FX Daily: USD may have stabilized; INR negative surprises

DXY held 92.2 support; INR under review
Philip Wee08 Apr 2021
    Photo credit: Unsplash Photo

    DXY regained its composure around 92.20 after the US 10-treasury yield found a floor just below 1.64%. Wall Street was mostly flat throughout the overnight session though the S&P 500 index did end at a new record high. The Fed, as per the FOMC minutes for the 16 March meeting, was not overly concerned about the rise in US long bond yields from an improved US outlook, some firming in inflation expectations and expectations for more debt issuance. Although uncertainties surrounding the improved outlook remain elevated, the Fed was clearly monitoring for upside risks after having underestimated the amount of stimulus from President Joe Biden. The Fed reckoned growth could stay strong in the next two years on continued vaccinations and the easing of lockdown restrictions. Boasting the lowest Covid-19 positivity rate in America, California has announced plans to fully reopen its economy in mid-June. 

    AUD and NZD have depreciated toward their pivotal levels at 0.76 and 0.70 respectively. News that New Zealand-Australia travel bubble would start on 19 April were brushed aside. Instead, the bulls were concerned that China has prioritized maintaining financial stability (by reining in credit supply to cool the property sector) over boosting growth. According to the IMF’s spring forecasts, growth in Australia (4.5%) and New Zealand (4.0%) would underperform the US (6.5%) this year. This contrasted sharply with the consensus at the start of the year for the US to lag behind these countries. On downside growth risks, the IMF has expressed concerns over unsustainable house price increases in New Zealand and the expiry of the JobKeeper scheme in Australia. Our mid-year targets for AUD and NZD remain at 0.75 and 0.68 respectively.

    INR fell hard by 1.5% to 74.56 on Wednesday to its weakest level since mid-November. The Reserve Bank of India maintained its 10.5% growth forecast for 2021 (DBSf is also 10.5%) despite the 12.5% growth predicted by the IMF. Sensex has yet to recover above 50,000 after it fell from 52,517 or its peak in mid-February. India’s growth outlook is clouded by a new wave of coronavirus infections. Maharashtra, the second most populous and largest contributor to India’s economy, has been place under lockdown since Monday till end-April. Meanwhile, current account has returned into a mild deficit in 4Q21 after three quarters of surpluses. The next CPI report on 12 April is expected to show inflation rising a second month to 5.5% YoY (consensus) in March from its bottom of 4.0% in January. Given the current landscape, the INR will be sensitive to global oil prices and US long bond yields when they resume their climb again. We will probably revise our forecast next week now that USD/INR has already hit our mid-year target of 74.2.


    Philip Wee

    FX Strategist - G3 & Asia

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