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Forex insight for 10th July
Publish date: 10th July, 2018
- Dollar Rupee continues oscillating between 68.40/50 and 69.00 levels on spot.
- Oil price maintains its uptrend but USDCNH has cooled off towards 6.61.
- US Dollar is largely flat against major Asian currencies.
- Majors, Euro, GBP and JPY has drifted lower against USD and that is providing support to USDINR.
- Domestic equity markets are trading higher, in line with Asian and US equities.
Our View
Divergences are galore in the intermarket space. Rupee continues to an underperformer in Asia and EM basket. On one hand, Nifty is less than 3 percent shy of all-time highs, but on the other hand, many mid-small-micro cap stocks have been battered black and blue. In the debt market, Indian long bond yields, are refusing to head lower, with 10 year back above 7.90%, even though US long bond yields are comfortably down from their 52 week highs.
The stress is on emerging markets. Trade war is slowing opening up political war between US, EU and China. Germany and China have reiterated that they are committed to the 2015 nuclear deal between Iran and the P5+1 group of countries following the United States' withdrawal. These are indications that things could ugly before they better. A trade-political war is bad news for the global economy and global financial markets but emerging markets, led by China will be worse affected.
We have seen how CNH/CNY has depreciated, succumbing to capital outflows. Chinese central bank stepped in with intervention, verbal and actual, and they have even stopped infusing liquidity in the economy. For the past one week, Chinese central bank has refrained from infusing liquidity in the interbank through open market operations. PBOC is slowly draining liquidity to support the Yuan. A weak Yuan will encourage even more capital outflows from China and adversely impact their stock market. Various media reports have suggested that leverage in Chinese stocks have soared past 2015 peak and hence the ongoing meltdown can create problems for lenders and borrowers.
Technically, USDINR is caught within a horizontal range of 68.40/50 and 69.00. In case the pair breaks out above 69.00 and sustains, then we can expect a move towards 69.50/60 zone on spot. Buy on decline remains the trade as long as the spot holds above the above support. Nevertheless, in case spot breaks down below 68.40 and sustains, we would reverse to short as a trade for 67.70 would become active.
On majors, we remains bullish on Euro, GBP and JPY. GBP appears to be pricing a lot of negative from political situation in UK. We are skeptical as to how eager would the other members in Ms May’s party will be to replace her and steer UK during this difficult period of Brexit negotiations. Therefore, if May survives and political risk fades a bit, we expect GBPINR to appreciate towards 92.00 levels on spot.
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