Weekly Currency Blog

Indian rupee spot depreciated by 0.14 paisa and closed at 83.07  vs previous week’s close of 82.92

In the week gone, the Indian rupee traded in the narrow range before closing at 83.07 a dollar with gains of 14 paise or 0.17%. The risk-averse moods, geopolitical worries and foreign fund outflows are weighted on the Rupee.

India’s FX reserves jumped $1.63 billion to $618.94 billion for the week ended January 12, the Reserve Bank of India weekly statistic said. Last week, Foreign institutions sold $1.98 billion in equities and bought $617 million in debts.

A reassessment of rate cut expectations in the United States is also likely to limit near-term gains for Asian currencies. Strong US economic data and pushback from Fed officials prompted investors to pare bets on aggressive rate cuts.

Rupee forward premiums edged lower with the 1-year implied yield falling 1 basis point to 1.86%. While the rupee drifted in a narrow range through much of Friday’s session, it gained in the closing minutes aided by dollar sales from foreign bank.

The rupee’s recent movement has largely been driven by inflows or outflows and the choppy trend may persist in the near term. India’s benchmark Nifty chocked the biggest weekly decline since October amid foreign fund selling and poor quarterly results from leading banks. The Nifty50 Index tumbled 1.47% to 21572

Dollar Index lost to 103.29, down by  0.86%  last week against previous week’s close of 102.41

The US Dollar Index price, despite the recent setback in speculator bets, has risen for two out of the past three weeks with 0.86% gains last week. Since October, the Index has been on a downtrend and declined from an October high of 107.05 to the most recent low of 100.32 in late December.

The US dollar has enjoyed a strong start to the year as US Federal Reserve Members push back against what they perceive to be excessively bullish interest rate cut expectations. US Treasury yields have backed up, underpinning the US dollar against a range of other currencies.

Dollar has been steadily solidifying its strength over the past couple of weeks on the back of wobbling rate cut expectations since the hawkish comments from Fed’s Waller. The Fed is in a tricky situation now, as both the inflation and the labor market remain strong, and the US fiscal spending is at an all-time high. 

A series of robust US economic data collectively suggest that Fed’s previous rate hikes have been well absorbed by consumers and the economy is well-positioned for a strong start in 2024. 

What lies ahead?

Rupee spot (CMP: 83.17) and Dollar index remains stable, BoJ and ECB Monetary policy in focus for this Week.

This week, the BoJ and ECB central bank’s policy decisions will decide the trend for forex markets. We have a holiday truncated week at home with only three trading sessions.

The BOJ is expected to stay put on the rates, pushing USDJPY higher. In 2024, JPY has already depreciated sharply due to rising US rates and indications from BOJ officials of continuing status quo policy. A move towards 150 is possible if the BOJ policy dismisses any possibility of rate hikes in coming months.

ECB is likely to hold rates and also signal that rate cuts are still not on the table. EUR has been range-bound after the initial appreciation towards 1.10 as the Euro area rates are also slated to come off sooner rather than later.

As for the Rupee, no real trigger seems to be visible in the short-term which can decisively take INR out of the current range. The  month-end’s FOMC meeting is the next major event for the Rupee, especially given that markets are fully invested in the possibility of 5-6 cuts this year and any signal from FOMC to the contrary could create issues for markets.

The direction of US interest rates and the greenback is expected to be influenced by economic data releases and the market’s response to the Treasury supply dynamics as the Fed goes silent ahead of the Feb.1 meeting.

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