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USDINR – 7 June 2023

Technical Analysis

Over the last year, USDINR has traded within a 7% range, having appreciated from 77.380 in June 2022 to an all-time high of 83.268 observed on the 20 October 2022. Trading throughout the last 30 days has seen USDINR consolidate around 82.600, having continually failed to breach the 82.900 resistance level throughout May.

With 82.900 serving as the key medium-term resistance level, a move above the handle may buoy further optimism and promote a rally towards the all-time high, particularly given how USDINR has formed a double-top around 82.900 (confirming strong resistance here).

Trading since February also indicates that 81.750 holds as a medium-term support level, with moves below 82.000 generally proving brief. While the consolidation of USDINR above the 81.750 support level since February is indicative of bullish dollar sentiment given higher-lows than trading prior to February, such optimism has failed to deliver higher-highs.

While USDINR is trading marginally below the 10-day simple moving average (SMA), it remains firmly above the respective 50-day and 200-day SMA of 82.151 and 81.913.

Accordingly, as evidenced by the graph, on a medium-term basis USDINR is trading firmly within the 81.750 level of support and 82.900 level of resistance. While the upward trajectory of higher-lows is indicative of bullish investor sentiment, the 82.900 level is the key resistance level that USDIRN will need to breach to test the all-time highs.

The graph evidences the support (81.750) and resistance (82.900) levels discussed above and the recent upward trajectory experienced.

Macro-Economic Analysis

The USD rally comes as investor optimism gathers momentum following the Biden-McCarthy deal averting the prospect of a technical default in the States. Crucially the Fiscal Responsibility Act suspends the debt ceiling through to 1 January 2025 – giving the US some breathing room as their debt obligations continue to soar and federal debt exceeds $31.47tn. While the fiscal tightening measures aims to reduce the government deficit by some $1.5T over next 10 years, the deal keeps intact much of Biden’s landmark Inflation Reduction Act which seeks to reduce inflationary pressures and mitigate against the prospect of a recession. Hence, while uncertainty around debt-ceiling discussions propagated a general risk-off sentiment, the passing of the Fiscal Responsibility Act has buoyed investor sentiment feeding into dollar strength.

Dollar strength has also come as a result of markets upward revising their rate hike expectations from the Federal Reserve. The release of the minutes from May’s meeting suggests while several of the FOMC may be inclined to ‘skip’ a rate hike in June, given that “many participants focused on the need to retain optionality after this meeting”, the possibility of further rate hikes remains. While markets in early January were pricing in a terminal rate of 5% (by June 2023), persistent inflation has seen this upwardly revised. For example, money markets are now pricing in 75% chance of rates hitting 5.5% by 26 July, with such revisions feeding into further dollar strength. Given the minutes’ emphasis on policy makers retaining optionality, much of this recent upward revision in rate expectations have been the result of fresh data pointing to further inflationary pressures.

With markets weighing on FOMC members’ policy inclinations being heavily data-dependent, recent economic indicators pointing to persistent inflationary pressure has seen investors rally towards the dollar. For example, on 1 June, the ADP Employment Change surpassed expectations of 170,000 having hit 278,000. Along with non-farms similarly beating forecasts (339,000 vs 170,000), markets assessed the impact that a persistently tight labour market would have on inflation and in turn, the FOMC’s appetite for a further rate hike. Notwithstanding marginally higher-than-expected unemployment and slightly softer wage-growth the DXY dollar index rallied 0.75% in the 12 hours following the US labour market print, as markets weighed on the possibility of a further hike.

The US labour market print came just a week after stronger-than-expected US Q1 GDP results (1.3% vs 1.1%), saw investors further rally towards the dollar. Here, consumer spending rose greater than forecasted though investor sentiment remains cautious given that the print still marked the weakest growth since Q2 2022 and consumer confidence slipped in April and May.

Meanwhile, the Reserve Bank of India surprised markets by voting to keep their benchmark policy rate unchanged at 6.5% on 4 April. This came against market expectations of a 25bps rate hike, which would have brought borrowing rates to their highest level since late 2015. Accordingly, borrowing rates remain at their highest level since 2019, following a rate hike cycle of 200bps starting in May 2022.

Much like their American counterparts, policy makers are keen to assess the impact of the rate hikes on inflation and want to avoid ‘over-tightening’. This comes as annualised inflation showed signs of slowing sharply in April, slipping to 4.7% as it marked its lowest level since October 2021. While this inflationary print was also softer-than-expected (at 4.8%), markets are still weighing on whether the RBI will deliver a 25bps hike on 8 June.

The Reserve Bank also remains cognisant of not wanting to overly hinder growth which accelerated to 6.1% in Q1 as government and private capital spending surged. As such, another decision to keep rates unchanged could see pressure on the rupee, raising the likelihood of a test of 82.900.

Elsewhere, given the implications that the strong dollar has had on the cost of servicing debt as well as food and energy imports, some within the BRICS states have more strongly, and publicly, voiced desires to reduce reliance on the dollar. Here, they have argued against the need to maintain substantial dollar holdings, intensifying research on developing an alternative common currency, or diversify international trade settlement methods. An example of this would be the recent bilateral trade agreement between India and Bangladesh which will settle trade transactions in rupee and taka. As themes of de-dollarisation continue to gain some traction, many maintain that it may impact the wider market over a longer time horizon.

Our View

In the short term we expect to see range-bound trading however as markets weigh on the RBI’s interest rate decision, a surprise policy change may see USDINR test of the aforementioned support and resistance levels.

Our medium to long term view expects a Fed pivot to materialise in H2 2023. If enacted, this could see investors seek higher yielding assets elsewhere, allowing a basket of currencies including BRICS to pare some of the loses seen over the last 18 months.

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