Rupee is in for a rough ride; poll results, Fed may set tone
India’s Q2 GDP grew at 7.1 per cent compared to a growth of 8.2 per cent in the previous quarter.
The rupee appreciated by over 5 per cent against the dollar, primarily on the back of a fall in global crude oil prices. But marginal strength in the dollar failed to restrict gains for the currency.
In November, crude oil plunged by over 20 per cent as crude oil stock rose for the tenth successive week even as refineries boosted output and exports increased. This month, market participants are keeping an eye on the OPEC dynamics as oil producers are burning midnight oil over a production cut. Any cut of more than 1.5 mbpd could support crude oil at lower levels.
On the domestic front, FIIs returned to Indian markets and brought funds worth $1.3 billion suggesting that the confidence is returning after an outflow in the last couple of months. But for the year, FIIs are net sellers and the outflow stands at $12.8 billion.
On the flip side, India’s Q2 GDP grew at 7.1 per cent compared to a growth of 8.2 per cent in the previous quarter.
December will be an eventful week, packed with RBI policy and OPEC deliberations. In its latest review, the central bank kept rates on hold, but investors will be looking for cues for further rate hikes in the next meeting.
The RBI has announced its plans to provide liquidity relief and also relax norms for securitisation transactions for the companies. Minimum Holding Period requirement has been relaxed for originating NBFCs in respect to loans of above 5 years.
On the domestic front, market participants will be keeping an eye on the state election results that will be out in the second week of December. We expect that volatility for the rupee would continue to remain high ahead as there are a host of domestic and global events. Given the current volatility, we expect the USD-INR pair to between the 71.60- 69.20 range for much of the month.
The dollar closed November almost flat as dovish comments from the Fed Chairman and the hawkish minutes kept the momentum neutral. Rather than economic numbers, market participants tracked the G20 meeting, wherein both the US and Chinese President decided to take trade war talks forward.
Both the Presidents have agreed to halt new trade tariffs for 90 days to allow for talks. The White House said this move is now suspended for 90 days, but added that the 10 per cent tariff will be raised to 25 per cent if the parties are unable to reach an agreement at the end of this period of time.
The dollar rose against its major crosses after the announcement, but volatility will continue to remain high as talks will continue between the two major economies.
This month, market participants will be looking forward to the FOMC policy statement wherein the central bank is expected to raise rates and will be providing guidance for the next year. Broadly, the greenback is expected to trade with a positive bias.
The euro continued to remain under pressure and one of the important triggers for the euro and the pound has been Brexit. Both the major currencies have witnessed volatility because of Brexit and earlier last month, EU leaders managed to get through the deal at the EU summit.
On the economic data front, inflation was one of the important numbers to watch for. Inflation in the Euro zone has risen 2 per cent YoY compared to 2.2 per cent in October. The ECB policy will be critical as interest builds on when the central bank is looking to end its bond buying programme. Any commentary from the ECB governor on what could be the impact of Brexit on the Euro zone economy will be keenly followed.
The pound continues to remain one of the volatile currencies and negotiations on Brexit are keeping most market participants on the edge. EU leaders have approved an agreement on the UK's withdrawal and future relations, insisting that it is the "best and only deal possible".
The UK Prime Minister Theresa May said the deal "delivered for the British people" and set the UK "on course for a prosperous future". The EU officially endorsed the terms of the UK's withdrawal during a short meeting, bringing to an end negotiations which began in March 2017.
This month, May will focus on getting the Brexit deal through in Parliament. She has said any rejection of the agreement by lawmakers in parliament’s House of Commons could see the world’s fifth-largest economy leaving the bloc without a deal, or not leaving at all.
Over the last couple of weeks, the Japanese Yen has been consolidating in a range of 111.50 and 114.50 as most market participants remained cautious ahead of the important events that were lined up. From Japan, most economic data have been in line with expectation and the Bank of Japan at the same time has failed to provide any cues on the rate front.
Major trend for the USD-JPY pair will be determined only on break of the range. With a number of important events lined up in the next couple of weeks, we expect volatility to remain high for the pair.
(The writer is Currency Analyst, MOFSL.)