Rupee ready for a directional trend, outperforms other Asian currencies; dollar plunges, outlook bearish

Rupee ready for a directional trend, outperforms other Asian currencies; dollar plunges, outlook bearish

By Dilip Parmar

The Indian rupee marked the best month of the current fiscal year and outperformed among the Asian currencies for the quarter ending on June 30, backed by foreign fund inflows, stronger regional peers and risk-on sentiments. Typically, June month remained one of the worst months for the rupee but this time it has bucked the trend by strengthening more than a three-quarters percentage. Rupee gained 0.83% or 69 paise to 82.04 a dollar.

Some of the world’s most important central bankers were on the stage at the European Central Bank’s annual conference in Sintra, Portugal on Wednesday. The ECB and the Federal Reserve sound like they’re approaching the peak in interest rates and have moved on to talking about the duration of the terminal rate, while the Bank of England is still focusing on how high to go. Lastly, the Bank of Japan is going nowhere anytime soon.

Fed’s favourite indicator, US inflation cooled in May and consumer spending stagnated, suggesting the economy’s main engine is starting to lose some momentum, supporting the Fed’s decision of June Pause. US Federal Reserve’s Chair Powell says the Federal Open Market Committee (FOMC) could hike at back-to-back meetings if the data so dictate. Market pricing of the Fed hiking by 25bp in July increased over the week (from around 70% probability to 80%) supporting demand for the US Dollar Index. Resilient data raise hopes of a soft landing and helped narrow credit spreads.

The dollar index, the basket of six currencies, plunged 1.36% to 102.9 as rates are near peak. Elsewhere, Brent oil posted its longest quarterly losses in data over three decades amid robust supplies and persistent concerns over demand. Speculative traders piled on the bearish positioning in the dollar as per the CFTC report and added $3.3 billion to aggregate dollar shorts which take the overall bearish bet on the dollar to $13.45 billion, a six-week high.

(Dilip Parmar is a Research Analyst at HDFC Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)