USD/INR opened the day a lot weaker at 72.48 after breaching the strong support at 72.50, registering an overnight loss of 11 paise/USD. The currency pair is now trading at 72.36 and a gradual depreciation is expected to test the 72 support level sometime in the coming week.
Though the market expects the RBI may not allow the rupee to rise sharply beyond the 72.00 level, the rupee is closely tracking the Yuan which strengthened to its highest level since 2018. The month-end dollar demand from corporates and oil importers has no impact on the rupee’s rise against the dollar.
From the beginning of January 2021 till date, the Asian currencies have shown a modest appreciation/depreciation against the dollar. The appreciation is led by a Taiwanese dollar by 2.68% and Yuan by 2.40%. Thai Baht registered a steep depreciation of 4.31% followed by the depreciation of 2.82% in Korean Won. Rupee gained by 0.75% in the referred period. The rise in Asian stocks is very steep, with the Taiwanese Weighted Index rose by 14.37% followed by KOSPI registering a huge gain of 11.05%. Most of the Asian stocks registered a rise between 5 to 8% and the BSE Sensex rose by 7.25% in the above period. MSCI All Country Asia Pacific Index registered a rise of 5.10%. The rise in local stocks is supporting the local currency to rise on a gradual scale, breaching the various support levels on the way and now set to test the 72.00 strong resistance level anytime soon.
Dollar registered a 5-month low of 89.59 this week but gained to trade above 90 levels as traders await crucial personal consumption expenditures index, the Fed’s preferred inflation gauge. Economists expect core PCE prices to jump 2.9% Y-O-Y in April compared with a Y-O-Y rise of 1.8% a month earlier. Chinese Yuan advanced to a new 3-year high of 6.3636 as investors increased their bets on further strength in the currency after the Chinese Central Bank appeared not to show discomfort with recent gains.
The US GDP increased at an annual rate of 6.4% in the March quarter which confirms the recovery in the US economy gathers momentum. The yield differential between the 2-year and 10-year US yields has contracted to 147 bps now from over 157 bps a month ago. The contraction in yield differential represents the possibility of higher GDP growth in the US and a gradual dip in US yields expected over a period of time, keeping the US inflation fears on the watch.
Out of the forward dollar premium position of RBI expected at over USD 45 billion, it is expected the Central Bank will extend their forthcoming maturities in May which would impact on the forwards to rise upto 6-month maturities with the rise in forwards more pronounced upto 3-month maturities. Even at the current spot level of 72.45 plus, we recommend the exporters sell their 6-month receivables under the anticipated exposures category to derive a favourable forward exchange rate. Allowing the spot rupee to appreciate and the forward rupee to depreciate seems to be inappropriate and the Central Bank has to announce the required measures to contain the rise in forward dollar premia levels across the maturities.