By Amit Pabari
Indian Rupee’s journey, in 2022 from Best Median performer to worst performer among Asian currencies is just underway. The move could be erratic as the USD will have a free run over the INR as no resistance exists. Till the first half of 2022, The Rupee managed to limit its losses as the RBI continued to intervene in between as and when needed to curb speculation.
How did Rupee behave till now?
The rupee remained the best median performer, though could not hold its fortress against the USD on the back of aggressive rate hikes by the US Fed. After a breakout of 80, it took merely 12 sessions for the USDINR pair to cross 82.00 levels. In line with other central banks’ interventions like the Bank of Japan, Bank of England, and Public bank of China which intervened directly or indirectly to curb the dollar rise, RBI too had intervened by opening a credit line worth $9 billion for oil companies. This together has bought the rupee near 81.15 levels in the last week but the same was immediately reversed as major importers rushed to buy bringing USDINR back near 82.00 levels. It indeed looked like a trailer for the coordinated intervention of 1985!
Flashback of 1985…
A meeting between G-5 nations in “Plaza Accord” agreed on dealing with the strong value of the US dollar with a coordinated dollar intervention. Well, the outcome was successful as it hammered the dollar strength by nearly 25% till the end of 1987.
Will the same formula work this time too?
Doesn’t seem like as firstly, the countries like EUR and UK were late raising interest rates and are currently doing so in a slow manner when the need for an hour was to be aggressive. And even if they try to match the phase, their previous passiveness makes it unlikely that markets will believe for the one to be sustainable. Secondly, an economically stronger dollar suits the US in a way that it didn’t in 1985 as this time, it is helping to an extent to bring down inflation by a few points. And thirdly, unlike last time the geopolitics this time are haywire; Russia-Ukraine war, US-China tussle over Taiwan etc. Plus, the US might be weaponizing a stronger dollar to target China as the Chinese property companies have to roll over nearly $ 8.55 trillion of liabilities this year, eventually hurting them to pay off dollar-denominated debt with a stronger USD.
Hence, the mighty dollar looks to be dominating for longer than the market thinks!
It’s repercussions on EUR
EUR strengthened sharply against the USD from a low of 0.9580 levels to 0.9982 levels as the Dollar Index pull back due to heavy intervention by major central banks. However, it was surely a trap for EUR bulls.
Considering the ongoing strive for survival during winters amid energy crises and widening trade deficits across the zone, the EUR will not hold any strength. Plus, as the ECB continues reinvesting the principle from the maturing securities purchased during the Asset purchase program (APP) and pandemic emergency purchase program (PEPP), EUR shall remain dented and could fall below 0.9500, 0.9000, and 0.8500 levels in the next 3 to 6 months and therefore any upticks close to 0.99 to parity can be taken as selling opportunity.
So, on the GBP
It’s been a roller coaster of a ride, after having its worst monthly decline since 2016 in September from 1.16 to 1.0350 levels. Clearly, the pair is pissed off by the policy divergence between the BoE and the Government. The recent super pullback from 1.03 to above 1.15 came after the series of actions taken by the BoE and Government after US Treasury yields shot up sharply post-fiscal policy, which triggered margin calls for various pension fund.
However, the bond yields have started to surge again despite BoE pledging to buy gilts worth nearly $65 billion up till 14th Oct. With the country surrounded by crises of all sorts and the economy reeling under pressure due to slowdown, rising inflation, and twin deficit, the current pullback in GBP also would be short-lived. Well, GBP is quite convincingly poised to shift on the downside again in the medium term and a breakdown below 1.12 levels will again push the cable below 1.03 and parity levels in the medium term. Therefore, upticks close to 1.15 to 1.17 can be taken as a selling opportunity.
Outlook on Indian Rupee
As we enter into the last quarter of the current year, the Rupee sank to a new all-time low due to a poor economic outlook, global growth concerns, and a widening twin deficit amid soaring oil prices. With a stronger US NFP, data would cement the US Fed’s to follow its aggressive to bring down inflation as so far, the tightening hasn’t done much good to the economy, eventually creating turbulence in the DM and EM currencies. If the RBI sets the rupee free in line with peers, the currency can move towards 84.00 levels in the medium term. On the flip side, 81.20 and 80.50 shall act as strong support for the USDINR.
(Amit Pabari, managing director, CR Forex Advisors. Views expressed are the author’s own.)