With the dollar index plumbing new lows, the Indian rupee is expected to open a tad higher on Tuesday but is unlikely to keep up with some Asian peers. According to the 1-month non-deliverable forward, it was forecasted that the rupee would open at 83. 85 against the US dollar and modestly up from the previous close at 83.87.
The dollar index fell to 101.76 during Asian trading hours, such a level of the USD / SGD has not been observed since early September 2020. On the flip side, most Asian currencies extended Monday’s higher levels, with most of them trading about 0.3% and 0.5%. This is quite a reversal from just a few days ago when, more generally, Asian currencies were under pressure. During that period RBI had to intervene actively to defend the rupee below the 84 mark of exchange.
However, traders are now expecting that the rupee will not fully mirror the dollar’s weakness, if at all, and perhaps not as much as other Asian currencies may. In recent days, the RBI has been selling the dollars at 83.97 level to support the rupee, sources familiar with the matter said.
A treasury official at a major bank said that by consistently continuing the intervention for the past several months the RBI has established the rupee as a carry trade currency which is expected to underperform when the dollar weakens and outperform when it strengthens.
Effect of the Anticipated Reduction in the Federal Fund Rate
Pundits have blamed the recent rate of decline in the dollar on the rising balance of expectations in terms of Federal Reserve rate cuts. The Fed is expected to cut rates by 100 bps in 2019 and possibly kick off the cycle in September. Another factor that has been precipitating the dollar’s decline is the market optimism that has been put in place, which makes investors shift from haven currency.
Now, more attention turns to Federal Reserve Chair Jerome Powell at the Jackson Hole Symposium on Friday. Most of the investors are patiently waiting for Powell to admit that a rate cut will be necessary, the further movements of which will affect the dollar. The current weakness of the dollar was highlighted by ING Bank in a note suggesting it might be a buildup towards Powell’s speech at Jackson Hole this week.
Through monitoring of such events, market participants will be in a position to understand the likelihood of the performance of the rupee shortly with especially reference to performance against peers in the region.
