By Gaurang Somaiya
Rupee fell to fresh all-time lows after consolidating in a narrow range for the last few months as the dollar index rebounded from its recent lows and is now headed to test level of 105. Also, the Chinese Yuan fell to the lowest level in three-months following expectation that the PBoC could announce more stimulus measures to stimulate the economy.
Recent volatility in the India Rupee has been led more by global factors than by domestic factors as there has been no major change in the India fundamentals. Market are pricing in that the RBI too is likely to act soon on rate cuts but the timing of the same is uncertain. Like the Fed, market participants are pricing that the RBI could initiate a rate cut this year.
On the domestic front, focus will also be on the general elections that is scheduled in the next couple of months. Recent, trade balance data showed from India showed deficit widened in the months of February to $18.71 billion from $17.49 billion in the previous month. On YoY basis, exports have risen by 11.89% and imports, on the other hand, rose 12%.
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Volatility last week was driven by few major central bank policy meeting importantly it was the Fed, BoJ and the BoE that was keenly eyed. In its initial reaction the Dollar index declined after the Fed held its key interest rates unchanged at 5.25%-5.50% as widely expected. GDP and inflation forecasts were revised higher from the previous projections reported in December.
The highlight was that the interest rate projections for this year saw the median rate unchanged at 4.6%, suggesting that the Fed could consider cutting rates thrice this year. GDP for 2024 was revised upwards to 2.1% from December’s projection of 1.4%. While core PCE is projected to tick higher to 2.6% from earlier projection of 2.4%.
The Fed Chairman also mentioned that he will continue to adapt a data-driven approach for future rate decisions. The Bank of Japan in one of the historic moves announced to raises rates after 17 years, bringing the range to 0-0.1% and also ended their YCC policy.
The statement mentioned that BoJ will continue to purchase long term JGB bonds, that weighed on the safe havn currency. They indicated that financial conditions would remain accommodative and refused to provide any additional guidance on future policy steps.
On the other hand, the BoE kept the interest rate unchanged at 5.25% and in its statement Gov Bailey said that the economy is not at a point where the bank can lower interest rates, but the economy is moving along on the right track.
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During the weekend, war escalated between Russia and Ukraine and that too is likely to disturb the overall market sentiment. In a latest update, an underground gas storage site in Ukraine was attacked in the latest wave of Russian missile strike on power facilities.
Volatility in major currencies is expected to elevate in the next couple of weeks following escalation of war between Russia and Ukraine and slowdown in China that is likely to push the PBoC to announce more stimulus measures.
This week is going to be a relatively shorter week as domestic bourses remain shut on Monday and Friday on account of Holi and Good Friday holiday respectively. This week, focus will be on a few important economic numbers that will be released from the US.
Starting with, consumer sentiment, final GDP and core PCE Index number that is likely to guide the dollar. The USDINR(Spot) is likely to trade with a positive bias and support have now shifted higher to 83.30 and resistance could be capped in the zone of 83.80 and 84.20.
(Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services. Views expressed are the author’s own. Please consult your financial advisor before investing.)
