Macro and Vol Commentary
The Indian rupee continued to weaken as the currency decline was driven by the divergence in economic growth performance with the US. Moreover, tough lockdown conditions in India clouded the economic outlook as global growth slowed. The decline of the rupee in the last three months made it one of the worst-performing Asian currencies during the period. Will this weakness last? And what is the outlook for USDINR in the near term?
India’s economy
- Given the reopening following the recent covid wave, India’s economy enjoyed a welcome respite as mobility strengthened and demand improved.
- June performance advanced rapidly, with the google trends pointing to stronger mobility in retail and recreating sectors of the economy.
- However, as that temporary boost weakened, the economy was faced with elevated inflation, tightening from central banks, and an overall global slowdown weighing on demand.
- In July, India’s business and consumption activity showed conflicting signs of recovery.
- Demand for Indian goods and services softened.
- Service PMI fell to 55.5, the lowest level in four months, on weaker growth and elevated inflation.
- International demand softened while domestic demand remained steady.
- Meanwhile, manufacturing performance advanced to an eight-month high of 56.4 in July.
- Although the upturn in demand gained strength, there were signs that capacity pressures remained mild as backlogs rose slightly and job creation remained subdued.
- Total vehicle registrations declined once again to 1.43m, driven by softening demand
- Semiconductor supply shortages are easing, however, automakers cautioned that higher borrowing rates could slow domestic demand.
- Industrial activity, and factory output signalled a moderation in June as electricity consumption and coal production slowed with the approach of monsoons
- The index of industrial production eased to 12.3% y/y from 19.6% in May.
- At the same time, inflation remains elevated at 6.71% y/y
- Consumer prices have fallen for three consecutive months in July but continue to remain above 6.0%
- The month-on-month softness is attributed to a cut in excise duties and softness in agricultural commodity prices.
- Food prices remain elevated
- Indeed, there are indications that a wheat crop was set to underperform which prompted the government to restrict exports in mid-May.
- State reserves have declined in August to the lowest level in 14 years, while consumer wheat inflation is running at close to 12%.
- Food prices remain elevated
- The month-on-month softness is attributed to a cut in excise duties and softness in agricultural commodity prices.
- Likewise, retail inflation also softened for the third straight month in July but stayed above the central bank’s 6% target.
- The central bank expects prices to moderate from their recent peak and slow to 4% within two years
- Consumer prices have fallen for three consecutive months in July but continue to remain above 6.0%
- Borrowing costs continue to rise, with the 10yr yield now at 7.30%
- The Reserve Bank of India raised interest rates by a total of 140bps in three moves so far this year.
- This includes back-to-back 50bps increases in June and August to cool down inflation within the mandate of 2.0-6.0%.
- It has also signalled that future tightening, which is scheduled to take place in September, would be calibrated to ensure there is not a massive economic slowdown.
- There is still quite a gap for the policymakers to close before policy rates approach zero in real terms, and so we expect the policymakers continue to hike in the face of elevated inflation.
- Trade deficit widened to a fresh record of almost $30bn as exports growth slowed to a 17-month low, led by weak global demand and a levy on outbound shipments of fuel.
- India has been importing Russian energy at a steep discount in the last couple of months, the share of oil from the country rose to 18.8% of overall imports in Q2, up from 3.4% same time last year.
- At the same time, imports stayed near record high levels due to a weaker rupee.
- A rise in imports was driven by inflows of crude and coal, which in total constitute about 40% of total impound shipments.
Indian economy is slowly losing steam, and we have seen signs of decelerating growth in July. Inflation remains elevated, and food prices continue to weigh on consumer incomes and, in turn, demand. However, India’s current account deficit is not being hit as hard as it could have been as it is taking advantage of Russian energy being sold at a discount. Over time, we would expect the INR to weaken against the USD due to higher inflationary pressures and a tighter monetary policy environment in the US. For the USD, the upside still looks to have more room, with the possibility of reiterated hawkish comments from Fed Chair Jerome Powell at the Jackson Hole symposium later this week expected to give the USD another boost. There are few alternative investments to the USD at the moment.
Source: Central Statistics Office India, Reserve Bank of India, S&P Global
USDINR Vol comment
Over summer USDINR vols have realised lower than implied following the start of year Ukraine-Russia war vol spike. However as we head into winter with economies facing further spikes in energy costs we see market sentiment worsening, the Indian economy slowing and USD continuing to strengthen against most currencies. We favour buying USDINR up-side and selling USDINR downside to upfront fund this.
