As expected, rupee continued its weakening bias moving into September expiry. The half-hearted efforts from government & regulator have been ignored by dollar bulls. The currency markets are rattled with over-lapping geopolitical factors rubbing shoulder against each other.
The weakness is likely to continue till the following factors subdued or somewhat under control:
- Political scene – The ‘if’ around Namo winning the next Lok Sabha elections are getting louder. In few weeks from now the rhetoric around election with get louder. The only solace amid rising energy prices has been a normal monsoon in the election year for the ruling dispensation.
- CAD – Uncontrolled trade deficit will create more head-ache for the markets with festival season around the corner. The reassurance given by finance ministry to contain deficit at 2.6% of GDP will be growth restrictive. The deficit creating ingredients (crude oil) are unlikely to cool-off given the positive outlook of US and European economies. FIIs, NRI flows, FDI can only bridge limited gap to bring down trade deficit.
- Trade War – The looming crisis of counter tariffs among world’s two largest economies has resulted in stronger dollar. Emerging economy currencies including CNY have depreciated due to looming and continued verbal spats. USD/INR will draw conclusion from USD/CNY movement going forward.
- Crude Oil – The subdued crude oil prices helped India return to normalcy from subsidy and liability overdue point of view, from 2013-17. The reforms to erase subsidy is coming back to hound the government with oil looking to touch $100/barrel mark. The elevated crude oil level will continue to put pressure on CAD, inflation etc. resulting in weaker rupee.
- US Fed – The liquidity kept all markets comfortable starting from equity, EM, fixed income and credit. The hawkishness and rate hikes have come to a level which can create lot of uncertainty in global markets. The markets may fall with Dow leading the way, funds going bankrupt, Emerging Markets depreciating further, then we will see further fall in INR and RBI policy tinkering will not work. In all likelihood, regulators will try to avoid a domino effect on markets, with fed moving from hawkish to dovish tone by the end of 2018.
What should companies do to manage forex risk?
A combination of Forwards and option strategies should be adopted immediately by companies to mitigate risk. The volatility index is likely to remain at stretched levels for next 6 months till we have clarity on Lok Sabha elections and looming trade war.
We expect the currency to see wild swings between 69.50 to 76.00 in times to come. Manage risk properly.
Events over the coming days:
Central Banks: US Federal Reserve and Reserve Bank of New Zealand will announce interest decision on Wednesday.
Economic data: German CPI inflation on Thursday. U.S. Q2 GDP report will be released on Thursday along with income and spending report. Japan inflation report will be released on Thursday.
Geopolitics: U.S. imposes tariffs on $200 billion worth of goods on Monday. U.S. -Japan trade talks to continue this week. EU and US to continue trade talks this week. President Trump will address the United Nations Security Council on Wednesday. Turkish president Erdogan to make a state visit in Germany on Saturday.