FX – WEEKLY UPDATE :
FX Weekly Currency Score Week 1
WEEKLY SYNOPSIS: 29/12/2023
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|
Currency Pairs |
DEC CLOSE |
NOV CLOSE |
% change |
|
USD/INR |
83.17 |
83.35 |
-0.21 |
|
EUR/INR |
92 |
91.48 |
0.56 |
|
GBP/INR |
106.10 |
105.86 |
0.23 |
|
JPY/INR |
58.82 |
56.68 |
3.77 |
Brent Crude closed at USD 77 VS prior month close of USD 80.70. Gold closed at USD 2063. Nifty closed at 21731 vs prior month close of 20133. 10 Year G-SEC Yield closed at 7.17%.
Major developments: USDINR traded in the 82.92-83.43 range in Dec and closed at 83.17, loss of 18 ps for USD as compared to prior month close of 83.35. EUR climbed 0.56% m/m and GBP climbed 0.23 m/m against Rupee. Indian benchmark Equity index climbed 7.9% m/m. 10 Year G-SEC Yield closed at 7.17%. 1-year fwd premia is at 1.78% p.a.
FX reserves stood at USD 620.44 bn as on Dec 22 nd. FX reserves climbed USD 4.47 bn, last week. In Dec, FPI’S have bought Rs 56390 Cr of Equities and bought Rs 18392 Cr of debt . In this calendar year, FII’S have net bought Rs 172853 Cr of Equities and have net bought Rs 70489 Cr of debt.
Rupee was range bound in this calendar year. It was bound in the 80.90-83.45 range. Rupee closed at 82.73 in 2022. Rupee has only declined by 44 ps y/y. Fwd premia has stabilised at lower levels of 1.78% p.a. for 1 year,
Over the past few weeks, many positives have emerged for Rupee: 1) USD rates have peaked, 2) Crude Oil has been declining, 3) USD is still looking shaky against majors, 4) Heavy FPI inflows.
But for Chinese related worries, threat to Rupee seems to have dissipated.
Based on the recent Global and Indian macro situation, expect USDINR to trade in the 82.60-83.35 range in coming weeks. For the full year, Rupee could trade in the 82.50-84 levels. However, if Global and Indian economic situation gets better with lower rates, Rupee could even gain to 80.50.
However, free FX movement has been stemmed by RBI. Based on their intervention approach, expect 82.50-83.50 to be a more realistic range.
Hedging advise: Imports be hedged closer to 82.80/82.65. Exports be hedged closer to 83.30/83.35.
Global developments: USD ended weaker in 2023 declining 3% y/y against Euro and around 5.25% y/y against Pound. Strong US economic and labor helped USD higher in Sept and Oct. However, the trend has reversed with market expecting aggressive rate cuts after Fed Chairman dropped hints of rate pivot.US 10 Year Yield has declined to 3.8% from above 5% in Oct. Cumulative rate cut odds for 2024 are fast approaching 160 basis points. This seems excessive when considering that the US economy is not in recession and Fed officials are only predicting about three 25-bps cuts. Since market is pricing rate cuts aggressively, there could be a counter reaction if jobs market continues to remain hot with higher numbers. Hence, focus will now shift to employment data, given greater certainty towards down trending inflation.
Euro has been popped up by hawkish comments from ECB. Unlike the Fed, the ECB is wary about sending any pivot signals before it can be sure that inflation is well and truly headed towards 2%.
At present, USD Yields have fallen more than Euro yields and hence this round has gone to Euro. However, with Euro zone economy set to grow slower than US, ECB may be constrained to deliver dovish comments ,setting rate pivots and indicating rate cuts in mid 2024.
Global and US stocks were supported by rapid loosening of financial conditions and rates. The rapid decline in Yield spurred S&P to near all time highs (just short). US Sovereign bonds rally, based on rate cut expectations fuelled this rally. Decline in Crude prices, despite attacks on commercial ships and geo political tensions was another comforting factor the market.
What to expect: There is a proverb which says that “One who foresees may lose vigilance”. Most forecasts went awry in 2023. There are many surprises and hence one should only look at changing dynamics. Russia Ukraine war, after effect of pandemic and rate increases dominated 2022 and 2023. Questions remain about the geopolitical situation, the direction and pace of the monetary policies of the Federal Reserve (Fed) and the European Central Bank (ECB), the state of the Global economy and labour markets, the extent to which inflation and energy prices can be controlled, who will be elected President of the United States in November 2024, the outcomes of Russia’s war in Ukraine and the ongoing conflict between Israel and Hamas, and the balance of power in the U.S.-China rivalry. If answers are known fully, then forecast is possible. Answers to these questions remain elusive.
Coming year also promises to be interesting with favourable conditions for investors.
Happy New Year 2024!.
Currency technical levels: USDINR: 82.80/82.65 (Supports), 83.30/83.40 (resistance),
EURINR:92(Resistance),89.50/
GBPINR: Supports: 104.20/103.40( supports), Resistance:106.50(Resistance).
JPYINR: Resistance:59, Supports: 57.45/56.45 (support).
Hedging advise: USDINR imports be hedged on decline to 82.85/82.60. EUR and GBP exports can be covered.