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USDINR: Strong US economic data to drive the pair higher; Rupee to trade in 81.70-83.00 in near term

The changing face of momentum shows that USDINR could be entering a phase of very high volatility and RBI may be forced to intervene aggressively

USDINR: Strong US economic data to drive the pair higher; Rupee to trade in 81.70-83.00 in near term
We expect an overall range of 81.70 and 83.00 over the near term, with an upward bias.

By Anindya Banerjee

Over this year, the currency market has witnessed massive volatility as USD has been on a record run higher. In spite of the Rupee falling to record lows against the US Dollar, it has strengthened against most of its peers. However, the aggregate data smoothens the interesting shifts in the performance of Rupee. 

Since the Fed meeting in September, Rupee has been underperforming. FPI flows turning negative and reversal of carry trade caused the underperformance. Over the next couple weeks how far USDINR moves up will be dictated by two factors: (i) where RBI draws a hard cap via aggressive intervention; (ii) how far the US Dollar Index can travel. 

US jobs data released on Friday. Next week US inflation and FOMC minutes will release. A strong showing in jobs, followed by higher-than-expected reading on inflation can cause sharp increase in the US bond yields. Higher US yields will make the US Dollar strong. 

As far RBI is concerned, it has ample levels of foreign exchange reserves to ensure stability in the Rupee. It can also use the forward book to add to the quantum of intervention. Having said that, it needs to be pointed out that central bank intervention is more effective when FPI outflow is not significant. 

USDINR: Spot price 

Price action remains decisively bullish in USDINR. There has been an interesting shift in the way price behaved. What was initially a shallow up move during the first phase, turned into a high momentum uptrend during phase two. Ahead of the current phase of rapid uptrend, there was a multi-month consolidation. The changing face of momentum shows that USDINR could be entering a phase of very high volatility and RBI may be forced to intervene aggressively. We expect an overall range of 81.70 and 83.00 over the near term, with an upward bias.

(Anindya Banerjee, VP, Currency Derivatives & Interest Rate Derivatives, Kotak Securities. Views expressed are the author’s own.)

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First published on: 08-10-2022 at 11:12:44 am