MONTHLY SYNOPISIS: JUNE 2019

Currency Map:

WT1 Crude: USD 58.20 vs 53.37 in May, Brent Crude at 64.40.

Nifty: 11788, dn 1.13% m/m.

Rupee traded in the 68.88-69.97 range in June and closed stronger at 69.03 as against May close of 69.69. EURINR gained 1.1%. GBPINR closed flat.

Indian 10 Year G-SEC yields have declined to 6.88% . USDINR fwd premia climbed steeply to 4.65%. Higher fwd premia was attributed to RBI’S buy/sell USD transaction. Bank’s bid for fwds pushed premia higher.

FII’S nett bought  Rs 1601 Cr ofIndian Equities in June . FII’S nett bought Rs 79485 Cr of Indian Equities in this calendar Year till date. FII’S have nett bought Rs 5821 Cr of Indian debt securities in June. FII’S have nett bought Rs 8499 Cr of Indian debt in this calendar year till date.

June month was dominated by RBI policy and US-China trade talks.

RBI cut rates by 25 bps and turned dovish. RBI changed its monetary stance to accomodative and indicated that further rate cuts is in the offing. This pushed long term yields also lower.

Indian CPI climbed to 3.07% in May. Food inflation climbed 1.83%.IIP climbed 3.6% in April. Trade deficit expanded to USD 15.36 bn, with exports climbing 3.3% and non oil imports climbing 2.9%.

Indian budget is the focus event for July. Monsoon was weaker in early phase in June, raising worries over agri output and its impact on rural demand.Rupee outlook stays positive. However, slippage in fiscal deficit and Oil prices pose risks to Rupee’s climb.

Global event was dominated by US-China trade spat. After raising the pitch, US President met his Chinese counterpart and agreed to restart the stalled trade talks. He has also agreed to defer imposition of new tariffs on Chinese products. Despite the truce, the road ahead is likely to be bumpy with possibility of verbal escalation. However, ther may be a comprehensive deal in the second half as US President would like to showcase the deal as an achievement.

Trade ceasfire is likely to be positive for Equities and US Dollar. Fed would be under less pressure to cut rates.  However, trade issues have already dented business confidence and investment and hence could pose danger to top line and earnings of US corporates in future.

Federal Reserve kept its benchmark unchanged but struck a more dovish tone in its latest policy statement. Fed elected to keep the benchmark interest rate within its target range of 2.25% to 2.5%, but new economic projections show more Fed officials seeing the case for a rate cut — or two — by the end of 2020.

Fed Chairman stated that “While the baseline outlook remains favorable, the question is whether these uncertainties will continue to weigh on the outlook and thus call for additional monetary policy accommodation,’’.

The Fed also released a fresh print of economic projections, which included new “dot plots” that map out policysetting members’ preferred rate paths through the next three years.The median dot reflected no rate changes through the rest of 2019, and one 25-basis point rate cut in 2020. The previous dot plots in March (before trade tensions escalated and economic data softened) also had the median dot calling for no rate changes by the end of 2019, but projected a rate hike in 2020.

Crude Oil has climbed as OPEC and Russia have signalled extension of production cuts by 6 months. US-Iran problems is also likely to dominate Oil market and keep Crude Oil prices on the upward path.       

G20 leaders ended the summit in Japan pledging to realize a free and fair trade and investment environment. But they stopped short of denouncing protectionism. 

Currency outlook: Indian budget, monsoon, Oil prices and US-China trade issues are likely to be major factors that could impact USDINR movement.EURO is likely to stabilise following Fed’s dovish stance.

Over the medium term, Rupee positives are 1)Fed’s status quo, 2) Weak EU growth, 3)Positive resolution to US – China trade talks. 4) Investment flows.

Considering the last year Rupee decline and the overall spot movement not matching the fwd curve over 3 year period, it is a worthwhile proposition to sell USD for 2 years and sell  USD for 1 year on rally to 69.75.However, if USDINR breaks 70.50 on the upside, exports hedging can be withheld.                                                                  

EURINR exports can also be fwd hedged as EUR/USD is likely to consolidate at an average level of 1.13 this Year due to status quo on interest rate differential. Hence, any short term Rupee weakness could help EURINR to climb to 79.50-80 levels and that would make a strong and confident case for 2 Year export hedging.

GBPINR is in decline mode and tied to Brexit resolution. Expect 87-90 range in coming weeks.

JPYINR could consolidate in the 63-65.50 range.

Upcoming events:

1) Union budget

2) US-China trade talks.

Outlook for July:

Suggestion: USD exports be hedgedon rally to 69.75, EURINR exportsbe hedged on rally to 79/79.50levels. GBPINR exports be hedged due to BREXIT uncertainty.