Oil prices, yuan to keep rupee under pressure

Recently global risk sentiment has swung to four broad macro themes- policy normalisation by central banks, developments around the US-Iran nuclear deal, sanctions and tariff wars.

The US dollar index firmed up beyond 95.50, after a US-EU trade pact and an upbeat Fed. Belligerent rhetoric following tit-for-tat Chinese responses to the US tariff imposition and the steady weakening of the PBoC Yuan fix (almost 9% in FY2019 so far) seems to be stretching the Sino-US relationship to a 'point of no return'.

The US Fed kept rates unchanged but upgraded its household spending and economic growth outlook. Along with a buoyant US July labour report, it reinforced the probability of two more Fed fund hikes in 2018. The US imposed financial sanctions on Iran and was mulling some on Russia for the Skripal poisoning incident.

The Euro slumped to below $1.1450 on a non-committal European Central Bank (ECB), Italy's lack of fiscal restraint and a drop in June German export orders, as US tariffs began to bite. The Bank of England (BoE) voted unanimously (9-0) to raise the base rate by 25bps, but yet the Pound slipped below $1.2800. Further hawkish expectations were tempered as governor of the BoE Mark Carney highlighted an 'uncomfortably high' risk of leaving the EU with no deal and Liam Fox, UK Trade Secretary ascribed a 60% possibility to it.

The Yen strengthened beyond its recent tight range of 111-113/$ as Bank of Japan (BoJ) kept rates unchanged but widened the 10-year JGB yield bound to 20bp from 10bp and introduced forward guidance. The Sino-US trade tensions, a resurgent GDP, unresolved trade talks with the US and BoJ minutes revealing intent to unwind its accommodative policy, helped the Yen gain to 110.58/$.

LATAM revealed in a post-election calm relief rally and duly progressing NAFTA trade talks. However, the Turkish Lira slumped to record lows on the imposition of targeted US sanctions on two ministers and its inclination to review Turkey's duty-free status for imports.

Oil prices softened toward $72p/bbl even as Opec hiked production in July. This despite Saudi Arabia halting exports through the Red Sea on Houthi rebel attacks and the ongoing US-Iran showdown.

After posting a new all-time low of 69.13/U$ in late-July, the Indian rupee gained to 68.26/$ on lumped initial public offering (IPO)-related foreign portfolio investor (FPI) inflow. Expectedly, the Reserve Bank of India (RBI) Monetary Policy Committee (MPC) hiked its policy rate for the second time in succession, by 25bp to 6.50%, and marginally raised its forecast for inflation. Bond yields softened to 7.70% and rebounded just ahead of the inflation and industrial production prints.

Oil prices as yet above $70p/bbl and Yuan weakness out of tariff wars will keep up the bearish pressure on the rupee. Any rupee appreciation, out of all-time highs in the stock markets, would be restrained by RBI intervention, especially if it threatens export competitiveness. This month we expect the rupee to trade the 68.40-69.25/$ range with a vigilant RBI at both ends.

IN TIGHT BAND

• Oil prices as yet above $70p/bbl and Yuan weakness out of tariff wars will keep up the bearish pressure on the rupee
   
• The rupee to trade the 68.40-69.25/$ range with a vigilant RBI at both ends

The writer is president-group treasury and retail broking, Kotak Mahindra Bank