Rupee trades cautiously against dollar, here’s why
Investors have been cautiously trading in rupee against dollar at interbank forex market ahead of macroeconomic data.
The Indian rupee strengthened against US benchmark dollar index for second consecutive day today. However, on Tuesday, the domestic currency first depreciated by 10 paise to 67.52 against the US dollar in early trade, but managed to recover from this and rose gradually by 0.050 points or 0.07% at 67.465 per dollar. Investors have been cautiously trading in rupee against dollar at interbank forex market ahead of macroeconomic data. The Central Statistics Offices (CSO) as it will be presenting India's Consumer Price Index (CPI) inflation numbers for May 2018 and Index of Industrial Production (IIP) for April 2018 today at around 5.30 pm.
Anindya Banerjee, analysts at Kotak Institutional Equities said, “Rupee opens flat, around 67.43 against the US Dollar. There is not much movement in the inter-market space. US long bond yields are at 2.95% on 10 year and the Indian 10 year is trading at near 7.98%. There seems to be conviction amongst buyers to step in protect the 8 handle. With US FOMC scheduled to hike rates this year, forward guidance through dot plot would not only impact the US Dollar but also US yields.”
In case US yields move higher above 3.00%, Banerjee said, “we expect Indian 10 year to succumb to selling from FPIs and local traders. In which case, local yields can test 8.10%, on their way to test next resistance of 8.20/22%. In such a scenario, Rupee can react negatively and depreciate against USD.”
In previous trading session, Indian Rupee was mostly muted but positive above 0.04% at 67.495 against US dollar.
As per Banerjee, technically, USDINR has resumed it uptrend last week, after a couple of weeks of corrective downtrend, which saw prices travel all the way down from 68.50 to 66.84 levels on spot. As long as 67.00 is intact on spot, path of least resistance remains upward. Major resistance levels are 68.00 and 68.50 levels on spot.
Nevertheless, incase of a valid break below 67.00, we would assume that trend has reversed and prices can head lower, possibly towards 66.50/60 levels on spot.
Therefore, for Rupee traders, Kotak says , “FOMC remains a key event to watch. With US economy in a strong upswing, there is greater chance of Fed sounding hawkish. However, the game changer can be if FOMC hints at two more hikes in their dot plot. In that, USD and rates, both can react quite positively to that hint but US yield curve can flatten.”
Further Kotak added, “A flat yield curve, coupled with strong USD is a double whammy for EMs, as it not only tightens the cost of external funding (higher CCY + higher USD rates) but also raises the risk of future demand suppression in the world largest consumption engine.”
Moreover, the benchmark Sensex index surged by 229.97 points or 0.65% today, trading at 35,713.44, whereas Nifty 50 jumped by 60.55 points or 0.56% trading at 10,847.50.