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  • Rupee hits all-time low of Rs 69/$: What's the way forward?

    Publish date: 28th June, 2018

    In the last 5 years, the rupee came very close to touching Rs 69/$ levels against the US dollar. It finally achieved this today on its fourth attempt. It hit an all-time low of Rs 69.25/$, for the first time ever in its history. The previous all-time low for the rupee was recorded in August 2016.

    Currently, the rupee is the worst-performing currency in Asia, having fallen by more than 8% in 2018, according to a report by Bloomberg.

    Let's address two key questions now:

    • What factors are driving the rupee lower?
    • What is the way forward?

    What factors are driving the Rupee lower?

    • Global trade wars: Trade was one of the major planks on which Donald Trump built his electoral win in the US presidential election. And with the US mid-term polls fast approaching this November, a trade war has been flared up due to the US’ seemingly protectionist policies.. Trump is determined to win the elections for Republicans and retain majority in Senate & House. He believes that spending, tax cuts, trade and emigration are issues which can get his party the winning votes.

      China has found itself bang in the middle of this trade war, causing huge amounts of capital leaving the country. This has resulted in a weaker Yuan. This is bad news for the Indian rupee because, in terms of parity, a weaker Yuan causes the rupee to fall down as well.

    • Related: US-China trade face off: Why should India be concerned? | US-India trade tariffs: Which sectors could get affected?

    • Rise in oil prices: There has been an increasing pressure on the rupee due rise in global crude oil prices. Further, the US is pressing its allies to stop all imports of Iranian oil by November. This move has sent oil prices surging. Higher oil prices is a bad omen for India. That’s because it widens current account deficit (CAD) and increases inflation.
    • Related: 6 effects of rising crude oil prices on the Indian economy

    • Strong US economy and Federal Reserve: The US economy has entered into the second half of 2018 with great momentum. The US government is committed to maintaining the momentum and controlling wage inflation through rate hikes and lower reserves in the system. This is bad news for emerging market currencies like the Indian rupee, which cannot remain immune to a globally strengthening dollar.
    • Politics: India is gearing up for a general election in 2019. At the same time, assembly elections in various states like Andhra Pradesh, Odisha, Sikkim and Telangana will also be held simultaneously. The political uncertainty as a result of the upcoming elections in 2019 is another major factor.
    • Domestic economy: Financial conditions are tightening in the domestic economy as RBI has begun the rate hike cycle, which is not good news for domestic equity and bonds. Equity markets are already quoting decent valuation premium to EMs and that is additional headwind. This discourages inflows and makes Rupee weak

    What is the way forward?

    For the past 5 months we have changed outlook on Rupee, and turned a bear citing a pre-election year could keep carry traders away from the market. That remains the larger theme. Add to the oil, Fed and Trump, the cocktail gets quite dangerous. Having said that, over the near term, much depends on CNH. If the Chinese Yuan reverse direction and begin appreciating against USD, we can see Rupee too appreciate against US Dollar.

    Technically, USDINR is still in a bull trend as long as 68.50 is intact on Spot. If the pair close below 68.50, we can assume that another top is in place and then we will play for lower levels. As long as above 68.50, buy on decline. Above 69.00, we can see the pair aim for 70.00 on spot.

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