Aug 20 2018

Cocktail in US Economy to hurt Euro (towards 1.05) & INR (72.50)

U.S. economy is roaring with buoyancy and firing on all cylinders. This kind of economic optimism is witnessed in world’s largest economy after almost 2 decades. The only difference then and today being, earlier US was in a giveaway mode while now they are self-centric. Let us summarize the content of this cocktail:

GDP growth – US economy is expected to cross 4% QoQ GDP growth in next 3-4 quarters. A $19 trillion economy marching ahead at 4% is phenomenal. Do we see a chance for capital moving back to US?

Job creation – The unemployment rate fell to a 10-year low of 4.5%. The falling unemployment will result in higher disposable incomes and improved retails sales numbers. The protectionism will further likely improve these numbers with US residents preferred for jobs in their home country.

Interest rates – Federal Reserve policy makers supported further increases in interest rates as the pace of economic growth continued above trend. The majority views 2 more rate hikes in 2018 and 4 in 2019 making USD a preferred currency for investment. Why would capital move from US to emerging economy?

Inflation – After coming up short for more than half a decade, inflation in the U.S. is back on track. Indicators show inflation rose 2% in May, meeting the central bank’s target and marking the highest rate seen since April 2012. The buoyant economic activity will further heat up inflation in world’s largest economy reaffirming US Federal Reserve rate hike outlook.

We base our expectations on above factors and see an uptrend in DXY to 100-102 in next 6 months moving Euro towards Parity and Rupee around 72.50.