Rupee to continue with appreciation bias next year

"The only thing that is constant is change," Greek philosopher Heraclitus had once said.

The saying is a universal and profound truth encased in a simple sentence. Why do we have to refer to this when we are dealing with "markets" whose basis is rooted in frequent changes? There lies the beauty of "understanding the implied changes", just a bit before others, reinterpreting leading to profitable readjustments.

The year 2018 brought in a lot of unanticipated volatility in major currency pairs. The upheavals sometimes were beyond forecasting. As a bright example, we can take global crude oil prices as a benchmark. General bullish rally in global benchmark crude started way back in July 2017 and ended abruptly in October 2018. During the course of this, the benchmark price moved from $46.11 (low) to touch a high of $86.74, almost doubling in 15 months (moving higher by 88.12% in 15 months). 

Compared to this gradual bullish move, the benchmark crude oil prices have fallen to touch a low of $49.93 from the high in about three months. Even now, it's difficult to gauge where this can stop. If this was not enough, Brexit worries had given another currency pair which has moved with the turns of event. GBP-US$ pair which was trading at a high of 1.4344 against $ in January, 2018, has now fallen to trade at a low of 1.2475 against $ (falling more than 13% in about 11 months). During the period, the euro lost around 10.67% against $. Consequentially, the dollar index, which had hit a low of 88.25 in the February 2018, has been trading around 96.50 pivot. However, this is not the full story, if we take into account the turmoil that emerging market currencies went through due to various underlying reasons. Be it the US Fed interest rate hikes or higher oil prices, or US-China trade tussle or yuan depreciation or even Brexit related uncertainty or local factors such as state elections in India, each event had its shadow left on emerging currencies. For example, the rupee, which was trading around 63.2500 against the dollar in January 2018 moved dangerously to the touching distance of 75 (high at 74.4850) per $ in a matter of only nine months (rupee depreciated 17.77% in nine months against dollar). The doomsayers around the time were predicting USD-INR parity to touch Rs 80.00 or even Rs 100.00 per $. At that point in time, the rupee was one of the worst performing currencies even in the emerging market currency pack. Fortunately, USD-INR reversed sharply since then, clawing back 6.47% in two months. 

The average volatility in calendar year 2018 in USD-INR pair also had moved up substantially.

Having said above, is it then fair to expect a less volatile calender 2019? The answer to this question can't be unqualified. For example, partial shutdown of the US government is almost a possibility now, as negotiation between the US Congress and the President, has not reached a certain closure. Also, worryingly, recent US data do not suggest the similar robustness of the US economy (US employment and inflation), which would bring pressure on US interest rate hike cycle. As is evident now, the hike cycle of US might be coming towards an end and it is highly anticipated that, we can expect only one hike of 25 bps in the entire 2019. Similarly, it is hoped that US-China trade spat will see some respite in calender 2019, thus releasing the pressure on emerging market currencies. The drama about Brexit is also expected to see closure in 2019, bringing some stability in Great Britain and, in turn Europe as well. 

The bigger question which worries the market is obviously the behaviour of global crude oil prices. Since the prices have corrected sharply, there is a possibility of their remaining weak throughout CY 2019. My perception is that global crude prices won't fall below certain unsustainable levels. Hence, one should actually expect certain rally in crude prices. If that happens, the rupee might have to give away some of the recent gains against the dollar. Also, another important factor which needs to be kept in mind in 2019 is that of political power at the Centre after India's general elections. Volatility can't be ruled out around that time. But given that crude prices remain soft and funds flow into emerging markets, including India, has increased, it is fair to assume that rupee appreciation bias will be intact in January, 2019. I am expecting area around 70.0000 which happens to be an important Fibo point to be pivotal. I am expecting a range between 69.5000-70.5000 to prevail in January 2019 as far as USD-INR pair is concerned.

STRONG FOOTING

• Due to soft crude prices and increase in funds flow into EMs, the rupee appreciation bias will be intact in January 2019
   
• A range between 69.5000-70.5000 to prevail in January 2019 in USD-INR pair is likely

The writer is senior regional head - treasury advisory group, HDFC Bank