Rupee to trade in a 72.25-74.00/$ range, with rupee strength contained by the RBI replenishing spent FX reserves
The global risk sentiment rebounded on the Sino-US trade war thaw, buoyant US employment data and a targeted US waiver from Iranian oil sanctions. The expected result in the US mid-term elections and in the US FOMC's decision also helped.
The US dollar index dropped from 97.20, a 16-month high, on President Trump's willingness to meet with Xi Jinping, General Secretary of the Communist Party of China at the G20 meeting in Argentina to resolve the tariff war. Expectedly in the US mid-terms, Republicans held the Senate but lost control of the House to the Democrats. This result will hinder more tax cuts and fiscal easing but leave President Trump free to continue his trade policies. This might also increase the likelihood of the US economic growth/inflation peaking, reduce the tightening pressure on the Fed and so weaken the US dollar. Later, the US Federal Reserve kept interest rates steady and said the strong growth in jobs and spending kept the economy on track, marred only by a dip in the growth of business investment. It reaffirmed its gradual monetary tightening stance, setting the stage for a rate hike in December.
The Euro continued to be pressured by the EU-Italy budget stand-off, weak Q3 2018 GDP print and German Chancellor Angela Merkel's unwillingness to stand for re-election as CDU party chief. The European Commission's cut in Italian growth forecasts added to investor concerns, keeping the Euro under $1.14.
The Pound firmed up to $1.3174 on optimism that the UK would prepare a Brexit agreement by end of November and on Bank of England's (BoE) inclination to raise interest-rates should the Brexit process go smoothly.
The Yen slipped past 114/$, to a five-week low, as a safe-haven demand diminished, monetary policy divergence with the US was reaffirmed and BoJ reiterated its "low for long" commitment on monetary policy.
The offshore Chinese Yuan rebounded from 6.98/$ on the hope of the trade dispute resolving. However, Brent crude slumped to around $70p/bbl, on concern about global growth, rising supply and news about conditional exemptions for eight major oil importing countries from the US sanctions on Iranian oil exports, operational from November 4.
The rupee reached 74.4850/$, a fresh all-time low (November 11) on weakness in asset markets and $85p/b plus oil prices. However, by early November the trend changed. The Reserve Bank of India (RBI) eased ECB and Masala bond norms and enhanced its OMO purchases (Rs 40,000 crore for November) to ease the domestic liquidity stress. The subsequent global oil price slump, reduced REER-based rupee over-valuation, a global asset market revival and persistent exporter dollar sales helped it rebound to 72.4350/$. The belligerent exchange between RBI and the finance ministry on a host of supervisory/liquidity issues did not subvert the bullish trend, as the US exempted India from its oil sanctions on Iran. Additionally, India jumped 23 places to 77 in the World Bank's "Ease of doing business" 2019 Survey, enhancing the NDA government's reformist credentials.
Going forward, we expect the rupee to trade in a 72.25-74.00/$ range, with rupee strength contained by the RBI replenishing spent FX reserves and major state elections looming ahead.
IN A RANGE
- Rupee to trade in a 72.25-74.00/$ range, with rupee strength contained by the RBI replenishing spent FX reserves
- Subsequent global oil price slump, reduced REER-based rupee over-valuation, a global asset market revival and persistent exporter dollar sales helped rupee rebound to 72.4350/$
The writer is president- group treasury and retail broking, Kotak Mahindra Bank
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The Pound firmed up to $1.3174 on optimism that the UK would prepare a Brexit agreement by end of November and on Bank of England's (BoE) inclination to raise interest-rates should the Brexit process go smoothly.
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