- The Indian Rupee attracts bids near 86.90 against the US Dollar on strong flash India’s HSBC PMI data for June.
- Iran threatens to close the Strait of Hormuz following the US attack on Tehran’s nuclear facilities.
- Fed’s Waller supports reducing interest rates in the July policy meeting.
The Indian Rupee (INR) gains ground after sliding to near 86.90 against the US Dollar (USD) during the European trading session on Monday. The USD/INR pair struggles to extend its upside following the upbeat preliminary HSBC Purchasing Managers’ Index (PMI) data for June and a pullback move in the Oil price.
According to the HSBC report, the Composite PMI expanded at a robust pace to 61.0 from 59.3 in May due to strong growth in activities in both the manufacturing and the services sector.
“India’s flash PMI indicated strong growth in June. New export orders continued to fuel private sector business activity, especially in manufacturing. Meanwhile, the combination of robust global demand and rising backlogs prompted manufacturers to increase hiring. Employment growth is also healthy in the services sector despite slightly weakening on a sequential basis from May to June. Finally, input and output prices continued to rise for both manufacturing and services firms, but rates of increase showed signs of softening,” Pranjul Bhandari, Chief India Economist at HSBC, said.
Meanwhile, the Oil price has given back its early gains and is up only 0.5% from Friday’s closing price, which rose 4% at open. Currencies from nations that depend significantly on Oil imports, such as the Indian Rupee, get impacted severely by rising energy prices.
Earlier in the day, USD/INR opened strongly as the United States‘s (US) invoving Israel’s assault on Iran over the weekend prompted risk-off market sentiment and a sharp increase in the Oil price. Tensions in the Middle East also weighed heavily on the Indian equity market, sent Nifty50 1% down to near 24,820. However, the 50-stock basket has recovered half of its early losses, but struggles to return above the psychological level of 25,000.
Daily digest market movers: USD/INR will likely rise to near 88.00 if Oil price continues to bleed
- The Indian Rupee strives to gain ground after sliding to near 86.95 against the US Dollar. The USD/INR pair faces resistance at higher levels as the Oil prices have surrenderd a majority of its early gains. However, rising crude prices due to flaring Middle East tensions after the direct involvement of the US in the Israel-Iran war will likely keep the Indian Rupee on the backfoot for longer.
- Over the weekend, the US struck three Iranian nuclear facilities: Fordow, Natanz, and Esfahan, aiming to restrict Tehran from fulfilling its ambition of building nuclear warheads. According to comments from the White House came on Thursday, Washington was expected to take decision on whether to strike Iran on not was expected to be taken within two weeks.
- Market experts are bracing for a significant upside in the USD/INR, citing that higher energy prices would accelerate India’s current account deficit, which will weaken the Indian Rupee.
- According to analysts at Bernstein, the Indian Rupee could depreciate toward Rs. 88 against the US Dollar if Israel-Iran tensions persist. The private wealth management firm estimated that a sustained $10 rise in crude prices over a quarter could add 0.11% of Gross Domestic Product (GDP) to India’s current account deficit.
- Meanwhile, Goldman Sachs has projected that Brent crude could briefly peak at $110 per barrel if oil flows through the critical waterway were halved for a month and remained down by 10% for the following 11 months, Reuters reported. Following the US attack on Iran, Brent Crude Oil has jumped to around $78.80, the highest level seen in five months.
- The unexpected direct involvement of the US in Middle East tensions has forced investors to shift to the safe-haven fleet, improving the demand for the US Dollar as a safe-haven asset. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, revisits the 10-day high slightly above 99.00.
- In retaliation, Iran is preparing to close the Strait of Hormuz, through which almost a quarter of the global Oil is supplied. The decision to close the Oil gateway, which Iran shares with Oman and the United Arab Emirates (UAE), has been approved by Tehran’s parliament and has been forwarded to the Supreme National Security Council for final approval, Iran’s Press TV reported.4
- On the domestic front, the Reserve Bank of India (RBI) minutes released on Friday showed that the Indian central bank front-loaded interest rate cuts to send a clear message to economic agents that it intends to support consumption and investment through lower borrowing costs. In the policy meeting, the RBI slashed its Repo Rate unexpectedly by 50 basis points (bps) to 5.5%.
- In the US region, traders are expected to raise bets supporting the Federal Reserve (Fed) to reduce interest rates in the July policy meeting as officials have split over the monetary policy outlook after holding it steady in last week’s meeting.
- On Friday, Fed Governor Christopher Waller argued in favor of cutting interest rates in July, citing concerns over the labor market. “The Fed should not wait for the job market to crash in order to cut rates,” Waller said in an interview with CNBC Squawk Box on Friday. He also stated that the impact of tariffs imposed by US President Donald Trump will be as big on inflation. “I do not think inflation impact from tariffs will be big, trend is looking good,” Waller said.
- Contrary to Fed’s Waller, Richmond Federal Reserve President Thomas Barkin said that there is no rush for interest rate cuts amid uncertainty over how much new trade policies will prompt inflation. “I am comfortable with where we are and nothing is burning on either side [inflation and labor market] such that it suggests there’s a rush to act,” Barkin said.
Technical Analysis: USD/INR struggles to break above two-month high around 86.90
The Indian Rupee struggles to extend its upside after revisiting an over two-month high of 86.93 on Monday. However, the near-term trend of the USD/INR pair remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 86.10.
The 14-day Relative Strength Index (RSI) holds above 60.00, suggesting that the bullish momentum is intact.
Looking down, the 20-day EMA is a key support level for the major. On the upside, the April 11 high of 87.14 will be a critical hurdle for the pair.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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