Indian Rupee at Risk as RBI Lowers GDP Estimates, Boosts Bond Buys. USD/INR Eyes NFPs

Indian Rupee weakens as RBI downgrades GDP estimates, increases bond buys Ahead, all eyes are on non-farm payrolls. Will stronger wage data boost USD? USD/INR may be readying to extend gains after bullish Falling Wedge breakout

The Indian Rupee finds itself under pressure against the US Dollar after the Reserve Bank of India (RBI) maintained its benchmark repurchase rate unchanged at 4.00% in June. This was widely expected. A surprise came in the fiscal year 2022 downgrade to growth estimates. GDP is seen coming in at 9.5%, down from 10.5% previously. The central bank also announced a higher amount of bond purchases for the second quarter, worth about INR1.2 trillion, likely amplifying weakness in the Rupee.

RBI RATE DECISION, GOVERNOR SHAKTIKANTA DAS HIGHLIGHTS (VIA BLOOMBERG)

‘Tough times need tough decisions’ – Das Spread of Covid in rural areas poses downside risks

Core price pressure may be elevated

Need enhanced, targeted policy support for exports

FX reserves indications show the nation crossed $600 billion Liquidity window of 150b Rupees opened until March 31, 2022

At the last RBI rate decision in April, the central bank unveiled a 1 trillion Rupee government bond purchasing plan, appearing decidedly dovish, pushing USD/INR towards levels last seen in June 2020. A reaffirmation of the 2 – 6% inflation target for fiscal year 2022 – 2026 might have also left a few investors disappointed that there was not a more aggressive approach.

Broader gains in the Indian Rupee and Nifty 50 since the middle of April have occurred despite the surge in local coronavirus cases. This may have been in part due to Prime Minister Narendra Moody’s hesitation to consider nationwide lockdowns. The markets may be looking forward to a recovery from the wave. The exponential growth in cases has notably slowed as of late – see chart below.

Heading into the remaining 24 hours of the week, USD/INR will likely be closely eyeing the US non-farm payrolls report. Thursday’s stellar ADP employment report offered a preview of how markets could react to a better-than-expected jobs report. Specifically, better wage growth could further fuel a push higher in Treasury yields as Fed tapering expectations are brought forward. That may propel USD/INR higher in the near term.

INR/USD, NIFTY 50 VERSUS INDIAN COVID CASES

INDIAN RUPEE TECHNICAL ANALYSIS

USD/INR could be readying to extend recent gains after bouncing off the key 72.3320 – 71.5600 support zone. That is because prices confirmed a break above a bullish Falling Wedge chart pattern. A daily close above the 23.6% Fibonacci Retracement level at 73.1040 would expose the 38.2% point at 73.5735. Above that sits the 50-day Simple Moving Average. A sharp turn lower could see prices retest February lows.

USD/INR DAILY CHART

Nasdaq 100 Retreats, Hang Seng May Fall on Escalating US-China Tensions

Dow Jones, S&P 500 and Nasdaq 100 closed -0.07%, -0.36%, and -1.07% respectively The US Dollar rebounded, reflecting rising fears about Fed tapering bond purchases

President Joe Biden signed an executive order to banUS entities from investing in an expanded list of Chinese companies, weighing on the Hang Seng Index (HSI)

ADP, US Dollar, US-China Tension, Nonfarm, Asia-Pacific at Open:

Wall Street stocks retreated on Thursday, dragged by the technology sector as fears about Fed tapering bond purchases geared up after a robust ADP private payrolls report. The private sector added 978k jobs in May, hitting an eleven-month high and also smashing the baseline forecast of a 650k increase (chart below). The pace of job creating appears to have accelerated over the past three months, underscoring a strong economic recovery. Meanwhile, weekly jobless claims fell to a fresh pandemic low of 385k, versus a 390k forecast.

The robust data hinted that tonight’s nonfarm payrolls data may deliver positive surprises, strengthening the prospect of Fed tapering. This came a day after Philadelphia Fed President Patrick Harker said it is appropriate “to slowly, carefully move back” on bond purchases at an appropriate time.

The market is indeed concerned about it. The DXY US Dollar index rebounded 0.65% to 90.49 overnight, and 10-year Treasury yields climbed to 1.625%. A stronger US Dollar sank gold prices and may weigh on commodities in general. Crude oil prices paused a rally and retreated from a two- and-half year high.

US ADP Employment Change – May 2021

Risk appetite tilted towards the cautious side for equities, with defensive sectors outperforming cyclical ones overnight. The risk-off sentiment could carry into the Asia-Pacific trading today, especially for the Greater China region. Futures in Japan, mainland China, Hong Kong, Taiwan, Singapore, Malaysia and India are in the red, whereas those in Australia and South Korea are in the green.

