MONTHLY SYNOPISIS: July 2020

Currency Map:

WT1 Crude: USD 40.44vs 39.80 in JUNE 2020, Brent Crude at 43.64 vs 41.72 in JUNE 2020.

Nifty: 11078, up 7.5% m/m. Gold closed at USD 1975.

Indian 10 Year G-SEC yield closed at 5.85% .

Rupee traded in the 74.50-75.60 range in July. The pair closed at 74.81, registering a gain of 0.92% for Rupee.  EURINR closed at 88.80, up 4.70% m/m, while GBP climbed 5.76% m/m. Yen climbed 2.4% against Rupee.

Rupee’s trading range between 75 and 76 was finally broken on 2 nd July. Rupee has been holding on to the 75-76 range due to hefty USD buying by RBI. FX reserves has swelled to USD 516 bn. Rupee gained to 74.50due to FDI inflows. RBI’S consistent USD buying has stemmed Rupee gains. EM Currencies advanced against USD, tracking broad based USD weakness against majors. Euro and GBP rally against Rupee is also attributed to Rupee’s strength being stymied.

Indian Equity indices extended its rally and soared 7.5% m/m for the second consecutive month of gain. Vaccine hopes, liquidity and better than expected corporate results and improving demand outlook despite localised lockdowns  are the recent triggers for the rally.

Indian IIP contracted by 34.7% in May over last year, compared to a revised contraction of 57.6% in April. Mfrg declined 39.3% in May. Mining output declined 21.4% and electricity generation contracted 15.4% .Indian CPI climbed 6.09% in June. Food inflation was reported at 7.87%. Inflation is above the upper band of 6% fixed by Govt. RBI may not act on higher inflation due to economic damage caused by Covid.Indian Trade account registered a surplus of USD 0.79 bn in June as against trade deficit of USD 3.15 bn in May. Imports contracted -47.6% and exports contracted -12.4%.                      

Technically, Rupee is bullish now as it has broken 50 day moving average. It is still trading above 200 day moving average. USDINR movement is still at the mercy of RBI. If RBI does not intervene, there is high probability of Rupee testing 73.50. USDINR pair will face resistance at 75.50.Important levels are 74.50/74.10/ 73.50 on the downside and 75/75.25/75.50 on the upside.

Global developments:Global Equity markets traded in a tight consolidative range as the mood fluctuated between impact of corona virus and the availability of deep liquidity with hopes for early vaccine development.USD slid, oil was flat and Gold extended its bull run closer to USD 2000 as five major central banks have unleashed USD 5 trn in asset purchases and that liquidity has supported the market despite rising infections.EU unleashed USD 750 bn recovery package and this boosted Euro to 1.19 levels. US Congress is debating on USD 1 trn fourth round of stimulus package. Though US, EU economies contracted deeply in last quarter, incoming economic data suggests possibility of V-shaped recovery.Fed maintained status quo and repeated a pledge to use its “full range of tools” to support the economy but cautioned that the outlook “will depend significantly on the course of the virus.”ECB left interest rates unchanged as widely expected. It also maintained its asset puchase program.European Commission projects a deeper recession in Eurozone and EU in 2020, due to coronavirus pandemic. EU GDP is expected to contract by -8.7% in 2020. However it is expected to grow at 6.1% in 2021.Eurozone GDP contracted -12.1% qoq in Q2, slightly worse than expectation of -12.0% qoq. Over the year, GDP contracted -15.0% yoy. 

US GDP(advance estimate) showed that US contracted -32.9% q/q.Despite deep contraction in Q2, incoming data on mfrg, retail sales and spending implies a equally opposite blow out growth in Q3.

Chinese Q2 GDP expanded 3.2% as against a decline of -6.8% in Q1.

The other focus was on US-China ties as it worsened with US ordering closure of Chinese consulate in Houston and China closing US Consulate in a key province. Focus will now steadily shift to US elections in Nov. US President Trump faces an uphill task as his rival and former VP Mr Biden is leading in opinion polls.

Gold extended its bull run and is closer to USD 2000/OZ due to liquidity, low interest rates and uncertainity surrounding US-China ties.                                      

Currency outlook: Expect USDINR to trade in the 74.10-75.50 range.

EUR/INR is expected to trade in the 87-90. GBPINR is expected to find support at 95 and possibly trade upto 100 levels.JPYINR could consolidate in the 69-72 range.

Outlook for AUG 2020:

Suggestion: USD imports be hedged at 74.40/74.10/73.50. Exports can be hedged closer to 75.50. EURINR imports can be hedged closer to 87. GBP exports can be hedged closer to 100+ levels.

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