Currency Monthly. 6 th January 2017

Transcription

1 6 th January 2017 SEBI Certified Research Analyst

2 Outlook Indian Rupee: Indian Rupee is estimated to depreciate for the month of January on account of stronger dollar index after US Federal Reserve hinted towards a gradual hike in interest rates for Further, there have been some serious foreign outflows from emerging markets which have kept pressure on the currency. On the domestic front, Modi government s demonetization move in order to remove corruption and terrorism has caused some inconvenience to the general public now but still the situation is to wait and watch. Moreover, downside in the currency will be witnessed due to postponing of GST tax which was supposed to be launched from 1 st Apr 17. Additionally, investors will be cautious ahead of the Budget announcement on 1 st Feb 17. However, sharp downside in the currency will be cushioned as a result of central bank intervention at the higher levels along with estimates of favorable industrial production and inflation data. For the month of January, Indian Rupee is expected in the range of Dollar Index: The US Dollar Index is expected to be on a positive side in an upcoming month on estimates of hike in interest rates by the Federal Reserve for the year for Further, optimistic moves and announcement by the new elected US President Donald Trump will lead to upside in the currency. Moreover, robust manufacturing and non-manufacturing data has pushed retail sales up, employment data like ADP and Non-Farm employment has been favorable along with upside in the economic growth of the country which has led to a positive movement in the currency. For the next month, Dollar Index will be in the range of Euro: The Euro is forecasted to recover from its low in the coming month due to optimistic manufacturing and non-manufacturing data from two major countries like Germany and France after a surge in new order intakes, which companies generally linked to a combination of better marketing initiatives and strong demand from foreign markets. Additionally, the rise in region s inflation coupled with an unemployment rate of the Euro region falling to seven year low at 10 percent will lead to upside movement in the currency. However, sharp upside in the currency will be capped as For the month of January, Euro is expected in the range of to Sterling Pound: The Sterling Pound is anticipated to be on a negative note in next month due to lack of clarity over when the Brexit will take place and its impact on the economy. Further, strength in the dollar index post the hike in interest rates will keep the pressure on the currency. However, sharp downside in the currency will be cushioned as a result of manufacturing, service and construction PMI data because all have surged by more than the expectations. The unemployment rate has plunged which will prevent sharp negative movement in the currency. In the coming month, the Cable is estimated in the range of to Japanese Yen: The Japanese Yen is expected to be on negative side for the month of January due to rise in risk appetite in global market sentiments which will lead to a decline in demand for the low yielding currency. While on the other hand, inflation rate, which is currently at -0.4 percent, still lingers below the 2 percent targeted levels. The reason behind the same could be attributed to anemic demand from global and domestic to some extent will keep the pressure on the currency. For the month of January, Japanese Yen is expected in the range of to

3 News and Developments US Federal Reserve hikes the interest rates by 25 bps in Dec 16 meeting The US Federal Reserve on 14th December 16 finally increased the target range for the federal funds rate by 25 basis points to percent; twice since the 2008 financial crisis. Since this move was already priced in by the markets, it was the underlying statements by Janet Yellen, the US Fed Chairwoman that caused ripples across world markets. She indicated the possibility of more rate hikes in the future. Three rate hikes are predicted for 2017 from two. This infused optimism in the markets, in turn, boosting the demand for the American currency. US Dollar index hit its highest level in nearly 14 years at and is currently trading at levels while writing. Yellen insisted that American economy was doing pretty well currently, however, clouds of uncertainty looms owing to Trump s new administration. European Central Bank kept the rates unchanged The European Central Bank in the monetary policy meeting dated 8th December 16 announced a continuation of the bank's generous asset-buying program to the end of 2017, but reduce the amount of its monthly purchases. The key interest rate was kept unchanged at 0 percent and is expected to remain at lower levels for an extended period of time. The monthly asset purchases which were at 80 billion has now been reduced to 60 billion that is intended to run till the end of December 16 instead of March 16, until the ECB achieves the 2 percent inflation target. BoE also maintains status quo in its meeting held in Dec 16 The Bank of England s Monetary Policy Committee, on 15th December 16, voted unanimously to maintain Bank Rate at 0.25 percent. The central bank has also confirmed to continue the program of buying 60 billion of government bonds to take the total stock of these purchases to 435 billion. The committee has predicted a "slightly lower path" for inflation rate in the future, although it still expects inflation to overshoot the 2 percent target in 2017; all thanks to rising crude oil prices and the recent surge in Sterling Pound. The Bank of England governor Mark Carney expects the unemployment rate to rise to around 5.5 percent by the middle of 2018 from the current rate of 4.8 percent (Nov 16). Moreover, the risk of Brexit negotiations has already harmed Britain s business activities and is expected to strain more in turn affecting companies profitability. Due to this, companies will be forced to cut their cost by lowering the employees income thereby hurting their spending pattern. It is a known truth that for any economy to perform consumer spending is a must, hence there is a high possibility that the Britain s growth rate, in future, will suffer too. The ECB President, however, kept the doors open to change in size and duration of the programme if need be, firmly shooting down any talk of tapering in the 1.7 trillion asset-buying program.

