22 February 2019
Year 2018 performance
Dollar bulls have wined and dined like kings and queens in 2018. The greenback appreciated the most against the emerging market currencies. The earlier part of the year saw the focus on rising US interest rates and political stories lead the way lower for EM. Trade wars also contributed to the risk-off narrative and will likely be a key area of focus in Q1.
Volatility was the story for Q4 as some of the major indexes fell over 20%. The panic that hit the markets saw safe-haven currencies surge on market uncertainty regarding trade wars, Fed quantitative tightening (QT), a partial government shutdown in the US, and Brexit worries. While the data in the US has been softer, many parts of the economy are still strong, such as record-low unemployment and near 3.0% GDP growth. With many risk events in play for the first quarter, we could see Fed policy remain on hold until the latter part of the year. If the Fed pauses interest rate increases and signals a goal on when QT will stabilize, we could see some headwinds for the US dollar in the first half of the year
As for the foreign exchange market, the beginning of 2018 was marked by a serious strengthening of the euro against the US dollar. At the peak, on February 16, the EUR/USD pair reached 1.2555. But then the difference in the monetary policy of the Fed and the ECB, the difficulties with the Brexit agreement, the Italian problems and the slowdown in the Eurozone economy as a whole, played into the dollar, and the pair went down, reaching the bottom at 1.1215 in mid-November. USD/INR was one of the worst performing Asian currency in H1 with a depreciation of more than 17% from 63.30 levels to a high of 74.30. The major reasons have been surging crude prices, stronger dollar, widening current account deficit and trade war between US and China. GBP/USD experienced similar fluctuations. It reached the maximum value of 1.4375 on April 17, and the minimum was recorded on December 12, when the pair fell to 1.2475, losing 1,900 points in eight months. As for the Japanese yen, investors viewed it mainly as a safe haven in case of acceleration of trade wars between the USA and China.
Major Driving force in 2019 for USDINR
One of the major driving force for rupee will be General Election in May. With the chances of BJP losing the share of votes vis-à-vis 2014 , will keep rupee under pressure ahead of the elections during April and May. Investor will be light ahead of the major event .We expect rupee to trade around 73 levels around this time from the current levels of 71.00
IN Fiscal deficit
Fiscal deficit has been one of the major reason for rupee weakness from 69.50 level to 71 along with Oil. In the interim budget government behind us government had announced the deficit of around 3.4% in FY 19 which will again have a negative impact on USDINR in the medium term
Brexit outcome nearing
The pound’s sharp rally over last week has come to an abrupt halt – at least for the time being. Rumours are circulating that 3 Conservative lawmakers are to follow the 7 Labour MPs. It remains to be seen how the markets would react. This could potentially trigger a new wave of resignations and create more uncertainty. It will also reduce Prime Minister Theresa May’s majority in parliament. Even if the rumours turn out to be just that, rumours, we don’t expect the pound to move meaningfully higher above 1.3175 until there is more clarity in the Brexit situation.
Theresa May’s government is continuing talks with the EU. Last month, UK parliament rejected May’s initial deal by a large margin, which has raised the prospects of the UK leaving the block without a formal agreement. The Tories want to make changes to the backstop arrangement, but the EU has continually insisted that they won't reopen the withdrawal agreement. So, the stalemate continues. But if and when Mrs. May is satisfied she has come up with the best alternative plan, she intends to put this to the vote again. However, it is not clear when this will happen, and time is fast running out. With EUR and GBP lower, this can create further pressure on USDINR. We do not expect euro and pound trade above 1.15 and 1.32 respectively in the near term.
Will the oil bottom hold?
While most analysts expect oil to be higher by the end of 2019, the fundamental concerns on both the supply and demand side could see the meltdown continue. In March, we may hear more talks of extending cuts from OPEC+ and if we see a framework agreement on the trade spat between the US and China, we could see positive sentiment return to the commodity. Overall we continue to stay bullish in Crude prices, NYMEX crude can rise to $60 in the near term while $55 hold. With higher crude the pressure can be felt on our CAD( current account deficit) driving the rupee further lower.
Global Dollar strength
So far, the world’s largest economy has remained fairly resilient despite the potential to import weakness from the Eurozone and emerging market economies, including China. Indeed, today’s CPI data from the US beat expectations with a headline print of 1.6% year-over-year for January and a core figure of 2.2%, both being slightly above estimates. Were inflation to unexpectedly accelerate then the Fed would have no choice but to tighten its belt further. That remains a key risk, with oil prices being on the rise again of late
Some of the dollar’s strength can also be explained away by the lack of any alternative currency offering the same level of yield as the dollar. The major central banks outside of the US have remained dovish over the years and for one reason or another been unable to tighten their belts meaningfully. In Europe, persistently weak data from Germany has discouraged the ECB to raise interest rates. Political concerns in Italy, Spain and France are additional factors weighing on the Eurozone economy. In the UK, Brexit uncertainty is undermining consumer and business confidence. The Bank of England has rightly allowed inflation to rise a little above its 2% target without adjusting interest rates higher since August 2018. That was the second increase since before the financial crisis. The BoE was due to hike one more time but the lack of progress in the Brexit situation prevented that from happening.
USDINR technical charts and next move?
Rupee has been steady so far in last 2 months staying below 72 levels and could make a high of 69.2350 on 7th Jan but since then rupee has been trading flat between 70.70-71.60 levels with either side break out not sustaining. As we see on the chart rupee has been converging within a symmetrical triangle between 70.50-71.70 levels and as we move into march we expect the trading range may be thinner between 71.40-70.70 with potential to break out of the range on the higher side by March end if not early.70.30-70.50 also coincides with the trend-line support hence it draws a major support around that level and once market if it test around that levels may find impetus to push higher to eventually break downward sloping trend line ( refer chart below) at 71.50-71.70 region quickly to move and settle around 72.40 levels in the month of April
It has to be noted that a strap upward move can be seen if rupee breaches 71.70 now which will confirm the upward trend and will move our first target of 72.45 ( high of 12th Nov), thereafter 74 by June and July. As shared above good support is seen between 70.35-70.65 mark and it should be a good level for importers to stay covered between 70.50-70.70 levels for march, april and may else to maintain a stop loss of 71.70 to hedge their outward payments. While exporters may sit aside and wait for the break out direction.
We advise importers to be more vigilant.
Routeforex Solutions Pvt Ltd.
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