Rupee may appreciate on lower crude oil prices, year-end rebalancing; USDINR to consolidate in this range

Rupee may appreciate on lower crude oil prices, year-end rebalancing; USDINR to consolidate in this range

By Dilip Parmar

It was a high-voltage week for the domestic currency market as the rupee fell from 81.21 to 82.77 before settling at 82.28 with a loss of more than a percentage point. The better global cues and lower crude oil prices failed to add gains in the rupee as unwinding in the Chinese yuan, lower forward premium, the central bank’s dollar buying and foreign fund outflows weighed.

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A gauge of the dollar’s strength is poised for its first weekly gain in three on mix bag of economic data. U.S. PPI matched the market forecasts of 7.4% y/y for November versus 8.1% prior. Further, the Core PPI rose to 6.2% y/y versus the 6.0% expected and 6.7% previous readings. Preliminary readings of the University of Michigan’s (UoM) U.S. Consumer Sentiment Index rose to 59.1 for December versus 53.3 market forecasts and 56.8 final readings for November.

It has been clear from last week’s US data that the US Federal Reserve is far from done in its fight against inflation. Expect a 50-basis-point hike and policymakers potentially signalling a 5.0% peak rate in the dot plot at this week’s meeting.

CFTC Position: In FX, the flow was skewed towards dollar selling as per the CFTC data. The overall dollar short increased by around $800 million on the week.

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– India inflation reading out on Monday but the highlight for the week will be US inflation and the Fed policy decision later in the week– India’s November CPI inflation is expected to come in at 6.36% YoY. Falling vegetable prices and stable gasoline prices will drive a weak month-on-month increase and help deliver a lower inflation print. However, it will be still above RBI’s tolerance level of 4%+/-2% and suggests one more hike early next year.– Federal Reserve, European Central Bank and Bank of England policy decisions will dominate investor focus this week. Money markets are betting that all three central banks will slow the pace of hikes to 50 basis points, although US inflation figures for November precede the outcomes and are forecast to slow.

(Dilip Parmar, Research Analyst, HDFC Securities. Views expressed are the author’s own.)