Changing dynamics – The fate of currencies in the hands of macros and Geo-politics!

By Amit Pabari

Market sentiment turned fragile following clashes between Israeli forces and Hamas over the past few days and the complex dynamics of risk aversion are expected to play out in the currency space with DXY remaining uplifted being the rise in overall safe haven demand. However, as long as the conflict remains contained between the two, the impact on financial markets seems minimal.

The US avoided a government shutdown coupled with a robust JOLTS report, and higher CPI prints spurring further gains in US interest rates and helping underpin the dollar above 106 levels. Well, the temporary funding by the government seems to remain a postponement of a potential crisis.

The bill’s provision for a 45-day government funding extension signals the need for renewed, in-depth deliberations within both houses of Congress – the Senate and the House of Representatives. The objective is to prevent the looming possibility of another government shutdown. However, in the absence of an agreement by November 17, the consequences will be felt by a significant number of federal employees, including approximately two million military personnel and over two million civilian workers nationwide, who will once again experience delayed paychecks. 

A failure to pass the bill again can raise concerns about the United States’ creditworthiness. If there are doubts about the government’s ability to meet its debt obligations, it can lead to downgrades in the country’s credit rating. A lower credit rating can potentially lead to higher borrowing costs for the government and weaken the dollar.

Will the DXY surpass the 108-level mark or has it peaked?

From June 2023 till Sep 2023, inflation across all major segments like food, shelter, energy, etc. except transportation has softened. That apart, Americans except the wealthiest 20% of the country have run out of extra savings and now have less cash on hand than they did when the pandemic began. The data indicates a reduction in the available disposable incomes for American consumers. Despite their strong resilience, which has contributed to robust economic growth this year and prevented the anticipated recession, there are concerns that a potential economic downturn could still occur as households deplete their savings. 

Fewer Savings >> Less Spending >> Reduced inflation >> Less Hawkish Fed >> Softer Dollar.

Hence, the upside is limited in the DXY, and going further we could expect Fiat to fall towards 105-103.50 levels.

Euro’s fate is in the hands of the ECB. What does the economic meter say?

With core Inflation slumping to a one-year low of 4.5% in September, the Euro’s fate lies in the hands of the ECB, bolstering anticipations of rate stability as the ECB evaluates the Impact of recent hikes. Headline inflation has also moderated to 4.3% from 5.2%, reflecting a drop in energy costs and a significant slowdown in services. Despite these trends, both measures remain well above the ECB’s 2% target, signalling continued elevated borrowing costs. While neither investors nor economists anticipate additional ECB rate hikes, some policymakers suggest that unforeseen shocks, such as oil prices hitting $100 a barrel, could warrant further action. This situation parallels that of the U.S., where the Fed has hinted at the potential peak in interest rates, while economic challenges persist in the eurozone, reinforcing the case for the ECB to pause its tightening measures. However, rising wages may complicate the path to disinflation, and a clearer picture of price dynamics may not emerge until 2024, keeping the Euro ECB dependent. However, an oversold state seems to take a pause and the pair is likely to move towards 1.0650 levels. On the downside, the support zone lies near 1.0350-1.04 levels.

The Sterling is selling heavily- More to go or to reverse?

The British pound has been slipping after US-specific factors dominated the macroeconomic environment. First up, UK services PMI data is expected to show a sharp contraction, marking the sharpest slowdown as customers rein in spending due to higher borrowing costs and subdued business confidence. The data adds to mounting evidence that the UK economy contracted in the third quarter and could be heading for a recession in the second half of the year. With inflation cooling and concerns rising over a prolonged economic slowdown, the market is convinced that the BoE has reached the end of its hiking cycle, which is keeping pressure on the pound. However, despite hawkish efforts from the BoE’s members, the pound remains on the back foot although cumulative rate cuts for December 2024 have been trimmed back from 25bps to 18.66bps at present. Well, as nothing remains overvalued or undervalued for a longer period, GBP too will have its share of relief after an untiring sell-off. However, it is in the overall bearish trend until it climbs above 1.2270, the support lies near 1.1990 post which the pound is likely to reverse upwards. 

The Rupee concurs to emerge as the most stable among all!

The Basket of Emerging market currencies has weakened by over 5% in the past two months. However, the commendable resilience of the Rupee is making it shine among all being the least depreciated currency. 

India’s Rupee is propelled by strong domestic fundamentals, strategic RBI interventions, increased foreign direct investment inflows, and a boost from India’s inclusion in JPMorgan’s emerging market debt index which is poised to attract significant investment, potentially providing vital financing for India’s current account and fiscal deficits. In the realm of domestic affairs, the focus is on whether the RBI will steadfastly adhere to its stance, potentially intervening in both spot and forward markets to pre-empt abrupt fluctuations in the rupee’s value. 


Sebi’s centralised system will make life easier for nominees

Well, India’s foreign exchange reserves have fallen by $16 billion to $586.91 billion in the past 2 months. Even if the revaluation of FCAs considers the impact of currency movements like the euro, pound, and yen against the US dollar within the foreign exchange reserves which account for nearly 67%, the net intervention could be said for roughly $5.5 billion. 

The optimism generated by JPMorgan’s decision, RBI Intervention, and the ongoing fundraising by corporations and banks could drive the rupee toward 82.80 once it surpasses the 83.00 level. However, it’s worth noting that any potential losses are likely to be contained within the range of 83.25 to 83.30-83.50 zone, thanks to significant intervention by the RBI. 

In our assessment, if USDINR remains below 83.30 with the RBI’s vigilant hold, there is potential for the Rupee to appreciate toward levels around 82.50 by the end of December.

Amit Pabari is Managing Director at CR Forex Advisors. The views expressed in this article is his personal views.