President Joe Biden signed an executive order on Thursday that bans US entities from investing in a widened list of 59 Chinese companies with alleged ties to defense or surveillance technology sectors. This move risks reigniting US-China tension, and may spook panic selling in those exposed companies.

As a result, Hong Kong’s Hang Seng Index (HSI) retreated 1.13% on Thursday. Selling looks set to carry on into the weekend, especially among the defense and surveillance technology sectors.

Looking ahead, traders will keep a close eye on Friday’s nonfarm payrolls data for clues about job market development and its ramifications for the Fed’s policy outlook. The figure is expected to come in at 650k, a big jump from previous month’s reading of 266k. Concerns about tapering renders the market vulnerable to heightened volatility if actual numbers deviate too far from baseline forecasts.

Looking back to Thursday’s close, 6 out of 11 S&P 500 sectors ended lower, with 52.1% of the index’s constituents closing in the red. Defensive- oriented utilities (+0.52%), consumer staples (+0.51%) and healthcare (+0.39%) outperformed, whereas consumer discretionary (-1.22%) and information technology (- 0.91%) were trailing.

S&P 500 Index Sector Performance 06-04-2021

Nasdaq 100 Index Technical Analysis

The Nasdaq 100 index reversed lower this week, forming a “lower high” on the daily chart. This suggests that near-term trend may be reversing and further consolidation is likely. An immediate support level can be found at 13,430 (the 161.8% extension), while a key resistance remains to be 14,000 (200% Fibonacci extension). The MACD indicator is about to form a bearish crossover, suggesting that upward momentum is fading.

Hang Seng Index Technical Analysis:

The Hang Seng Index (HSI) failed to breach the “neckline” of the “Double Bottom” chart pattern formed since early March and retreated to the 100-day SMA line looking for near-term support. An immediate resistance level remains to be 29,350 – the 50% Fibonacci retracement. Breaching below a near-term support of 28,920 may open the door for further losses with an eye on 28,300 – the 78.6% Fibonacci retracement.

Hang Seng Index – Daily Chart

ASX 200 Index Technical Analysis:

The ASX 200 index hit an all-time high of 7,260 and breached above the 127.2% Fibonacci extension level. Recent surge in prices pulled the RSI oscillator close to the overbought territory, rendering it vulnerable to a technical pullback. The MACD indicator formed a bullish crossover and trended higher, suggesting that bullish momentum may be dominating.

ASX 200 Index – Daily Chart

The Federal Reserve Bank: A Forex Trader’s Guide

The Federal Reserve System (the Fed) was founded in 1913 by the United States Congress. The Fed’s actions and policies have a major impact on currency value, affecting many trades involving the US Dollar. Find out about the history of the Fed, its influence on USD and how to trade Fed monetary policy decisions.

WHAT IS THE FEDERAL RESERVE?

The Federal Reserve is the central bank of the United States. It was founded to create a stable, flexible monetary and financial system for the nation. Its general duties are to set monetary policy and oversee effective economic operation, ultimately serving the public interest.

To meet these top-level directives, the Fed performs five general functions:

1.     Promote maximum employment, stable pricing and moderate interest rates long term

2.     Reduce risk where possible to create a stable financial system

3.     Develop safety within financial institutions

4.     Champion safety within payment and settlement systems

5.     Advocate consumer protection through a supervisory stance.

To execute day-to-day operations, the nation is divided up into 12 Federal Reserve Districts, each of which is served by a separately

incorporated Reserve Bank. These districts and member banks operate independently while being supervised by the Federal Reserve Board of Governors.

Who owns the Fed?

The Fed is both a private and public institution. The Board of Governors is a government agency, while the banks themselves are structured like private corporations – member banks hold stock and earn dividends.

Who is the Federal Reserve chairman?

As of August 2019, the chairman of the Federal Reserve is Jerome Powell, who has served in this office since February 5, 2018. He is the 16th person to have held the position and will serve a four-year term. Before his appointment, Mr Powell served as a member of the Board of Governors from May 25, 2012. He also currently serves as Chairman of the Federal Open Market Committee, which looks after monetary policy.

Which banks make up the Fed?

The 12 Federal Reserve Districts, each with their own Reserve Bank, are:

Boston

New York

Philadelphia

Cleveland

Richmond

Atlanta

Chicago

St. Louis

Minneapolis

Kansas

Dallas

San Francisco

How is the Fed held accountable to its functions?

The Fed is accountable to the public, as well as to the US Congress. The Chair and Federal Reserve officials testify in front of Congress, while the system of setting monetary policy is designed to be clear and transparent. In the interests of accountability, the Federal Open Market Committee (FOMC) will publish statements following all annual meetings. All financial statements are audited independently once a year to ensure financial accountability as well.

