FX – MONTHLY UPDATE :

FX Monthly Update USD INR February 05, 2024

 

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Monthly SYNOPSIS: 31/01/2024

Currency Map:

Currency Pairs	JAN CLOSE	DEC CLOSE	% change
USD/INR	83.05	83.17	-0.14
EUR/INR	89.88	92	-2.3
GBP/INR	105.31	106.10	-0.74
JPY/INR	56.20	58.82	-3.77

Brent Crude closed at USD 81 VS DEC close of USD 77. Gold closed at USD 2037. Nifty closed at 21725 vs DEC close of 21731. 10 Year G-SEC Yield is now at 7.05%.

Major developments: USDINR traded in the 82.81-83.35 range in Jan and closed at 83.05, loss of 12 ps for USD as compared to Dec close of 83.17. EUR declined 2.3% m/m and GBP declined 0.74 m/m against Rupee. Indian benchmark Equity index closed flat m/m. 10 Year G-SEC Yield closed this week at 7.05%. 1-year fwd premia is at 1.82% p.a.

In Jan, FPI’S sold Rs 35977 Cr of Equities and bought Rs 26743 Cr of debt . In last calendar year, FII’S net bought Rs 172853 Cr of Equities and net bought Rs 70489 Cr of debt.

FX reserves stood at USD 616.93 bn, as on Jan 26 th.

Budget dominated market headlines. Indian budget maintained status quo on taxes, increased Capex by 11.1% to Rs 11.1 lac Cr. Major highlights were: 1) 3 Railway corridors, 2) Housing for Middle class, 3) Expansion of airport developments. 4) Long term interest free loans to states to boost tourism. FY 24 Fiscal deficit is expected to be 5.8% of GDP and is likely to decline to 5.1% of GDP in FY24-25.

Fiscal prudence triggered decline in G-SEC yields. 10 Year yield fell to 7.03%, lowest in 6 months.

Core sector grew at the slowest pace in 14 months at 3.8%. Coal sector grew at 10.6 per cent while natural gas rose 6.6 per cent in December. Refinery products saw an increase of 2.6 per cent in December, down from 12.4 per cent growth witnessed in November. Fertiliser sector grew 5.8 per cent year-on-year in December. Cement and electricity sectors each grew 1.3 per cent and 0.6 per cent in December. In November last year, core sector growth was 7.8 percent.

Jan GST collections grew 10.4% y/y in Jan to climb to Rs 1.72 lac Cr.

Rupee continues to be range bound and is expected to trade in the 82.80-83.35 range for some more months. There is no clear theme in Global FX markets. However, with US inflation trending down in a sustained manner and with very little signs of negative impact of US tighter monetary policy on US growth and employment, Fed may bring forward rate cuts to second quarter. This may have positive implications for inflows into Indian debt and equity markets and support Rupee.

Hedging advise: Imports be hedged closer to 82.80. Exports be hedged closer to 83.17/83.35.

Global developments: US Fed meeting, BOE MPC meeting, US employment data and ISM(mfrg) were important events last week. Euro declined and US stocks extended its gains.

Fed Chairman dashed hopes of March rate cut. While he said that declining inflation is encouraging, caution is necessary due to labor market imbalances. He added that inflation is maintaining downtrend , but still above its goal. He added that members felt that rate cuts can be done at some time during this year and can be expedited if labor market shows weakness. He also added that Fed can maintain its present rate for a longer time, if outlook remains uncertain on inflation.

Fed Chairman’s views on labor market was validated by a very strong Jan payrolls data. US Non-Farm Payroll employment rose 353k in January, significantly surpassing expectation of 178k. Prior month’s growth was also revised sharply higher from 216k to 333k. Both were well above monthly average of 255k growth in 2023.Unemployment rate was unchanged at 3.7%, below expectation of 3.8%. Labor force participation rate was unchanged at 62.5%. Average hourly earnings grew 0.6% mom, well above expectation of 0.3% mom. Annual hourly earnings growth also accelerated from 4.4% yoy to 4.5% yoy, above expectation of 4.1% yoy.

ISM(mfrg) stayed in contraction mode, but was better than expected.

BOE maintained status quo, with 6 members opting for no change, 1 opting for rate cut and two opting for rate hike. This reflected divergent views and indecisiveness in BOE MPC.

BoE has notably relinquished its tightening bias, and significantly lowering the conditioned rate path, which now sees interest rate to fall to 3.9% by the onset of next year. Despite this dovish tilt, the bank simultaneously revised its inflation forecasts upward, suggesting that inflationary pressures will persist above target until 2026. 

Euro declined on signals from ECB members about early rate cuts. ECB Governing Council member hinted at cutting interest rates “sooner and more gradually”, as there are a lot of evidence that inflation is falling sustainably towards 2% target. He also argued that ECB doesn’t need to wait for May wage data before acting.

Eurozone GDP was stable in Q4, better than expectation of -0.1% qoq contraction. Compared with the same quarter of the previous year, GDP increased by 0.1% yoy.

Focus is on US ISM(services) data.

Currency technical levels: USDINR: 82.80/82.65 (Supports), 83.18/83.35 (resistance),

EURINR:90.50(Resistance),89.15(Support),

GBPINR: Supports: 104.10/103.70( supports), Resistance:106.50(Resistance).

JPYINR: Resistance:57.25, Supports: 55.50 (support).

Hedging advise: USDINR imports be hedged on decline to 82.80. EUR nearby payables be covered at 89.15.