FX Daily: Higher DXY and USD/INR in 4Q23

We see DXY ending the year higher at 107 instead of 105 previously. DXY held above 105 ahead of today’s FOMC meeting. Like the European Central Bank last week, the Federal Reserve could surprise with a hike despite wide expectations for the Fed Funds Rate to stay unchanged at 5-5.25%. First, the Fed should lift its GDP forecasts today. Fed staff stopped forecasting a US recession at the FOMC meeting on 26 July. Since then, the US yield curve has become less inverted, with the 10Y-2Y differential narrowing from -100 bps to -73 bps. Second, Fed Chair Jerome Powell warned at Jackson Hole on 26 August that the inflation remained too high and that the Fed was prepared to raise rates further if appropriate. On 13 September, US CPI inflation accelerated to 3.7% YoY in August after rising to 3.2% in July from a 15-month low of 3% in June. Since 27 June, WTI crude oil prices have surged 35% to more than USD90 per barrel and lifted the US Treasury 10Y yield by 60 bps to a fresh 16-year highof 4.36%. Apart from the rate decision, the dot plot and the Summary of Economic Projections (SEP) will attract the most attention for the Fed’s guidance on “higher for longer rates.” In July, the Fed delivered one of the two hikes pencilled in June’s SEP. A recent Financial Times-Booth survey did not rule out 1-2 more hikes for the rest of this year, including at today’s meeting.

We lifted our end-2023 forecast for USD/INR to 84 from 81.8. We see USD/INR moving from its year-long 81-83 range into a higher 83-85 range. First, the Fed-RBI policy rate differential has tightened to 100 bps from 350 bps during the Fed tightening cycle. The Fed is more likely to hike in 4Q23 than the RBI, which does not expect India’s CPI inflation to stay above the 2-6% target beyond July-October. Second, USD/INR and USD/CNY closed above last October’s highs, with USD/JPY not far behind. USD/INR had ignored the rises in USD/CNY and USD/JPY in the first 7-8 months because USD/INR did not fall with them during the USD’s sell-off between November 2022 and January 2023. India is unlikely to ignore the CNY’s depreciation because of its desire to attract foreign investments from companies pursuing a "China plus one" strategy. Third, Brent crude oil prices broke above USD90 in September after keeping a stable USD72-88/barrel range in the first eight months. Last week, the International Energy Agency warned that production cuts by Saudi Arabia and Russia risked “locking world oil markets into substantial deficit.” We noted that USD/INR rose further above 83 last Friday after India’s trade deficit widened to USD24.2bn in August from an average of USD20.4bn in June-July. The deficit has been widening after shrinking to USD15.2bn in April, its narrowest since August 2021. Real GDP growth was strong at 7.8% in the April-June quarter on domestic demand; the economy has been in an export recession since the October-December quarter.

Quote of the day
“The best way to find yourself is to lose yourself in the service of others.”
Mahatma Gandhi

20 September in history
In 1932, Mahatma Gandhi started a hunger strike against the way Hindu untouchables were treated.

Philip Wee

Senior FX Strategist - G3 & Asia

philipwee@dbs.com

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