Rock-solid Rupee stability:
USD/INR price-stability is maintained at 60.70/60.95-61.70/61.95 since August 2014, post intra-2014 Rupee recovery from 63.32 to 58.33. During this period end Mar'15 $ trading range is seen in back-and-forth mode at 63-64/64.50 and 12M $ at 65.50-66.50/67.00. All stake-holders have benefited from this consolidation phase; exporter's $ sales at spot 61.70-61.95 paid dividend with time-decay & price-recovery, importer's $ hedge at 60.70-60.95 did cut the pain of being unhedged with decent price-benefits net of time-value and RBI built reserves against rising value of the USD against global currencies. The beauty is also that there is not significant pain or gain being unhedged on imports or exports or FC assets/liabilities. What next?
Rupee gets support from significant improvement (and optimism on the way forward) in India macroeconomic fundamentals; risk from trade/current account deficit and Balance of Payment is behind; high dependency on hot-money fair-weather FII lumpy flows is diluted with accelerated FDI/Long term inflows and RBI pocket is getting deep to defend Rupee against sudden & lumpy $ outflows. The only risk against Rupee is the need to administer value around REER to stay attractive for exports (and inflows) till structural woes of elevated CAD and inflation is out of worry. Till then, any abnormal squeeze in India-US rate differential is bad for Rupee. All taken, RBI stance will be in $ buy mode and retain pause mode on policy rates to retain Rupee stability at 60/61-63 into end of FY15 and beyond. The ST focus is retained at 60.70/60.95-61.95/62.20; end Dec'14 spot target not beyond 61.85-62.35 and end Mar'15 $ spot below 62.85-63.35. The strategy for all stake-holders (including RBI) is to play end-to-end as overshoot either-way not expected to sustain.
USD value stretched but retain bullish undertone:
USD gets bullish advantage from relatively better economic fundamentals (over the developed economies) and the Interest rate advantage from contra monetary position on the way forward. All cues taken, DXY rally from 81-83 (since August-September) to striking distance of target June 2010 high of 88.70 is to the script but the speed is excessive. In the process, Euro is pushed down from 1.40 to 1.2350 and JPY fell sharply 101 to 115.50 in quick time. What is the way forward?
USD retains its upper hand over the Euro and JPY over long period till 2016 from relatively strong economic performance and FED shift into rate-hike cycle from mid 2015 while ECB/BOJ stay in ultra-dovish monetary policy stance till 2016. The only risk on the USD for now is from possible unwind of long book to encash more than expected appreciation before end of 2014. Let us set focus on DXY at 86.25/86.75-88.25/88.75; EUR/USD at 1.2300/1.2350-1.2550/1.2600 and USD/JPY at 112.50-115.50; while ST bias is for extended dollar strength, need to be cautious on whip-saw near-term moves ahead of Christmas holiday season!
Moses Harding
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