FX – WEEKLY UPDATE :

Weekly SYNOPSIS: 01/03/2024

Currency Map:

Brent Crude closed at USD 82.85 VS Jan close of USD 81.05. Gold closed at USD 2035. Nifty closed at 21982 vs prior month close of 21725. 10 Year G-SEC Yield is now at 7.06%.

Major developments: USDINR traded in the 82.82-83.12 range last month and closed at 82.91, loss of 14 ps for USD as compared to prior month close of 83.05. EUR closed flat m/m and GBP declined 0.26 m/m against Rupee. Indian benchmark Equity climbed 1.18% m/m. 10 Year G-SEC Yield closed this week at 7.06%. 1-year fwd premia is at 1.65% p.a.

In Feb, FPI’S bought Rs 4000 Cr of Equities and bought Rs 19693 Cr of debt . In last calendar year, FII’S have net bought Rs 172853 Cr of Equities and have net bought Rs 70489 Cr of debt.

FX reserves stood at USD 619 bn, as on Feb 23 rd.

Indian economy steamed ahead with stunning 8.4% growth in Q3. Q2 GDP was revised upwards to 8.1% and Q1 GDP was also revised upwards to 8.2%. CSO expects FY 24 growth at 7.6% as against RBI estimate of 7%. Mfrg climbed 11.6% y/y, construction climbed 9.5%. Trade, transport and hotel services climbed 6.7% Agri sector contracted 0.8% due to poor rainfall in some areas. Private consumption grew only by 3.6%. Govt consumption contracted 3.2%. Gross fixed capital formation grew by 32.4% in Q3. Investment growth outpaced consumption growth.

Core sector grew by 3.6% in Jan, lowest in 15 months.

India’s economic growth during the December quarter has emerged as a surprise for economists who were expecting a contraction in its growth due to a nominal decline in government spending, slow growth of the industrial output, and an uneven monsoon in the third quarter. However, a strong construction and manufacturing sector helped the nation in outperforming the experts’ expectations.

Indian PMI(mfrg) climbed to 56.9. The upturn in manufacturing output was the strongest seen for five months and led by the capital goods category. New export orders grew at the highest pace in 21 months, but employment levels changed little as firms felt existing staff strengths were enough to cope with the workload.

GST Collections climbed 12.5% to 1.68 lac Cr in Feb. Average collection in this financial year stands at Rs 1.67 lac Cr.

Rupee continues to be range bound and is expected to trade in the 82.80-83.35 range for some more months. There is no clear theme in Global FX markets. However, with US inflation trending down in a sustained manner and with very little signs of negative impact of US tighter monetary policy on US growth and employment, Fed may bring forward rate cuts to second quarter. This may have positive implications for inflows into Indian debt and equity markets and support Rupee.

Hedging advise: Imports be hedged closer to 82.80. Exports be hedged closer to 83/83.05.

Global developments: Strong spending, but declining inflation and weak manufacturing have given mixed signals about US economy last week. Core PCE index cooled to 2.8% year-on-year, still above Fed’s target. The three-month and six-month rates are at 2.6% and 2.5% (annualized), respectively. This is getting closer to Fed’s target of 2%. US ISM (mfrg) reading fell well short of market expectations and signalled that the recovery in the manufacturing sector is progressing rather slowly.

These indicators show that demand that powers US economy may be cooling off and aid Fed to look at rate cuts in Q2.

Eurozone CPI slowed from 2.8% yoy to 2.6% yoy in February, above expectation of 2.5% yoy. CPI core (ex-energy, food, alcohol & tobacco) slowed from 3.3% yoy to 3.1% yoy, above expectation of 2.9% yoy.

US ISM(services), employment data and ECB rate decisions are to be watched out events in coming week.

Major currencies are still stuck in a range. USD should get the benefit as the economy is better placed compared to EU, UK and Japan. Riding high on a wave of US economic resilience, the dollar is currently the best-performing major currency this year, having gained nearly 3% against a basket of currencies in a couple of months.

Fed Chairman Powell will appear before Congress both on Wednesday and Thursday for his semi-annual testimony.

EU Zone growth is stagnant and rate cuts are necessary to bring economic growth back. ECB may pause in this meeting, but could signal rate cuts in June. The spotlight will fall mostly on the updated economic projections and any signals by President Lagarde on the timing of rate cuts.

Near term direction for FX pairs will be decided by ECB signals and US data.

Currency technical levels: USDINR: 82.80/82.65 (Supports), 82.95/83.05 (resistance),

EURINR:90.20(Resistance),89.10/88.80(Support),

GBPINR: Supports: 104.10/103.70( supports), Resistance:105.40/106.50(Resistance).

JPYINR: Resistance:56.60/57.60, Supports: 54.20 (support).

Hedging advise: USDINR imports be hedged on decline to 82.80. EUR nearby payables be covered at 89.15/88.80. Receivables can be covered on pullback to 90.10/90.35. GBP receivables can be covered at 105.50+.