Rupee Opens Lower; Trade Deficit Narrows, Yuan Falls More

Rupee Opens Lower; Trade Deficit Narrows, Yuan Falls More

16 Oct 2019 09:17 AM

USD/INR – The Indian rupee opened lower against the dollar amid further weakness in the Chinese yuan and a larger-than-expected fall in the trade deficit at home. The rupee opened at 71.59 to a dollar in early trades compared with its previous close of 71.54. The onshore yuan on Wednesday extended its decline, falling 0.2% to 7.0940 to the dollar to add to yesterday’s 0.3% drop. Earlier in the week, the Chinese currency had climbed to a near two-month high after the U.S. and China reached a preliminary agreement. Reports that China requires more talks before the preliminary agreement is signed have prompted the yuan to pull back. The rupee, tracking the yuan’s advance after the agreement, had reached 70.75 on Monday, but has struggled thereafter amid weak domestic data and corporate dollar demand. Yesterday, the International Monetary Fund cut India’s economic growth forecast for the current year to 6.1% from 7% earlier. For the next year, the growth estimate was reduced to 7% from 7.2%. Meanwhile, data released yesterday showed that India’s trade deficit narrowed to a seven-month low of $10.9 billion last month amid a decline in merchandise imports. That compared to a trade gap of $14 billion a year ago and $13.5 billion in August. Economists had expected a deficit of $12.9 billion.

EUR/USD – The effect of last week's U.S.-Sino trade news continues to wane as investors fear tensions might still escalate, which could dent growth and drive the EU's economy closer to recession. IMF downgrades to economic growth forecasts, especially the euro area and China, left EUR/USD investors cautious. Potential for a Brexit deal has counter balanced some of EUR/USD's downside risks but a large move in either direction seems unlikely for now. Risks from upcoming Fed and ECB meetings could keep traders side lined. Market expectations for both Fed and ECB cuts recently have been pared back and traders prefer to keep their powder dry ahead of those risks. EUR/USD was last trading little changed at 1.1030.

GBP/USD – Sterling surged on Tuesday to its highest level against the dollar since May while British stocks and government bond yields also rose after Bloomberg said British and EU negotiators were closing in on a draft Brexit deal. Already higher on the day, the pound jumped after the report as investors watched for any signs of a breakthrough in the Brexit talks. The British currency climbed 1.5% on the day to $1.28, a five-month high. Sterling has risen nearly 5% higher over the past week as investors rushed to reprice the prospect of a last-minute Brexit deal by the end of Oct. 31 deadline. However, the pound pulled back from its highest level in almost five months versus the dollar on Wednesday to trade at $1.2750, erasing some of the rally sparked by signs Britain is closing in on a deal to leave the European Union.

USD/JPY – The yen rose slightly to 108.70 per dollar, pulling away from a two-month low. Risk-on flows out of the haven yen and into GBP have surged on a report that the UK and EUR are closing in on a Brexit deal, that after Germany's Scholz said a no-deal event should be avoided. The market has further reduced the probability of future Fed rate cuts, with one on Oct. 30 down to 68%. But a follow-on rate cut isn't fully priced in until November 2020, suggesting less panic about the trade war before next year's U.S. presidential election. But a Brexit deal could still fall through or fail to win approval in the UK Parliament, so some caution is warranted.

Currency Range for today

Currency Pair Lower Upper
USD/INR 71.35 71.85
EUR/INR 78.60 79.40
GBP/INR 90.80 91.60
JPY/INR 0.6555 0.6615

Important data releases today

Time Ccy Event Forecast Previous
2:00 PM GBP CPI (YoY) (Sep) 1.8% 1.7%
2:30 PM EUR CPI (YoY) (Sep) 0.9% 1.0%
6:00 PM USD Core Retail Sales (MoM) (Sep) 0.2% 0.0%
6:00 PM USD Retail Sales (MoM) (Sep) 0.3% 0.4%
8:00 PM USD Crude Oil Inventories 1.413M 2.927M