By Dilip Parmar
It’s the week before Christmas, after a volatile year, so expect a calm market with the odd spurt of overshooting short-term moves. Indian rupee surrendered November’s month gains to close at a record low level on a weekly chart and worst performing currency among the Asian currencies following a rebound in the dollar index, strong dollar demand from importers and unwinding of the carry trades.
RBI Repurchase Rate vs Fed Funds Target Rate (Upper Band)
USDINR Outlook
Spot USDINR gained 0.72% or 59 paise to 82.87, in the week gone and a few bucks away from the record high of 83.29. Technical set-up remains bullish for the pair and we may continue to head towards 83.50 in the coming weeks. In the near-term, pair has support at 82.10 and resistance at 83.25.
Last week, no less than seven central banks from Hong Kong to Mexico matched the Fed’s half-point hike. The most striking takeaway from the week was the near-uniform view among FOMC members that the appropriately restrictive level for rates exceeds 5%. Stocks tumbled while the haven dollar surged as global rate-hikes galore continued in full swing and policymakers signalled more tightening ahead. The looming backdrop is the freshly reiterated dichotomy between the Fed’s insistence that monetary policy will become more restrictive for longer, versus the market’s bets that they will pivot toward easing much sooner than forecast.
Fed vs Market Projection on Rate
In another contrast between markets and fundamentals this week, Tuesday’s BOJ meeting should be entirely uneventful on the policy side, and yet is already the anchor point for yen volatility on a favoured 2023 theme.
CFTC Position
In FX, the short covering has been seen in yen (12.8) as per the CFTC data. Speculators also bought sterling (2.5k) and AUD (2.7k). Euro positioning was little changed. The aggregate dollar short rose by a little over $1 billion in the week gone. The dollar Index has put in some kind of low near 103.40 and last week’s data can provide the defensive, high-yielding dollar with some support. We believe the greenback could retrace towards 105.91 before breaking support of 103.40.
(Dilip Parmar, Research Analyst, HDFC Securities. Views are author’s own.)