Coronavirus fears keep US dollar in high demand; rupee to remain unchanged

The US dollar has skyrocketed through a series of positive economic releases which have returned values in favour of the currency. It eased aside many of its challenges including manufacturing PMIs, factory orders, services and non-manufacturing PMIs, thereby showing improvements. With non-farm payrolls and average hourly earnings both showing an uptick in values, USD kept the strength on. Other than that, safe heaven demand plays its own role in giving the currency a boost. The fears of the coronavirus kept USD in demand as many investors rushed to the dollar as a safe-haven currency.

Going ahead, USD shall remain on the upper hand against its rival currencies. Investors will keep an eye on the coronavirus headlines as the same revealed that Chinese researchers noted that they had found a breakthrough drug, effective in the treatment of the disease. This got investors’ hopes up and reduced the fear around the disease, allowing investors to return from the safe-haven USD to more risk-sensitive assets. If any further developments arise around a vaccine or cure of the virus, then USD will likely decline. On the data front, investors will keep eyes on CPI releases which will pave further course for dollar.

Euro traded on a bitter note after President Lagarde’s optimism of a recovering Eurozone economy was undermined by poor German market data. Going ahead, the euro will be looking to bounce back as it awaits the unveiling of its economic growth forecasts, industrial production figures and GDP value for Q4 2019.

• The first will be the European Commission’s economic growth forecasts which will outline the forecasts for the Eurozone’s growth as well as a glimpse of the recent events leading up to the forecast. Revisions for economic growth could be seen tomorrow.
• Following this, the Eurozone’s industrial production is due on Wednesday. With a drop in the German industrial production figures, investors will maintain a cautious approach to this data release.
• Finally, the Eurozone will reveal its GDP figure for Q4 of 2019. As per the forecast that there will be a little change in the GDP figure, but investors will be keen to observe the actual outcome as it could influence the currency if a shocking number is revealed.

Investors keep an eye on EU-UK trade talks

All three releases will likely shape the euro’s path in the near-term as the currency looks to perform better than recent weeks and there is the hope of recovery. Also, technically, the pair has taken support around 1.0940 levels and a bounce back towards 1.1000-1.1020 levels is likely to unveil in the coming sessions.

The GBPUSD pair had fallen close to 1.2870 levels, its lowest since last November. The combination of GBP weakness and dollar strength has taken the GBPUSD rate lower. In spite of UK PMI data giving encouraging signs, the GBP caved in to dollar’s demand. The country’s retailers saw their sales jump to the highest level in six years last month, amid political stability following PM Boris Johnson’s victory. Meanwhile, investors will also keep an eye on the EU-UK trade deal negotiations which are set to continue for the next 11 months as the two parties attempt to come to an agreement on the Brexit trade deal.

The UK has officially exited the EU, but a deal on the future relationship is still to be done. The UK and the EU seem to be in opposed stances toward how future trade should be conducted, hence triggering concerns that an agreement can’t be reached before December. The road ahead looks uncertain for both parties and volatility will be seen as the talks develop. However, a technical bounce back can be seen towards 1.2980-1.3020 levels which shall remain ideal levels for hedging immediate exposures.

Trading in rupee

Domestically, trading in rupee is like watching paint dry. Volatility in the currency is lost from the last couple of sessions. The pair has been swinging in a range of 71.10-71.45 levels. After the budget and the RBI policy, a lot of foreign flows have started diverting to the Indian Bond market due to which the bond yields have fallen from 6.55 percent to 6.43 percent.

Going further, it is most likely that pair will follow global cues for further direction but most likely the pair shall not depreciate heavily on the back of strong inflows in the bond market and also would not be appreciated sharply as the RBI is constantly building reserves which are now at $ 471.30 billion. Hence, it will remain in the range of 70.70-72.20 levels till the current financial year-end.

Amit Pabari is the MD of CR Forex Advisors