KEY ECONOMIC MANDATES OF THE FEDERAL RESERVE SYSTEM

US monetary policy is the core mandate of the Federal Reserve bank. The statutory objectives of this monetary policy are outlined by the Congress and are:

Maximum employment: The monetary policy set out by theFOMC should ensure unemployment remains low, working to boost the economy where needed so that businesses thrive, make a profit and hire more staff to grow

Price stability: The Fed defines price stability as an inflation rate of 2% in the long term

Moderate long-term interest rates: This works alongside price stability – when an economy is stable, long-term interest rates remain at a moderate level

The Fed aims to achieve its monetary policy through its influence over interest rates and the general financial climate. This can lead to volatility of the US Dollar, ahead of Fed announcements and changes to policies.

Federal Open Market Committee

Monetary policy is set by the Federal Open Market Committee (FOMC), which oversees the open market operations of the Federal Reserve System. They set a target for the federal funds rate at FOMC meetings; this is the interest rate that they want banks to offer to each other for overnight loans. While the FOMC doesn’t control the rate, it can influence it in three main ways:

Open market operations. This means the buying and selling of government bonds on the open market – selling bonds decreases monetary supply with the aim of increasing interest rates. Buying bonds puts money back into the economy, with the aim of decreasing interest rates

Discount rate. This is the rate that banks pay to borrow money from the Fed. When this rate is lower, then it is also more likely the federal funds rate will be lower too

Reserve requirements. Banks need to hold a certain percentage of customers’ deposits to cover withdrawals – this is the reserve requirement. When these are raised, banks can’t loan as much money and must ask for higher interest rates. When lowered, banks can loan more money and ask for lower interest rates.

HOW DOES THE FEDERAL FUNDS RATE AFFECT THE US DOLLAR?

The Fed’s interest rate, also known as the Fed funds rate, is set by the Board of Governors of the Federal Reserve System. The current interest rate and the expectations of future interest rate changes can both affect the value of the US Dollar. If traders anticipate a change in interest rates based on announcements from the Board of Governors, this can cause the Dollar to appreciate or depreciate in value against other currencies.

This table sets out the way in which market expectations and rate changes can affect the value of the dollar:

Find out more about the impact of interest rates on the foreign exchange market.

As you can see in the chart below, the Dollar strengthened against the Yen in the leadup to the Fed’s interest rate announcement in December 2016 because it was widely expected that the fed funds rate would increase. The pair peaked at around 118.371 on the day of the announcement, December 14, 2016.

USD/JPY chart before and after Fed hikes in 2016

HOW TO TRADE THE FED MONETARY POLICY DECISIONS

In order to prepare for Fed rate change decisions, traders should follow these two key steps:

Keep up with news from the Fed. The FOMC holds eight regular meetings a year, where policies and interest rates are discussed and agreed upon. Keeping up with news ahead of these meetings is the best way to make predictions about interest rates, and whether to buy or sell the US dollar

Keep with news from the markets. Rest assured that it won’t just be you speculating on interest rates – ahead of Federal Reserve meetings and announcements, many forex traders will be watching what happens very closely. Keep an eye out for others’ predictions and forecasts, and stay well informed enough that you can have your own opinions and add your own logic to that of others

No method of predicting interest rate decisions can ever be completely accurate and surprises do occur. It’s always important to protect yourself when trading forex, so make sure you place stops in advance to ensure you keep your losses to a minimum should the markets move against you.

Remember to stick to your trading planand never place a trade where you wouldn’t be able to afford the losses. Trades can go both ways. No matter how sure you feel that they will work in your favour, there’s always the chance that they might not.

TOP TAKEAWAYS ON THE FED AND FOREX TRADING

Traders should aim to keep track of developments within the Fed and look out for announcements ahead of and after their FOMC meetings.

See our Central Bank Calendar for important meeting dates and join our Central Bank Weekly webinar.

The US Dollar is one of the most widely traded currencies, but this doesn’t make it risk free – far from it. Be aware of potential losses and know that are trade is never guaranteed to succeed. If you’re just starting out in trading, download our New to FX guide to learn the basics.

Keep up to date with monetary policy and general developments within the Fed. Currency value and monetary policy are closely linked.

Risk Warning:

Trading leveraged derivative products such as Foreign Exchange (Forex) and Contracts for Difference (CFDs) carries a high level of risk to your capital.

These derivative products, many of which are leveraged, may not be appropriate for all investors. The effect of leverage is that both gains and losses are magnified. The prices of leveraged derivative products may change to your disadvantage very quickly, it is possible for you to lose more than your invested capital and you may be required to make further payments.

Before deciding to invest in any financial product, you should carefully consider your investment objectives, trading knowledge and experience and affordability. You should only trade in Forex and CFDs if you have sufficient knowledge and experience of the risks involved in trading such products and if you are dealing with money that you can afford to lose. You should seek independent professional financial advice if you do not understand the risks involved.