Over the last one week, thanks to steady dose of foreign currency inflows Indian rupee touched a five week high of 60.33/34 levels on spot.
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Hope of easing in the geopolitical tensions in central Asia played a role. However, FIIs continue to chase the equity and debt assets of EM markets like Brazil, India and Indonesia. A sharp rally in the Russian currency and markets also supported the Rupee. Risk appetite remains robust, as momentum remains a strong attraction for global money managers.
Volatility continues to remain low as demand for US Dollar from reserve manager and supply of the same from foreign speculators dampens possibility of a trend. RBI is quite happy to absorb the inflows sub 60.50 levels on spot. At the same time, option traders are eager to sell volatility and gamma due to low realised vol and lack of near term triggers. However, historically September has seen high volatility.
The recent trend of economic data from the globe has been a mixed bag, but with more misses than hits. In China, trend of manufacturing and services PMI remained weak. In Japan, capital spending by Japanese companies fell 1.8% in Q2. Manufacturing PMIs from Euro zone were weak, with Italian PMI sub-50, indicating contraction. Services PMI improved in Spain but was weak in Italy. German factory orders, a volatile time series, rose by 4.6% in July over June.
In Eurozone, retails sales contracted in August. UK economic data was mixed too, with manufacturing PMI being weak but services PMI putting up a strong show. In US, economic data continued to surprise on the upside, with ISM manufacturing and factory both suggesting strong trends in industrial sectors. We expect the August jobs data from US to beat consensus estimates of 209K.
Many participants have been bewildered by the disconnect between USD/INR and the US Dollar index. However, though it is unusual but it does not surprise us. We had mentioned in the past and will mention once again, on why we are seeing the disconnect and what can reverse it. US Dollar continues to strengthen against developed world currencies with divergent path if monetary policies. At the same time, US Dollar has found traction against EM currencies with either political or economic vulnerabilities.
However, US Dollar has largely remained flattish against Asian and EM currencies where foreign investors