Currency Map:

Currency PairsAUG CLOSEJULY CLOSE% change
USD/INR79.4579.26 0.23

Brent Crude closed at USD 96.50 VS prior month close of USD 107.60. Gold closed at USD 1710 in Aug. Nifty closed at 17759 in Aug vs prior month close of 17158. 10 Year G-SEC Yield closed at 7.24%.

Major developments: USDINR traded in the 78.50-80.12 range in Aug and closed at 79.45 as against prior month close of 79.26. Rupee had a roller coaster ride. EUR declined 1.77% m/m and GBP declined 3.65% m/m against Rupee. Indian benchmark Equity index   climbed 3.6% m/m. 10 Year G-SEC Yield closed at 7.24%. 1-year fwd premia is at 3% p.a. FX reserves stands at USD 564 bn as on Aug 26 th. FX reserves has declined from its all time high of USD 650 bn.

Rupee showed weakening tendency tracking USD index’s gain. Rupee hit 80.12 and persistent selling of USD by RBI kept Rupee away from further weakness. Rupee gained on Thursday to 79.30 due to FII inflows for MSCI rebalancing.

In Aug alone, FII’S have net bought Rs 49387 Cr of Equities in Cash segment and have bought Rs 4370 Cr of debt. In this Calendar Year, FII’S have sold close to Rs 1.45 lac Cr worth of Equities. In 2021-22, FII’S net sold Rs 128897 cr in Equity segment and have net bought Rs 4805 cr of debt. In 2020-21 financial Year, FII’S nett bought Rs 2,74,203 Cr of Equities and have sold Rs  42820 Cr in debt.

Indian Q1 GDP grew by 13.5% y/y as against RBI estimate of 16%. Low base effect and recovery from pandemic stuck Q1 of 21-22, were also contributors to high GDP data. The GDP had expanded by 20.1 per cent in the corresponding quarter of 2021-22. In Q4 of 21-22, GDP expanded by 4.1%. GVA at basic price at constant terms during the June quarter rose 12.7 per cent. Agriculture grew by 4.5%, mfrg grew by 4.8%, mining grew by 6.8%, construction climbed 16.8%, trade, hotels, transport, communication & services related to broadcasting climbed 25.7 per cent. Q1 Capital formation climbed 20.1%, Govt consumption climbed 1.3% , private consumption grew by 26%.

Core Sector output slowed to 4.5% in July from 9.9% year ago.

Aug GST collections was up 28% y/y to 1.44 Lac Cr. PMI(mfrg) was robust at 56.2.

Crude Oil price decline augurs well for trade deficit and Rupee movement. Iranian Oil may enter market and along with Global economic slowdown could contribute to further softness in prices. Chinese slow down could bring down commodity prices and is positive for inflation decline. However, the negative for Rupee stems from further USD rate hikes. Indian Exports could slow down due to economic weakness in EU and US. RBI has only used intervention tool till now. It remains to be seen as what further measures will be taken by RBI, if USD is unrelenting due to steep rate hikes.

Indian Equity indices are outperforming Global Equity indices, led by banking sector.

USDINR’s resistance is at 80.12. Support is at 79.30/79.20.

Global developmentsUSD index breached 109 levels. Pound continued to sink. Euro did not get any support, despite ECB officials also sounding hawkish. US macro-economic data continues to better data from EU. Europe is reeling under the impact of Russia- Ukraine war. Gas shortage, higher inflation and large trade exposures to China are weighing down on EU growth.

As market was expecting Fed to indicate terminal rate, Fed Chairman poured water and said that “Reducing inflation is likely to require a sustained period of below-trend growth. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation,” he said, adding, “but a failure to restore price stability would mean far greater pain.” Additionally, Powell emphasized, “the historical record cautions strongly against prematurely loosening policy. We must keep at it until the job is done. History shows that the employment costs of bringing down inflation are likely to increase with delay.”

Some other Fed members even called for 4% rate by early next year. Though softness in Crude and commodity prices may bring down US CPI, Fed will not be comfortable till inflation comes down significantly and partial demand destruction takes place to anchor inflation.

Based on the second estimate, US GDP contracted at -0.6% annualized rate in Q2, comparing to first estimate of -0.9%, PCE price index and core PCE price index were left unchanged at 7.1% and 4.4% respectively.

US mfrg continues to be robust with ISM(mfrg) data reported at 52.8. Eurozone PMI Manufacturing was finalized at 49.6 in August, down slightly from July’s 49.8. Eurozone CPI accelerated further from 8.9% yoy to 9.1% yoy in August, above expectation of 9.0%. CPI core (all items excluding energy, food, alcohol, and tobacco) rose from 4.0% yoy to 4.3% yoy, above expectation of 4.0% yoy.

US non-farm payroll employment grew 315k in August, slightly above expectation of 300k. Total employment was 240k above the pre-pandemic level.Unemployment rose 0.2% to 3.7%, above expectation of 3.5%. Average hourly earnings rose 0.3% mom, 5.2% yoy, matched expectations.

In the accounts of ECB’s July 20-21 meeting, it’s noted that “a very large number of members” agreed that it was appropriate to hike interest rates by 50bps. The 50bps hike was seen as “warranted in view of the worsening of the inflation outlook since the Governing Council’s June meeting”.

Focus will be on US CPI data in coming week. Lower CPI data could offer support to crosses and riskier assets. ECB meeting is another key event.

Currency technical levels: USDINR: 80.12 (Resistance), 79.30/79.20 (Supports), EURINR: 80.90/81.40(Resistance), 79.10 (Support), GBPINR:  95.40 (Resistance). JPYINR: 57.50-60 range.

Hedging advise: USDINR exports hedging can be deferred. Imports can be hedged. EURINR receivables be hedged on spike to 80.90, GBP Exports be hedged.

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