Last week, global risk sentiment was weighed down by the tariff reciprocity between the US and the rest of the world, top-level UK ministerial resignations and elevated NATO tensions. In the mid-week, the Sino-US trade war escalated as the USA announced its intent to impose 10% tariff on U$200 billion of Chinese imports.
At first, the US dollar index dipped on the deepening US-China trade friction, the belligerent talk by Iran and the stagnant pace of wage growth. Later, however, rising CPI inflation pressure and hawkish Fed-speak pushed it to 10-day highs. The euro toggled the $1.17 level after German coalition calm, improving Greek finances and reduction in the European Commission’s 2018 growth forecast.
The pound sterling reached $1.3362, a three-week high, on the governor of the Bank of England, Mark Carney’s economic confidence and British PM Theresa May’s “Chequers Accord”, a cabinet approval for her Brexit plan. But then, it slumped below $1.32 after two key Eurosceptic ministerial resignations. Brent crude ignored the vague Opec agreement on production hikes (one without specific targets) and Iran’s belligerent finger-wagging at the US, over the annulment of the nuclear accord. Crude futures softened to $72.67/bbl on the probable global slowdown induced by tariff wars, recommencement of Libyan oil exports and the US pressure on Saudi Arabia to increase production.
The Indian rupee dipped to 69.10/$, a fresh all-time low on contagion from Emerging Markets, notably the Yuan. Covert intervention, lower oil prices and all-time highs in stock markets, helped it rebound to 68.3150/$. In April-May 2018, the Reserve Bank of India (RBI) sold around $18bn (in spot plus forward maturities) while the FX reserves have eroded by over $20bn till June-end from their mid-April peak.
In June, CPI inflation hit 5%, on base effects and weaker oil/rupee levels. In May, factory output growth slowed to a seven month low of 3.2%, due to weaker consumer, non-durables production growth. The RBI MPC will weigh this and the extent of the pass-through of the announced MSP hikes, as it refreshes its monetary policy stance on August 1.
Over the next few weeks, we expect the rupee to trade at the 68-69/$ range with covert intervention restraining surges at both ends. A medium-term, bearish caveat is that trade and oil wars could morph into currency wars and push the rupee even lower.
IN FALL ZONE
- Over the next few weeks, the rupee may trade at the 68-69/$ range
- RBI MPC will weigh CPI data, factory output growth and MSP hikes, as it refreshes its monetary policy stance
The writer is president-group treasury and retail broking, Kotak Mahindra Bank
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The Indian rupee dipped to 69.10/$, a fresh all-time low on contagion from Emerging Markets, notably the Yuan. Covert intervention, lower oil prices and all-time highs in stock markets, helped it rebound to 68.3150/$. In April-May 2018, the Reserve Bank of India (RBI) sold around $18bn (in spot plus forward maturities) while the FX reserves have eroded by over $20bn till June-end from their mid-April peak. 
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