerns weigh.

The dollar index stayed almost stable amid reports that UK Prime Minister is set to face a leadership challenge. Post the comments on tax reforms by President Donald Trump sentiment on the greenback is lifted. Markets have almost priced in a December Fed rate hike but continue to considerably underprice 2018 hikes. This represents upside risk for funding costs and the US dollar, if inflation picks up in 2018, as it may justifiablybe expected to given tight labour markets. The 10-year T-bond yield is currently trading at 2.40% and the swap spread between 3-month USD Libor and 5-year USD fixed swap rate has also widened to about 70 basis points at this point of time.

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Daily Report :- 13-Nov-2017

Rupee opened the week sharply lower at 65.37 registering an overnight loss of 21 paise/USD as compared with the Friday’s close at 65.16. The huge dollar demand from oil importers and corporates combined with the BSE sensex trading on a negative bias, the rupee is now trading well past 65.40 and looking to test the initial 65.50 support and 65.80 strong support before the end of this month. The FPI debt inflows which have been hugely positive at USD 2.44 billion per month during the period February to October 2017 has now turned negative with the sharp increase in 10-year US T-bonds and the corresponding yield rise in 10-year sovereign bonds. If the debt outflows increase the dollar buying from foreign Banks may take the rupee swiftly lower to 65.80 before any recovery. A range between 65.50 to 65.80 can be targeted by the exporters to sell their medium-term receivables as the far forward dollar premium is ruling high. The anticipated range of 64.70 to 65.30 has been violated and we now see a revised range trading between 65.00 to 65.80 with a neutral bias and providing the possibility of two-way exchange rate movement in the suggested currency range.

The dollar traded lower against a basket of currencies as consumer spending data fall short of expectations while ongoing fears over delays to corporate rate cuts continued to weigh on sentiments. On the global front, asian markets were exhibiting mixed trend, as investors seemed seeking fresh catalysts after last week’s run to record highs. The US dollar index is currently trading at 94.45 and the 10-year US T-bond yield at 2.39% aiming to climb higher.

As the rupee exchange rate is trading with a weaker undertone and expected to remain weak in the remainder of the calendar year, importers are hedging their payables atleast upto the next 3 month maturities taking the forwards to trade slightly higher. The paying interest from PSU Banks on behalf of the Central Bank in far forwards lifted the 6-month forward dollar premium to currently trade at well above 4.55% per annum.

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Daily Report :- 10-Nov-2017

The rupee opened the day at 65.05 maintaining a neutral bias in the trading range between 64.70 to 65.30. The receding FPI debt inflows in November kept the rupee under pressure but the FPI equity inflows of over USD 1.7 billion in this month has helped the rupee to retain its firm trend against the dollar. It is interesting to note that though the BSE sensex shows a net fall from Tuesday this week, the rising FPI equity inflows represents the emergence of buying interest from foreign investors. The stable performance of the domestic currency gives the needed comfort to exporters and importers to plan and hedge their forex exposures appropriately to achieve the internal target rates set by the Management.

RBI FX intervention is September was at USD 1.26 billion with buying of USD 3.79 billion and selling of USD 2.53 billion. The two-way intervention stance from RBI is providing comfort to the market to believe that the weakness of the domestic currency, if any due to adverse external events can be well managed by the Central Bank without much currency volatility on a future period. In the April-September 2017 period, the net FDI inflow was at USD 20.79 billion which is almost the same as seen in the corresponding period previous year. However, higher FPI inflows in the first-half of the current financial year led to total foreign investment to rise to USD 35.46 billion from USD 28.94 billion previously. All these developments on the external front have helped the domestic currency to maintain a stable environment. In the remainder of the current financial year, we do not expect any depreciation in the rupee exchange rate by more than 1 to 2% from the current spot level. Hence, at this point of time, one can safely assume that the hedge or no-hedge position may lead to marginal exchange rate gains or losses due to adoption of above stance by the company against the medium-term foreign exchange exposures.

The dollar remained broadly lower against other major currencies after the release of disappointing US jobless claims and uncertainty over the fate of major US tax reform bill. The dollar index fell below its crucial support level of 94.50 down by 0.5% for the week.

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Daily Report :- 09-Nov-2017(Evening)

Dollar selling by exporters and IPO related inflows took some pressure off the currency from higher oil prices. Indian companies have raised about USD 8 billion from IPOs in India so far in what is set to be a record year. The huge inflows from FPI/FDI and IPOs helped gradual ascent in the rupee exchange rate from 68.00 level at the beginning of the calendar year to the current level of 64.90. Rupee touched a high of 63.55 on 3-8-17 and determined intervention from the Central Bank pushed the rupee to trade a little lower above 64.30 in the period thereafter.

During the period January to October 2017, the average monthly FPI debt inflow was USD 2.26 billion. The higher debt investment limit availability combined with the appreciation in the rupee exchange rate in the referred period led to huge debt inflows into the market which supported the rupee to stay broadly stable in the 64.30 to 65.00 range. With the 10-year sovereign bond yield at close to 7% and the debt investment limit almost utilized, the debt inflows would recede and one can expect moderate debt outflows before the end of December 2017. The dollar demand to meet such possible outflows could weaken the rupee toward 65.80-66.00 level. The US economic data to be released in the interim period and the near-certainty of 25 bps rate hike by Fed in the December FOMC meeting would hasten gradual rupee weakness to meet the above target level.

