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

Why we lifted our DXY and USD/INR forecasts.
Group Research, Philip Wee20 Sep 2023
    Photo credit: Unsplash/Adobe Stock Photo

    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


    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.

    GENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates)

    The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

    This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

    This report has been prepared by a personnel of DBS Bank Ltd who is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).  This report is being distributed in Hong Kong by DBS Bank Ltd, DBS Bank (Hong Kong) Limited and DBS Vickers (Hong Kong) Limited.

    DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

    DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.