VIEW: Despite US election outcome in swing, rupee is seeking 73.50 levels

It has been a rollercoaster for the US election outcome and the ride is not over. Since the counting has begun, Biden has managed to remain in the lead despite a tough call between the two was seen later. Until the final outcome is announced, it seems like there will be a lot of firecrackers bursting to a market surprise.

However, the rupee holds the advantage to rise against the dollar given by below global and domestic updates:

Globally, the dollar continues to struggle and equity picks up a rally.

In our previous report, we had mentioned, whoever wins, the pressure for the dollar will continue to sustain on the downside and equity will rebound sharply in the mid-long run from whatever levels it has fallen to.

The same has been evident from the recent price action movement and struggle for the currency to sustain above 94.00 levels despite its safe heaven nature.

The latest polls suggest Joe Biden’s wins in Michigan and Wisconsin which gets him closer to taking the White House which gave him 264 Electoral College votes out of the 270 needed to win the presidency whereas Trump stands at 214 votes followed by the remaining 60 votes which were still in count.

This leaves Biden a little away from the White House and results in the key states of Nevada and Georgia could be declared to confirm the victory.

Adding spice to the most controversial US elections, recently Trump has filed a legal battle to contest the US elections that are inevitably resulting in a Biden victory and opened legal fights to stop vote counting in two states and asked for a recount of ballots in Wisconsin.

Trends suggest that it is likely that Trump’s Republican Party will maintain control of the US Senate and the White House shall go to Democrat Joe Biden.

However, winning with the majority by either party will have a lot to do with the size of the stimulus package and policy reforms that will be framed and a neck to neck win shall invite more uncertainties keeping markets on edge.

Despite no clear winner at sight and uncertainties still surrounding, US indices have rallied in the past two sessions by 6.5 percent and have recovered nearly almost all losses marked in the previous week. On the contrary, the dollar has retraced below 93.00 levels.

Also, the Chinese Yuan rose to nearly two years high at 6.63 levels offshore against the US dollar as Joe Biden edged closer to the White House in the US election, thereby additionally given the rupee and other Asian peers an edge over the US dollar.

Domestically, RBI’s will continue to manage rupee volatility

With a record $560.63 billion reserves, RBI is now looking at diversifying its foreign exchange reserve investments amid the fall in global interest rates. It is interesting to note that RBI seeking diversification besides exploring other opportunities to increase the overall yield on the forex reserves.

It is likely to increase its gold investments, as well as buying dollars and exploring investing in AAA-rated corporate bonds for the first time. Broadly, with the statements and actions that RBI has come up in the last two months, one thing is certain that the apex bank is doing a wonderful job by managing the volatility in the pair with intervention on both sides.

  • The recent statement indicates that RBI will continue buying dollars and other assets like gold, bonds etc. which will provide an overall boost to the exports and attract investments. Hence, strength in the pair will likely be capped around 72.80-73.00 levels with a dollar buying regime and thereby providing a boost to exports.
  • On the north side, despite the pair was depreciating heavily in the NDF, yet onshore, RBI didn’t allow the pair to move past 75.00 levels as inflation is already high since months and a breakout above 75.00-75.20 levels could trigger panic buying. This could have further accelerated inflationary pressure amid India being a net importer.
  • Over-all with RBI stance, it seems like the central bank is comfortable with a rupee range within 72.80-75.20 levels for the near to medium term and hence losses past 75.00-75.20 levels seem difficult despite the given uncertainties.

Outlook for Indian Rupee

As we see dollar weakness ahead, a strong rebound in equities and strength in the Chinese Yuan; global trends suggest that the rupee will remain resilient from weakening in line with other Asian peers.

Also, though the global trends are influential for the rupee but the impact on the pair shall be diluted as domestically, RBI is active in managing the volatility and preventing unprecedented losses in the pair.

Hence, it is most likely that the pair will retrace back close to 73.00-73.50 levels in the days to come and in the near to medium term, the range for rupee will remain well within 72.80-75.20 levels.

-Amit Pabari is managing director of CR Forex Advisors. The views expressed are personal.

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