Investors ended last week on a risk-on mood amid optimism regarding ongoing trade talks between China and the US. On Saturday, Treasury Secretary Steven Mnuchin said that the US and China were nearing the final stage of trade negotiations. The tone of the declaration was quite optimistic and suggested that the waiting would be finally over. A matter of days apparently. However, investors remained somewhat cautious despite the comments. The US government has been extremely optimistic over the last few months despite a clear lack of progresses. There is therefore the fear that the US delegation would under deliver, especially since China would also be able to enforce the agreement should the US reneges on certain part of the deal afterward – and vice-versa.
The buck continued to move lower on Monday morning with the dollar index reaching 96.80. The Swedish krone performed the best as USD/SEK eased 0.30% to 9.2454, while the pound sterling and the single currency were also edging higher, up 0.21% and 0.19%, respectively.
We believe that the dollar suffer more in the coming days amid rising tension between the Fed and Donald Trump. The US president suggested that the Fed should unleash liquidity to give a kick to economic growth. It would send a very bad signal to investors should the central bank starts taking order from the government as it hurt massively its credibility.
INR under pressure as a second rate cut, general elections loom
General elections, inflation and growth slowdown as well as emerging market economies vulnerability remain the major factors for the second consecutive drop in the Reserve Bank of India (RBI) Current Rate. Yet INR should continue to face further pressure as a third rate cut appears practicable in June.
Indeed, although India’s budget deficit for fiscal year 2018/2019 ended 31 March 2019 meets fiscal deficit target of 3.4% amid spending cuts and a tax collection deficit of 1 trillion rupees ($14.44 billion) compared to target, the Indian economy is facing additional headwinds. Headline inflation has been ticking higher (2.86%) in February but still remains below its long-term target of 4% while the real gauge eased at 5.02% (prior: 5.29%). Furthermore, India’s GDP growth closed the last quarter of 2018 in its slowest pace in five quarters (GDP y/y 2018: 7.20%). It is therefore to observe whether PM Narendra Modi party Bharatiya Janata will be winning actual general elections closing in 19 May 2019 and whether current budget deficit target can be achieved despite election promises.
For now, USD/TRY is expected to rise further as uncertainties within Asia’s third largest economy remains. Heading along 69.38 short-term.