USDINR 1-month Realised and Implied Volatility
Trade Idea
- 3 month expiry
- Buy USDINR European Digital, pay out 150k USD if USDINR fixes over 83.00 – Cost circa 20k USD
- Sell USDINR Put spread in 5m USD notional per leg, strikes 79.5 & 77.5 – Rec circa 22k USD
- Total structure premium circa rec 2k USD
Positioning Charts
USDBRL NDO Positioning Data 12/08/2022 - 19/08/2022
Options in the week of August 26th showed little trading interest, with the number of puts and calls decreasing. Moreover, the notionals are less clustered around 5.00-5.50 as they were in the week ending August 19th. We saw more calls traded with expiries in October, with the size of notional increasing further on in the quarter. The momentum for the spot on the upside is waning, and there is little upside cover above 5.70; the national values are low, meaning there is little conviction.
USDBRL NDO Positioning Data 19/08/2022 - 26/08/2022
USDCNY Vanilla Positioning Data 12/08/2022 - 19/08/2022
The options market saw more volume in the week to August 26th, with calls growing in notional size and volume strongly week-on-week. The range of puts was relatively wide between 6.70-7.20, and we see bigger notionals in Q4 2022. There are smaller and more frequent calls and puts that are due to expire in September, with a strike range positioned between 6.80 and 7.00. The positioning in the near-term points to an increase in calls week-on-week, so we can assume the market begins to favour the upside.
USDCNY Positioning Data 19/08/2022 - 26/08/2022
USDINR Positioning Data 26/06/2022 - 26/07/2022
We have seen more upside cover for the market in the month to August 26th. Spot has moved higher, with options traded around 82.-83 now with a notable notional value. However, in the near-term expiries, the puts prevail at the 78-80 range, suggesting further downside before a trend reversal. We expect this to remain the case in the near term, and we could see the market drift lower. Notional values for the call options are growing in size closer to year-end, showing growing conviction.
USDINR Positioning Data 26/07/2022 - 26/08/2022
Charts and Tables
FX Expiries
Volatility Grid
Historical Spot FX Volatility (30D Rolling)
FX Matrix (today)
Weekly Change
Key Events & Releases
Technical Analysis
JP Morgan Global FX Volatility
The index has improved in the recent weeks but has struggled to break above resistance at 11.50 and softened yesterday to 11.01. The stochastics are falling, with %K/%D converging on the upside in the oversold, which means we could see a change of trend in the near term. Likewise, the MACD diff is negative and converging, highlighting a weakening selling pressure in the near term. The index needs to hold above the trend support of 200 MA at 10.96 before it can target the 11.50 level again. On the downside, the break below the near-term support could pave the way for 100 MA at 10.66. All three moving averages are holding firm, and the indicators suggest a possible change of trend on the upside in the near term.
Dollar Index
The index has rallied in the last couple of weeks, keeping momentum on the front foot, but resistance at 109 has caused that momentum to slow down to 107.77. The stochastics continue to edge lower, with %K/%D diverging on the downside towards the oversold, suggesting the bullish sentiment is waning. The MACD is negative and diverging on the downside. The index broke above moving averages of 200, 100, and more recently 50 at 107.89, a strong bullish signal. However, now the index is trying to break below this level. If this materialises, this could set the scene for lower prices down to 107. On the upside, to suggest the outlook for the further price increase, the index needs to break above the longer-term resistance of 109 before 109.29. The gains have been well bid, but the bearish engulfing pattern today confirms the slowdown of that momentum. The indicators point to the dollar edging lower; we expect the strength of gains to subside before a change of trend in the near term.
USDINR
In recent days, the pair has found resistance at 80.00, and protracted buying pressure cooled. However, the pair has also found support at 50 MA and struggled to break below the level in recent sessions, causing it to trade range-bound. As a result, the %K/%D stochastic has converged on the downside in the overbought, while the MACD diff is positive and converging. Narrow candle bodies point to a lack of appetite out of the current levels, and if the pair is to confirm the indicators, it needs to break below the 50 MA at 79.61 and then target 79.50. On the upside, the 80.00 and 80.05 are now resistance levels that the pair would need to break above to suggest a reversal of bearish momentum. We would expect to see moderate losses in the near term as the pair aims to break below the near-term support level.
