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The US Dollar (USD) rose through March on shocks from the Iran war, overcoming hawkish comments from other central banks, though it came off at end of month on hopes of the war ending. During this period, the Indian Rupee was also allowed to weaken, with the requirement for banks to square Non-Deliverable Forward (NDF) arbitrage positions proving ineffective. We continue to see fiscal dominance as the main driver after such shocks, allowing weakness in both the USD and Japanese Yen (JPY), while the Chinese Yuan (CNY) could become more interesting if confrontations continue in the absence of a leadership summit. We also revised our INR targets higher, in line with March closing levels.
USD up on Iran war, INR weakens on fading intervention, continued outflow
The broad USD was bought early in the month with the shock from weekend attacks on Iran, and then with stronger US data on JOLTs and PCE inflation, and further bolstered by a more hawkish than expected FOMC. Hawkish comments from the ECB, BOE and BOJ tended to reverse the move, along with indications the US was looking for an off-ramp. However, apparent rejection by Iran of US proposals and a potential US escalation took the USD higher still. However, comments from US president Trump on leaving Iran in 2-3 weeks led to moves lower. After considerable INR defence, the RBI allowed significant depreciation. This did not halt despite a change in rules forcing banks to unwind NDF arbitrage positions.
Fiscal dominance the main global driver, unconventional INR measures possible
We continue to see US policy uncertainty being driven by domestic factors incentivising risk taking, and with the trade agenda all but limited by the earlier SCOTUS ruling. However, the USD has reclaimed its status as a geopolitical risk haven, rising in response to shocks. We continue to expect more limited barriers to fiscal dominance at the US and Japan to drive currency weakness, while more rule-based policymaking in the ECB and BOE allow for appreciation. Our CNY appreciation call has become consensus, but geopolitical developments might make the currency interesting again. On the INR, intervention could not stall depreciation, with even the change in rules forcing banks to unwind NDF arbitrage not bearing fruit – opening scope for more unconventional measures. Until fundamental problems are solved, weakness will continue
Continued INR depreciation, other global views largely held
We noted earlier this month that end-Mar moves in the INR can be widely dispersed, with the rest of the year driven by these levels. With the INR weak at month-end, we update projections accordingly. Apart from this, we retain other projections, with the potential for a short-term move in JPY towards 170 before reversing.
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