This is the advantage of the dollar, because currencies oscillate at the rate of central bank policies


Currency fluctuations, especially in the second half of 2021, are driven by various positions of global central banks. A weak August non-farm payroll report and a conciliatory speech by Fed Chairman Jerome Powell in Jackson Hole dampened some of the dollar’s spike to the upside. As a result, the rupee outperformed the most in the Asian emerging market basket in August.

However, the Indian currency then began to pull back amid the lingering volatility due to the uncertainty surrounding monetary normalization by the RBI. The latest move by India’s rate-setting agency to soak up liquidity through the VRRR auction worth Rs 50,000 crore hinted at the first step in monetary tightening.

Meanwhile, the dollar gained modest support against the rupee following large purchases by importers. However, the momentum for dollar flows is not yet over. The rupee still remains the preferred carry trade counter in the emerging market basket, despite possible capital outflows that may arise due to concerns about the Delta variant.

Regarding monetary tightening, it will be done gradually by central banks, avoiding any major volatility due to policy divergences between them.

Technically, the rupee has a solid ceiling against the dollar around 72.80 while the floor may be around 74.40 followed by 74.80 in the coming months. We will remain negative on the rupee over the medium term based on the stronger dollar trend, which is expected to hold for the remainder of the year.

EUR-USD as well as EUR-INR came under pressure after the ECB moved to a symmetrical inflation target of 2.0% at the end of July. While not as aggressive as the Fed’s average inflation targeting, the ECB’s new policy still succeeded in lowering real euro interest rates to a new plus. low and hit the trade-weighted euro.

As for the rupee, the appreciation of the Indian currency since the end of April this year has kept the Euro-rupee pair lower. This comes at a time when the US Fed is preparing to normalize its policy. With US employment figures likely to improve in October, the dollar may remain stronger against the euro in the coming weeks. We believe the EUR-USD pair may remain in the 1.16-1.20 range by the end of the year, but the risks are clearly on the downside. The British pound has continued to follow a narrow range of 1.37 to 1.39 against the dollar for the past two months.

The pound remains volatile in a range despite a better than expected national house price index and manufacturing PMI for August. Surprisingly, the pound lost steam after the British Prime Minister announced a tax hike to finance the budget deficit, which weighed on the currency as the recovery of the UK economy could take longer than expected. .

In addition, markets are starting to take into account the political risks associated with Brexit associated with the end of the grace period at the end of September for issuing Northern Ireland-UK commercial checks. Technically, the Euro and the Pound are expected to fall over the next few months, which could take the dollar index to around 94.80 by the end of the year.

(DK Aggarwal is the CMD of SMC Investment and Advisors)

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