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Fed not hawkish leading USD lower, but INR sticks out
The USD was boosted in June, with good US JOLTs and payrolls data as well as an apparently hawkish FOMC, along with West Asia developments – only to come off lately as the Fed was seen as less hawkish, while PCE inflation and payrolls were both softer. The effective end of the West Asia crisis sees pillars of fiscal dominance weakened, but we continue to see more fiscal spending as well as rates being kept lower than they should be – with fiscal dominance in the Eurozone and UK less intense. In Japan, the JPY is likely to remain above 160, CNY is likely to see steady appreciation, and INR steady depreciation
USD reaches peak on FOMC, labour prints, but retreats, INR stability fades
The broad USD was boosted early in June, with back and forth on the West Asia conflict, as well as stronger US labour markets data. Momentum cooled in the second week with mixed numbers and no clear headway on West Asia, but the third week saw fresh gains in line with the FOMC being seen as hawkish. However, more mixed US data towards end-June as well as recovery in the GBP on political shifts led the USD to come off highs – with the first week of July also seeing supply with softer US payrolls. The INR appeared to have stabilised, but is once again seeing RBI defence lately, while the CNY has been kept largely stable through these developments
Fed not as hawkish as seen, trends favour mild weakening; INR the standout
The effective end of the West Asia conflict and the Fed message under chair Warsh was seen challenging both pillars of fiscal dominance, pushing the USD to gain. However, the Fed might not be as hawkish as thought, while leadership shifts in the ECB and policy shifts in the UK under PM Burnham are all supportive of a weaker USD. On the JPY, we continue to see a test of PM Takaichi’s reflationary model while keeping the currency stable, while the closing of China’s inflation gap with peers can limit appreciation pressures. The INR might have found fair value for now, but productivity can drive longer-term weakening.
Pushing up projections of INR and JPY, rest unchanged
Given the limited impact on INR of concessional swaps and the potential for productivity to leach combined with the need for the RBI to buy back reserves to cover short positions, we increase projected depreciation of the INR going ahead, formalising our call for a breach of 100 in 12 months. On the JPY we see the range shifting higher given developments outlined above. The rest of the projections are already in line with views expressed in the report in the line of US fiscal dominance remaining a force, with political shifts allowing for higher rates in the Eurozone and the UK, along with controlled appreciation in the CNY.
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