The INR fell by around 1.5% on Brexit before regaining 0.5% to close at four months low levels of Rs 67.96 to the USD. Chart 1. Will the INR weaken further or can it stabilize at current levels? The answer lies in the expectations of the reaction of Global Central Banks to Brexit.
The Fed views Brexit as negative for the US and Global economy and in all likelihood put off rate hikes for 2017. The Fed might also consider steps such as QE to provide liquidity to markets in case of high sustained volatility. The ECB and BOJ too are ready to stand by to provide liquidity to markets.
The currency market reaction to Brexit was classical risk aversion trades. The sharp drop in GBP by around 10% led to rise in the JPY and fall in the Euro. The USD broadly gained on safe haven trades.
The INR fell in sympathy to the broad strength in USD but going forward may hold its own as liquiidty is kept cheap and high in markets. India could also attract FII flows as markets look to stable currencies to invest given easy and cheap liquidity.
The INR is more likely to stay ranged against the USD with levels of Rs 68.80, which is record low seen in August 2013, acting as the lower end of the range and Rs 67, the highest seen over the last one month, acting as the upper end of the range.
Global currency markets last week was in turmoil after voters in Britain shocked the world by voting to leave the European Union, a historic decision that is sure to reshape the nation’s place in the world. The leave camp secured 51.9% of the vote from total of 17.4 million votes
The verdict has sent the GBP (British Pound) to a more than 30-year low against the USD while the Yen rallied and at one point of time broke JPY 100 level against the USD, levels last seen in November 2013. Apart from the Yen, gold, which is considered a safe haven investment in times of turmoil, closed 4.76% higher, after rallying by more than 7% intraday.
USD started the week on a low note as market sentiment for risk was strong at the start of the week after two opinion polls published on Saturday showed that support for the ‘Remain’ campaign had regained its lead over the “Leave” campaign. USD was also under pressure after the Federal Reserve left interest rates on hold in its last FOMC meet and lowered forecast for the number of interest rates hikes this year.
However, USD got a major boost on Friday after the verdict came for Britain to exit EU, sending the USD Index (DXY), which tracks the movement of the USD against six major currencies sharply higher by 2.05%. On weekly basis the index rose by 1.32% closing at levels of 95.45.
Janet Yellen in her testimony before the Senate Banking Committee on Tuesday said that the gradual interest rates hikes were likely to be needed. She added that the Fed is “closely monitoring global economic and financial developments” and taking a cautious approach to raising interest rates. Yellen also warned that a vote by Britain to exit the EU could have significant economic repercussions.
U.S. Department of Labour on Thursday reported that number of individuals filing for initial jobless benefits in the week ended 18th June decreased by 18,000 to 259,000 from the previous week’s total of 277,000 against the expectation of a decline of 7,000 to 270,000.
Asian currencies except Japanese Yen came under heavy selling pressure on Friday as global investor become highly risk averse. Japanese Finance Minister Taro Aso on Friday signalled that his government would step in to control the sharp rise of the Yen. Apart from Aso, the Bank of Japan governor Haruhiko Kuroda also said that the central bank was prepared to infuse ample liquidity into the financial markets in order to stem the rise in the Yen. He further added that this could be done through the existing swap arrangements it had with other central banks.
On weekly basis Asian currencies were mixed against the USD. Australian Dollar appreciated by 1.07%, New Zealand Dollar appreciated by 1.06%, South Korean Won depreciated by 0.51%, Philippines Peso depreciated by 0.87%, Indonesian Rupiah depreciated by 0.39%, Indian Rupee depreciated by 1.30% against USD and appreciated by 0.43% against Euro, Chinese Yuan depreciated by 0.53%, Malaysian Ringgit appreciated by 0.19% and Thai Baht depreciated by 0.15%.