Rupee hits 3 month high on FX inflow, positive risk sentiment

The US economy added 4.7mn jobs in June against expectations of a gain of 3mn, bringing the unemployment rate down to 11.1% from 13.3% in May and 14.7% in April. Sector which added most jobs were food services and retail.

Post data cheer was marred a bit by worries over rising cases in US stoking fear of a second wave. Also White House economic advisor Larry Kudlow's saying that the US was unhappy with China implementing the National security law caused investors to turn cautious heading into the US Independence Day holiday.

Overall risk sentiment for Asia and EM is however likely to remain positive. We seem to be in that phase of the Dollar smile where good US data is risk positive given Fed's strong forward guidance of an accommodative monetary policy. Investors thereby see US Dollar as a funding currency.

Onshore, USDINR finally broke through 75.40. Break of a strong support which had held for a long time triggered stop losses and resulted in a brisk move lower. Nationalized banks who had been mopping up IS Dollars on behalf of the central bank were absent from bids. Rupee had underperformed in the last one month and had weakened on a relative basis against it's Asian peers because of aggressive central bank Dollar purchases (likely to strengthen it's balance sheet in line with the new economic capital framework). It will be interesting to see how much the RBI allows the Rupee to adjust. It has so far not allowed positioning to build up in any direction and has kept speculators at bay. Given this regime's commitment to keeping volatility low, it will be interesting to see where the new floor in USDINR is for the medium term.

There is chatter in the market that we may see a repo rate cut or introduction of SDF (standing deposit facility) to discourage banks from parking funds with the RBI and to encourage them to lend instead, thereby facilitating monetary policy transmission.

USDINR is likely to trade 74.50-75.00 with downside bias. Indonesian Rupiah has depreciated 7 straight sessions as the risk of debt monetization is getting to the IDR.

Strategy: Exporters have been advised to cover on every uptick. Importers are advised to hold. The 3M range for USDINR is 74.00 - 77.00 and the 6M range is 74.00 – 80.00.

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