USD/INR recovers on persistent US dollar demand, upside potential appears limited

VaselineAugust 21, 2024

0 4 minutes read

USD/INR recovers on persistent US dollar demand, upside potential appears limited

The Indian rupee edged lower in the Asian session on Wednesday.
Persistent USD demand from importers is weighing on the INR, while low oil prices could limit its losses.
Advanced August PMI data from India and the US will be released on Thursday.

The Indian rupee (INR) weakened on Wednesday and remains the worst-performing Asian currency in August due to trade deficits and persistent USD demand from importers. Any significant weakness in the INR is likely to be limited amid possible intervention from the Reserve Bank of India (RBI), which could sell the USD to prevent the local currency from breaking the critical 84.00 mark. In addition, the prolonged decline in the price of crude oil could support the local currency in the short term.

Traders will monitor HSBC’s preliminary August purchasing managers’ index (PMI) on Thursday for further impetus. The highlight this week will be Federal Reserve (Fed) Chairman Jerome Powell in Jackson Hole on Friday. There is growing speculation that Powell will signal a potential rate cut in this event, which could put some selling pressure on the greenback.

Daily Digest Market Movers: Indian rupee remains sensitive to global factors

Analysts at MUFG Bank said in a note that “Asian currencies continued to strengthen against the US dollar amid broad-based US dollar weakness and risk-on sentiment.”
Foreign investors pulled about $2.5 billion out of Indian stocks in August, according to depository data.
India’s exports fell 6 percent in the current fiscal year to July compared to the same period a year earlier. In FY24, foreign direct investment in India fell by 3.5%.
Fed Governor Michelle Bowman said on Tuesday that she would remain cautious in her approach to any change in policy stance. She added that overreacting to any single data point could jeopardize the progress already made.
Markets are pricing in a roughly 67.5% chance the Fed will cut interest rates by 25 basis points (bps) in September, according to CME’s FedWatch tool.

Technical Analysis: USD/INR holds a long-term positive position

The Indian rupee is trading on a stronger note on the day. The bullish outlook of the USD/INR pair remains in play as the price remains above the 100-day exponential moving average (EMA) on the daily chart. However, some selling pressure below the 11-week uptrend line in previous sessions and the 14-day Relative Strength Index (RSI) below the 50 median line indicate that a further decline cannot be ruled out.

The key upside barrier for USD/INR appears near the 83.90-84.00 area, the uptrend line and the psychological level. A break above the mentioned level could lead to a rise to the record high of 84.24 on the way to 84.50.

In the bear event, the initial target could be 83.70, the August 1 low. Further south, the next cushion level appears near the 100-day EMA at 83.55, followed by 83.36, the June 28 low.

Price in USD for the last 7 days

The table below shows the percentage change of the US dollar (USD) against the main listed currencies over the last 7 days. The US dollar was the weakest against the Australian dollar.

	USD	EURO	GBP	CAD	AUD	JPY	NZD	CHF
USD		-1.11%	-1.25%	-0.68%	-1.62%	-1.06%	-1.22%	-1.33%
EURO	1.10%		-0.14%	0.43%	-0.53%	0.07%	-0.10%	-0.19%
GBP	1.23%	0.15%		0.57%	-0.39%	0.22%	0.04%	-0.06%
CAD	0.68%	-0.43%	-0.57%		-0.96%	-0.34%	-0.53%	-0.63%
AUD	1.63%	0.51%	0.37%	0.93%		0.56%	0.40%	0.29%
JPY	1.03%	-0.07%	-0.25%	0.33%	-0.61%		-0.19%	-0.29%
NZD	1.21%	0.10%	-0.04%	0.53%	-0.43%	0.19%		-0.10%
CHF	1.30%	0.22%	0.08%	0.64%	-0.29%	0.26%	0.11%

The heatmap shows the percentage changes of major currencies against each other. The base currency is chosen from the left column, while the quoted currency is chosen from the top row. For example, if you choose Euro in the left column and move along the horizontal line to Japanese Yen, the percentage change shown in the box will be EUR (base)/JPY (quote).

Frequently Asked Questions about the Indian Rupee

The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of crude oil (the country is heavily dependent on imported oil), the value of the US dollar – most trade is done in USD – and the level of foreign investment are all influential. Direct intervention of the Reserve Bank of India (RBI) in the foreign exchange markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are other major influencing factors on the rupee.

The Reserve Bank of India (RBI) actively intervenes in the foreign exchange markets to maintain a stable exchange rate to help facilitate trade. In addition, the RBI is trying to maintain the inflation rate at the target of 4% by adjusting interest rates. Higher interest rates usually strengthen the rupee. This is due to the role of “carry trade” where investors borrow in countries with lower interest rates so that they place their money in countries that offer relatively higher interest rates and profit from the difference.

Macroeconomic factors that influence the value of the rupee include inflation, interest rates, the rate of economic growth (GDP), trade balance and foreign investment flows. A higher growth rate can lead to more investment abroad, increasing demand for the rupee. A less negative trade balance will ultimately lead to a stronger rupee. Higher interest rates, especially real rates (interest rates minus inflation) are also positive for the rupee. A risk-on environment may lead to higher foreign direct and indirect investment (FDI and FII) inflows, which also benefits the rupee.

Higher inflation, especially if it is comparatively higher than India’s, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, resulting in more rupees being sold to buy foreign imports, which is negative for the rupee. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates, and this can be positive for the rupee due to increased demand from international investors. The opposite effect is true for lower inflation.

VaselineAugust 21, 2024

0 4 minutes read