Asian currencies were moderately down today as investors pondered the impact on the dollar stemming from potential delays to Donald Trump’s major tax reform plans. Asian currencies will remain susceptible to the headlines on the US tax bill.

Demand for the dollar continued to be underpinned by expectations that the Federal Reserve is on track to raise interest rates in December for a third time this year after strong US factory and service sector data last week backed the case for continued policy tightening. The US dollar index is currently trading at 94.80 near the recent 4-month highs of 95.07.

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Daily Report :- 09-Nov-2017(Morning)

The rupee opened the day at 64.94 almost unchanged from the previous day’s closing level. On increased selling of US currency by exporters and Banks, the rupee touched an intra-day high of 64.85 in the early session of trading today. But the rupee’s gains were restricted by stable US dollar in the overseas markets and the local stock market remaining flattish without any significant gains seen at this point of time. In the absence of any fresh factors to move the rupee exchange rate one way or the other, the two-way movement in the rupee within the anticipated range of 64.60 to 65.30 is being seen, with the rupee touching a low and high of 65.15 and 64.85 between yesterday and today. The rupee exchange rate moving in the anticipated range provide better opportunities for importers and exporters to hedge their forex exposures appropriately to accomplish the internal benchmarks set by the Management. With the geo-political tensions gradually dimming, selling of forward dollars for medium-term maturities seems to be a better option at this point of time as the forward dollar premium clearly overstates the expected level of depreciation over the corresponding period for medium-term maturities.

The dollar is trading slightly lower as the Washington Post reported that Senate Republican leaders are thinking of making significant changes and postponing the implementation of major corporate tax cut by one year to comply with Senate rules. The dollar index is now trading at 94.70 and the 10-year T-bond yield quoted at 2.32% almost unchanged in this week.

The forward curve is currently demonstrating a flattening pattern with the forward dollar premia for 1-month to 1-year maturities quoted at 4.5 to 4.35% per annum at the near-end to far-end maturities.

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Daily Report :- 08-Nov-2017(Evening)

The rupee dropped to a low of 65.1550 in the early session of trading today on increased dollar demand from importers amid overseas fund outflows from local bonds and stocks. However, the dollar’s moderate weakness against euro and Yen in global markets capped the rupee’s losses. After political upheaval in Saudi Arabia, a spike in crude oil prices triggered dollar demand from oil importers to weaken the rupee well beyond the 65 mark but ended the day a tad softer at 64. 96. The bias on the rupee is neutral in the anticipated range between 64.60 to 65.50 in the remainder of this month.

The crude oil prices rose to a more than 2-year high which sparked concerns that inflation may accelerate in coming months. As a result of increase in oil prices, Government bonds slumped for a second straight day today. The 10-year sovereign bond is now trading at 6.94% per annum. In the January-October period, the net FPI inflow was over USD 22.5 billion which supported the rising spree in the domestic currency from the beginning of the current financial year. As the 10-year sovereign bond prices are close to the bottom, the overseas bond investors may be tempted to sell a part of their investments bought over the last 9 months period to derive a higher bond yield in USD terms, even as the rupee exchange rate broadly remain steady in the referred period. The resultant forex outflows could lead to a weakening in the rupee exchange rate toward the upper end of the suggested range at 65.50.

Amid weak global cues, Indian equity benchmarks traded cautiously and ended the day at a loss of 152 points. Asian counters were traded in red today amid concern about the progress of US tax reforms. Geo-politics remained a focus as US President continues his tour of Asia. Investors were also keeping a wary eye on Saudi Arabia’s sweeping anti-graft purge and on escalations of tensions with Iran.

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Daily Report :- 08-Nov-2017(Morning)

Rupee opened the day a tad weaker at 65.12 and after testing an intra-day low of 65.1550 in the early session of trading today, it recovered moderately to trade at 65.05 at this point of time. With the dollar’s strength continuing against the major currencies and the flattish opening in the local stock indices, the rupee is steadying well above the 65.00 level. We strongly feel that the expected range between 64.60 to 65.30 may not get violated in the next 7-10 days timeframe from now. As per our repeated recommendations, we suggest the importers to hedge their payables upto the end-February maturities at the spot target level of 64.70 or so as the rupee’s direction in the short-term is clearly on the downside on a moderate scale due to receding FPI debt inflows and gradual rise in global oil prices.

The dollar continued its gradual ascent against other major currencies as investors monitor progresss on the US tax bill and the chances of a rate increase. Investors are also waiting to see how Republicans would reconcile differences over their proposed tax bill that, if enacted, would be the biggest overall of the US tax system since the 1980s. On account of a stronger dollar, euro weakened to 1.1552 its lowest level since mid-July.

Due to spike in global oil prices, the domestic inflation expectations have risen, eliminating any chance of a rate cut in the forthcoming RBI policy meeting. The benchmark 10-year sovereign bond yield is currently trading at 6.93% and the lower bond prices may encourage the foreign investors to sell the bonds in their effort to crystallize a higher positive real USD yield. The receding FPI bond inflows after huge flows seen from the beginning of February 2017 indicates that the fresh buying interest from investors is receding and the available debt investment limit is also near completion. All in all, we do not expect the 10-year bond yield to decisively breach and sustain above the 7% level in the background of the current developments.

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