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| Edited By: Bhaskar Panda |Source: DNA |Updated: May 28, 2018, 05:35 AM IST
A lot of water has flown through the Ganges, as the saying goes since I wrote my last column here. During the last month, a lot has already happened to warrant such an analogy. In my last newsletter, I had mentioned that “there was a real possibility of a summit meeting between the US and North Korea”. The latest news suggests that the US President Trump has unilaterally called this off. Also, the call for more severe sanctions on Iran was shriller than expected after the US unilaterally withdrew from Iran nuclear deal, though European allies of US are still supporting the deal.
OPEC’s self-imposed restriction of production will come up for discussion/review towards the end of CY 2018. Until then global crude oil prices are expected to remain elevated. Recently Brent Crude broke the $80/barrel barrier and is hovering around $80 pivot.
In India, there was much drama in forming the government in Karnataka after peoples’ verdict threw up a fractured mandate. As of now, JD(S) led government has been sworn in and business is as usual. So, what could all this mean in terms of currency volatility and what possible strategies can be adhered to manage this phase of 'uncertainty'?
Latest the US FOMC minutes suggest that US inflation might be not only meeting 2% inflation target but also going past it, necessitating more rate tightening. The language suggests that the increase would be calibrated and gradual, rather than too steep. Having said this, there is a real possibility of a rate hike in the US in the upcoming June FOMC.
In the meanwhile, the US 10 year yield has already jumped past 3% mark. All this has boosted dollar as it has started rising. Technically speaking, the dollar index is now near resistance level which is at 94.19 and if it breaks above that, next target is 96. At this point in time though, the area around 94.19/94.28 is looking tough to break. Having said this, the overall trend is dollar bullish. Europe seems to be going through a rough patch and it had already got reflected in euro-dollar prices. The latest PMI reading from Europe in general and Germany, in particular, was disappointing, showing real signs of a European slowdown. Italian problem seems to be confounding as the country prepares for elections. Given this background of the real economy and further supported by technical parameters, the euro-dollar pair is still looking bearish. However, there could be a short-term breather for the pair around 1.1703 levels and a decisive break below this will pave the way to target 1.1545/1.1438.
In the Indian context, the rupee has suffered badly on the back of multiple factors. First, global crude prices have rallied putting pressure on Indian basket which has shot up recently. Secondly, growth in the Indian exports has been sluggish while imports are going up, putting negative pressure on the balance of payments. Thirdly, the FPIs, who had been pouring in money into Indian debt as well as equities, have become circumspect. In fact, they have pulled out close to $6 billion in the month of April May alone. Fourth, the US interest rate is on an up cycle while Indian interest rate has remained range bound (though last MPC was hawkish) resulting in a high dollar index.
If we also throw in the political equation into this “khichdi”, we have a potent combination to derail any currency pair, not to mention dollar-rupee.
While all this has acted in tandem to push dollar-rupee towards life high (68.8650), the question which needs an answer is whether this phase is over or not. My simple answer is that it’s very difficult to say anything definitively at this point in time as far as rupee depreciation is concerned. We will encounter more rupee depreciation if the current context remains valid. There is a rider though, i.e. technically breaching the previous life high would be a difficult event, and hence dollar-rupee pair would consolidate below that for some time. The trend though is still rupee bearish. As far as Indian yield is concerned, the 10-year benchmark yield has moved up and I am expecting that to eventually move towards 8% mark.
The writer is senior regional head, Treasury Advisory Group, HDFC Bank
