Re to move in 63.50-64.25 range unless Budget changes things

The year 2017 was interesting as various asset classes, especially stocks and commodities rallied. The point to note from the Indian perspective was the massive rally in crude oil prices, including the rise in Indian crude basket.

Warning from market experts, the announcement of quantitative easing unwinding by influential central bankers and the upwardly mobile global interest rate cycle hasn’t punctured the enthusiasm of so called “value seekers”, yet. With this in the background and witnessing the same trend continuing in 2018, it has made the job of forecasting very difficult indeed.

On one hand, there is the fear of overvaluation and frothiness in some of the asset markets, while on the other we need to keep our clear focus on “global growth”. To understand this in the context of how currencies might fare in future is all the more daunting and interesting as well.

The dollar index, which is a gauge for the US dollar strength, was on a sequential downturn from the beginning of calender year (CY) 2017, and had a brief rally in September-November the same year. Since then, it has fallen by another 5.25% and threatening to break below 90 for the first time in three years. The causes for this decline have been different everytime and the the US Budget deadlock was the proverbial last straw this month. Thankfully, as I write, that has been resolved. Which means, we could see some respite in dollar bearishness for the time being.

Fundamentally, if one looks at the condition of the US economy, it seems to be on the even keel and improving. Forecasters are also gunning for either two or three 25 basis point hike in the US interest rate in calendar year 2018. My vote as of now is in favour of three rate hikes in CY 2018 if conditions such as now persist. As we all know, the US tax proposals should add up a few basis points to the US GDP growth. Elsewhere, especially in Europe, the formation of German government under Angela Merkel, has been a worry and the recent workaround didn’t work. This has brought in a kind of uncertainty for the euro. Also to note that the British pound has had a perky start in the new year, almost threatening to go past 1.4000 level.

Technically speaking, euro is still in a bullish rally, and support around 1.2175 seems to be holding. Giving the current pattern and despite German fears and on the basis of technical alone, we should see some more rally in the euro and a target around 1.2400 looks achievable. Given this, I would tend to be “long” euro around 1.2175 area. Similarly, GBP-USD is also looking pretty bullish, though area above 1.4000 looks a little messy. The strong rally that we had witnessed in the recent past may peter out around 1.4000 area and we could anticipate retracement of sorts. Hence, as a contrarian, I would like to see GBP “short” positions around 1.4000.

The Indian stock markets have seen spectacular rally, breaking new highs in the recent past. A cursory look at fundamentals is a must. GDP growth in fiscal 2018 moderated to 6.5% from 7.15% in fiscal 2017. However, various estimates throw a favourable number for fiscal 2019. According to our house view based on all the parameters, India GDP growth would pick up and grow at a rate of 7.3% for fiscal 2019.

However, the fear of worsening twin deficit remains a real concern as long as global oil and commodity prices remain elevated. This also brings back our focus on the inflation trajectory in fiscal 2019 and consequently expected rate action from the central bank. The CPI headline inflation has inched up to touch 4.8% in November and given all the indications are looking to move higher. Given this background, it would be difficult to expect any kind of rate cut in the coming policy meetings. We also need to keep a watch on the coming Union Budget proposals to be presented on February 1.

Given the indications, fiscal prudence won’t be compromised. Having said this, current rally in bond prices may sustain and the benchmark yield can move above 7.5%. On the USD-INR front, dollar bearishness has helped rupee appreciate against USD moderately, though it’s been difficult to penetrate below 63.5000. I don’t expect too much action in the USD-INR market, given the current situation as I expect range play within 63.5000-64.2500 range. Obviously, the Budget day could change all these.

CURRENCY MOVES

• Current rally in bond prices may sustain and the benchmark yield can move above 7.5%
   
• Dollar bearishness has helped rupee appreciate against USD moderately

The writer is senior regional head- treasury advisory group, HDFC Bank