• The Indian rupee appreciated for the 2nd week in a row following dollar inflows. INR remained the 2nd best-performing currency among Asian baskets. In the week preceding, foreign institutions bought $1.2bn equities and $184mn debts while the rupee gained a quarter per cent to 81.96 a dollar.
• The rupee witnessed range-bound trading against the US dollar in early trade on Monday as crude oil prices hovered above USD 80 per barrel and a negative trend in domestic equities weighed on investor sentiments.
• Most Asian currencies were down to begin the week, while the dollar index was hovering just above 101. Rupee forward premiums were slightly lower, with the one-year implied yield at about 1.66%.
• The rupee and other emerging market currencies are eyeing the U.S. Federal Reserve’s policy decision, due Wednesday. With a rate hike fully priced in, Fed Chair Jerome Powell’s comments and tone at the press conference are likely to be a key focus.
• India’s foreign exchange reserves jumped above the $600 billion mark for the first time in 15 months, as portfolio flows remained strong in Asia’s third-largest economy. According to RBI data released on Friday, reserves rose $12.74 billion, the highest weekly gain since March 17, to $609.2 billion. The RBI mopped up dollars when the USD INR dipped below 82, according to traders. This has partly helped India’s forex reserves to climb past $600 billion.

Dollar Index gained to 101.07, up by 1.16% last week against the previous week’s close of 99.91

• The dollar recovered broadly last week and it seemed to have emerged from its near-term selling climax. While it’s premature to call for a bullish trend reversal, the greenback has likely entered at least a consolidation phase, with the potential for a more robust recovery on the horizon.
• Last week could have marked a near-term turning point for Dollar, as it appeared to have passed its selling climax, staging a rebound in the midst of mixed risk sentiment in US stock markets. The late reversal in the Japanese Yen and the underperformance of the Euro helped bolster the greenback’s position.
• It’s a big week for FX markets given looming rate decisions in the US, the Eurozone and Japan. The dollar goes into these meetings in a slightly corrective mood and retracing some of the sharp losses after the release of the soft US June CPI report earlier this month. What might support that corrective mood is market positioning.
• The Fed’s dot plot has indicated one more rate hike after Wednesday, but investors feel there are slim chances of that happening. The Fed will continue to signal the prospect of further hikes, but with the credit cycle turning, doubt it will carry through

What lies ahead?

The rupee spot (CMP: 81.85) remains in a tight range and awaits the FOMC rate decision scheduled this week

• Dollar’s next move will likely hinge more on overall risk sentiment than the anticipated Fed rate hike. Despite these fluctuations, the basics remain the same. A 25bps hike by Fed at its meeting on the coming Wednesday should be a done deal. But the future beyond this decision is clouded with uncertainty. While Fed anticipates at least one more hike this year according to its own projections, futures markets remain highly sceptical.
• DXY looks like it could grind higher to the 102.50 area. This week also sees US consumer confidence, second-quarter GDP revisions and the second-quarter Employment Cost Index. As always, the dollar store is driven by the push-pull factors of the US versus the Rest of the World. Unless we get some upside surprises in European PMIs today or Chinese authorities announce some overwhelming stimulus measures at Friday’s Politburo meeting, it looks like the dollar can continue in this corrective/slightly bid tone.
• USD INR remains in a tight range (81.70 – 82.25), and as historical behaviour suggests, INR could face a volatile break-out from the range in the coming months, following a long period of calm. This FOMC might not disturb the current range, as a rate hike is fully factored in.
• We expect stress from unexpected quarters to precipitate the next move in currencies, and we are watching the real estate and small-bank sectors of the US economy. Unless the macro environment changes decisively, in the form of a sharp deviation in inflation or a significant slowdown, macro data points could have just an incremental impact on currencies including the Rupee.