Rupee erases yearly gains; rise in dollar demand from oil imports, bargain buying weighs on Indian currency

Rupee erases yearly gains; rise in dollar demand from oil imports, bargain buying weighs on Indian currency

By Dilip Parmar

The Indian rupee erases yearly gain in the week gone following the dollar demands from the oil importers and bargain buying. The fall in Asian currencies, risk-averse sentiments, absence of central bank’s intervention and gain in crude oil prices weighed on the local units.

Spot USDINR gained 0.86% or 70 paise to 82.74, marking the biggest weekly gains since December 9. We believe the central bank may intervene in the coming week as the pair reaches a psychological level of 83. Technically, the support has been shifted to 82.25 from 81.70 and resistance between 83 to 83.30. 

A gauge of the dollar declined after data showed US job gains moderating in June, spurring some concern about the labour market under the Federal Reserve’s monetary tightening. The dollar index registered the first weekly decline in three to settle at 102.27. Among the major trading currencies, the pound and yen surged the most among the G10 currencies while the euro gained half a per cent in the week gone.

Two-year yields last hit the level of 5.11% before closing at 4.94% the levels of 2007, indicating a hawkish Federal Reserve. With DM central banks still furiously tightening, the question is how long the bond remains weak. In the recent CFTC data, the speculators trimmed their dollar short position in the week gone and now the net dollar short position remained at $ 11.5 billion.

In the coming months, the effect of the Fed’s current Quantitative Tightening program is likely to be seen. While the RRP account stands at more than $1.8 trillion and the overall Fed balance sheet has only shrunk by a fraction of the amount. US Federal Reserve Bank credit fell by $48 billion from a week ago, leaving the Fed’s portfolio of interest-bearing assets at $8.269 trillion. In one of the events, Yellen said it’s too soon to rule out the threat of a US recession, but data suggest “that there is a path to bring inflation down in the context of a healthy labour market.

The week will bring a heavy load of data releases, kicking off with China’s inflation report on Monday, and India and the US CPI on wednesday. In India, we see inflation picking up again, likely giving the central bank reason to keep its guard up. Inflation in the US likely continued to soften in June but a key measure of underlying price pressures is still running at an uncomfortable pace that keeps the Federal Reserve tilted toward resuming interest-rate hikes this month.

(Dilip Parmar, Research Analyst, HDFC Securities. Views expressed are the author’s own. Please consult your financial advisor before investing)