Indian rupee spot appreciated by paisa 0.57 and closed at 82.17 vs previous week’s close of 82.74

  • Meanwhile, USDINR remains tethered to a range and is not able to enjoy the full benefit of the current Dollar weakness trend. India’s trade deficit for June came in at 22.6 billion, which is significantly lower than the last June’s 30+ billion. At this rate, the annual Current Account Deficit will be a manageable 50 billion, which can be easily funded by an FII flow of 15 billion. The major headwind for the CAD is the large contribution of 16+ billion a month by invisible (IT/ITES and Remittances), which are very sensitive to global slowdown/recession. Such a scenario could disrupt the Current Account and affect flows in the capital account – a double impact on the Rupee.
  • With a contrasting inflation tale between US and India wherein US core CPI data comes as cooler at 4.8% meanwhile for India CPI due to high commodity prices and increase food & retail inflation. These contrasting scenarios will increase the interest rate differential leading to low forward premiums impacting Rupee.
  • The foreign institutions remained net buyers in the week gone by buying $954mn equities and selling $122mn debts. India’s forex kitty was up by $1.23bn to $596.3bn as per the latest weekly statistics from the RBI.

Dollar Index lost to 99.91, down by 2.31% last week against the previous week’s close of 102.27

  • The Dollar index registered its worst week in eight months following a fall in US yield after a surprise drop in monthly core inflation, the lowest since 2021, which led traders to abandon their previous idea that there might be two more rate increases still to come.
  • The dollar fell and everything else climbed. The Japanese Yen, Pound and Euro gained the most against the US dollar among the major currencies. Elsewhere, a gauge of EM currencies saw its best week since January.
  • qUS CPI came in at 3% against the consensus of 3.1%. More importantly, the core CPI came in at 4.9% (5% expected). Further, core CPI minus the shelter costs was significantly lower, triggering hopes that the inflation in the US is now under control.  While the CPI data did not change the rate expectations for the upcoming FOMC meeting,   markets now expect this hike to be the last in this cycle.
  • Disinflation was the key theme of the week with headline US CPI and PPI all coming in well below estimates, and sparking excitement that the Fed may only need to hike once more, which removes pressure from other central banks to keep on hiking (BOE aside).
  • Strong UK wages data sent GBPUSD to a 15-month high and tag the 1.30 handle as traders placed bets on another 50bp BOE hike and a terminal rate above 6%. China’s trade continued to decline with exports slumping -12.4% YoY and imports down to -7.5% YoY.

What to Watch Apart from US economic data (17th – 21st July) – 

China’s economy will be front and centre in the week ahead, starting with the People’s Bank of China setting its one-year rate. Later that day second-quarter GDP and June activity data. The UK and EU inflation report due Wednesday is set to be the week’s main event as it will help traders and investors fine-tune their bets on how far the BoE and ECB will raise interest rates after a strong re-pricing over the past week.

What lies ahead?

The rupee spot (CMP: 82.02) remains in a tight range, with major swing movement seen between 81.80 – 82.90

  • The rupee’s range could be intact for a longer time now unless the Fed’s narrative comes out very different from expectations. Given the high degree of uncertainty beyond July, it’s not necessary to dwell too much on these predictions for now. After all, both Fed and markets need some more time to make sense of the evolving inflation landscape.
  • On RBI’s stance, it is likely to be a hawkish hold for this time amid a rise in inflation due to an increase in retail inflation. Whereas for US central bank Fed Reserve 25bps rate hike in July is already priced in but there is speculation for one more hike post-July either in September or November.
  • On the other hand, markets are also pricing at the end of the rate hike cycle by this year’s end or the start of 2024 amid cooling off inflation. July 25-26 FOMC is the key event to watch for further decisive action in the Dollar index and Rupee.
  • Until then, USDINR could have its tight range and one can capitalize on both side swing action ongoing for a short term. For Dollar Index might be stable until its major day but tends to be vulnerable as other central banks of BoJ, BoE, and ECB will be weighing its resilience amid hawkish stance and rate differentials could lead to inflows in other currencies than in Dollar.

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