4 RBI kept key rates unchanged in its fifth Bi- Monthly Monetary Policy Indian Rupee (USD/INR) The Reserve Bank of India in its fifth Bi-Monthly Monetary Policy review kept its benchmark repo rate unchanged at 6.25 percent. Other important rates were also kept at the same levels like the Reverse Repo Rate at 5.75 percent and both marginal standing facility and bank rate stood unadjusted at 6.75 percent. Markets were expecting a rate cut of 25 basis points as India s inflation rate eased more than the expected levels for the third consecutive month in October 16. However, the central bank decided to wait and watch for sometime then take the action The six-member monetary policy committee was ofthe opinion that the recent Rupee Demonetization would temporary push down inflation but there is a high possibility of rising in future, all thanks to the implementation of 7 th pay commission and GST bill. Moreover, the recent agreement by the OPEC members to cut output production by 1.2 billion barrels per-day may firm up crude oil prices in the coming months. This will further intensify problems for India s inflation rate since it is one of the prime importers of crude oil. The Reserve Bank of India is thinking of ways to curb the excess liquidity. It has asked schedule banks to maintain 100 percent Cash Reserve Ratio for the deposits received between 16 th Sep 16 to 11 th Nov 16. However, banks hate CRR as their money is kept idle. Hence, the Reserve bank of India has come up with Market Stabilization Scheme (MSS) where banks can suck excess liquidity from the system with an opportunity of earning money on that. According to the RBI governor, global growth is improving as industrial activities resume in advanced economies. Donald Trump s victory in the US Presidency Elections along with the higher prospect of a rate hike in the US has led to huge volatility in international financial markets. Investors are fleeing to US markets to take the advantage of higher interest rates which is affecting emerging market economies. Moreover, political instability in the Euro area will add to the woes. However, he feels that things will slowly improvise as world trade is showing sign of stabilization. The above chart shows that Indian Rupee appreciated in the month of December around 0.7 percent and currency had depreciated by more than 2 percent in November and October, while appreciation was seen by 0.38 percent and 0.53 percent in August and September respectively. The currency appreciated and touched a high of after Reserve Bank of India (RBI) surprised the markets and kept key rates unchanged. Further, optimistic economic data from the country led to upside movement in the currency. The central bank in its fifth Bi-Monthly Monetary Policy review kept its benchmark repo rate unchanged at 6.25 percent. Other important rates were also kept at the same levels like the Reverse Repo Rate at 5.75 percent and both marginal standing facility and bank rate stood unadjusted at 6.75 percent. Additionally, selling of dollars by exporters at higher levels, a decline in CPI and WPI inflation of the economy along with rise in the industrial activity led to positive movement in the currency. However, huge outflows of foreign funds from India affected the Indian Rupee. So far this fiscal year, foreign institutional investors bought $1.69 billion in equity, while they sold $5.72 billion in debt since Trump s selection and Indian Rupee demonetization. Indian Rupee touched a low of and high of in the month ofdecember. While in the month of November, it touched an all time low of

5 105.5 US Dollar Index (DX) Euro The US Dollar Index surged around 0.7 percent in December as shown in the above chart. The currency rose to a high of and low of in thelast month. The currency rose due to hike in interest rates by the Federal Reserve in Dec 16 meeting. Further, promises made by the newly elected US President led to upside movement in the DX. The US newly elected President Mr. Donald Trump has promised to increase government spending, cut taxes and ease the financial regulations. This factor led to expectations that his policies could see a recovery in the global economy which is little bit fragile at this movement. Even the US Federal Reserve Chairwoman in her recent speech stated that economy will see a gradual hike in interest rates for the year of Additionally, host of economic data sets from the country, led to positive movement in the currency. Right from the labor market sector; like ADP, NFP and unemployment rate came on a good note. Also, GDP and consumer confidence data along with manufacturing, retails sales and housing data showed signs that consumers are confident about the economy and leading to more spending. Moreover, the surge in consumer sentiment kept currency in the positive territory. The above chart shows that Euro remained under pressure for third consecutive month in December after declining in last month and dropped by more than 3 percent in the month of November. The currency depreciated on account of strength in the dollar index. Euro declined after European Central Bank s vicepresident warned that under Trump s rule, Eurozone economy could be exposed to rising protectionism and political risk, suggested that the bank is ready to agree to a fresh round of controversial bond purchases to bolster the economic recovery. The currency touched a high of and low of in the month of December. Moreover, the Italians have voted for no change in the constitutional referendum which led to the resignation of Italian Prime Minister Matteo Renzi as promised. ECB President had stated that the committee was in a position to address bond scarcity and has flexible programs to maintain monetary accommodation which kept the currency in negative territory. However, sharp downside in the currency was prevented due to optimistic manufacturing, economic sentiments and business climate data from theregion.

6 Sterling Pound Japanese Yen The Sterling Pound came under pressure and depreciated by more than 1 percent in the month of December. The currency fell on account of a stronger dollar. Further, uncertainty on when Brexit will be completed and economy s impact on the same led to worries over the investors which kept currency in negative territory. Moreover, drop in manufacturing and retail sales data led to a negative movement in Cable. However, sharp downside in the currency was prevented after the new Chancellor pledged to increase spending on the UK's infrastructure and research and development programs. This statement saw an additional spending on high-value investments, specifically in infrastructure and innovation. Additionally, construction and services data turned out to be on favorable side which cushioned sharp downside movement in the currency. In addition to that, unemployment scenario was stable and claimant count change data declined in Nov 16 which restricted further plunge in Sterling Pound. The Japanese Yen depreciated by more than 2 percent in December after declining by more than 9 percent in Nov 16 and around 3.5 percent in the month of Oct 16 respectively. The currency depreciated on account of rise in risk appetite in global market sentiments which led to a decline in demand for the low yielding currency. The currency declined as economic growth of the country plunged marginally in Q3 of 2016 giving the hopes to shift country into an inflationary stage from deflation. From the domestic front, the Bank of Japan (BoJ) kept the key rates unchanged in its Dec 16 meeting which led to a negative movement in the currency. Japan s inflation rate failing to hit its target levels of 2 percent. However, sharp downside in the currency was cushioned due to positive manufacturing and non-manufacturing data from the country.

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