Asian foreign exchange rally weakens, causing Indian rupee to depreciate; correlation with yuan strengthens.
In a shift of fortune, the Indian Rupee dipped by 0.4% at 84.55 against the US Dollar today. This move comes after a momentary pause in the offshore Chinese Yuan, with traders attributing the decline to typical dollar demand from oil companies and importers.
At 11:20 a.m., the dollar index was maintaining a steady position below the 100 mark while the offshore Chinese Yuan observed a decrease of 0.2%.
The 14-day correlation between the Indian Rupee and the offshore Chinese Yuan has picked up intensity, reaching a near three-month peak. This surge was fuelled by optimism surrounding a softening of U.S. trade policies, which benefited Asian currencies.
In addition to this, increased demand to buy dollars at the daily reference rate published by the Reserve Bank of India (RBI) has weighed down the Rupee today.
Although the rupee had significantly pulled down the Chinese yuan-Indian rupee cross rate (CNY/INR) to a nearly nine-month low last week, it has since recovered somewhat. This recovery can be attributed to analysts' observations that the RBI may remain wary of excessive Indian Rupee richness against the Chinese currency.
The Analysts' View: ANZ Weighs In
Analysts at ANZ foresee potential downside risk to USD/INR but caution that the RBI will be cautious about letting the Indian Rupee outperform significantly, especially against the Chinese Yuan. It is speculated that the RBI intervened via state-run banks last week to cap the gains in the Indian Rupee.
What's Next?
In the short term, the focus will be on developments related to U.S. trade deals with various countries. Meanwhile, investors will keep an eye on the Federal Reserve's policy decision due in U.S. market hours on Wednesday. Although a rate hike is not anticipated, comments from Chair Jerome Powell will be under the spotlight for clues regarding future policy rate direction.
Insights into the Correlation Mechanism
- Trade Competitiveness: The Indian and Chinese economies compete in multiple export sectors, including machinery, electronics, pharmaceuticals, chemicals, and textiles. A weaker Yuan can make Chinese exports cheaper and more competitive, potentially leading to a weaker Rupee.
- Exchange Rate Dynamics: The weakening of the Yuan typically triggers a similar trend in the Rupee due to trade and economic pressures. Regional trade flows link the two currencies closely, making an offshore Yuan drop a potential source of downward pressure on the Rupee.
- Central Bank Response: The RBI's stance regarding the managing of the Rupee in such scenarios can impact its value. A more passive approach may lead to further depreciation if the Yuan continues to weaken.
In conclusion, the Indian Rupee's correlation with the offshore Chinese Yuan plays a significant role in determining its value against the US dollar. A weaker Yuan tends to cause the Rupee to weaken as well, driven by competitive pressures in export markets and strategic decisions made by the RBI in managing the currency.
- The Indian Rupee's dip against the US Dollar today can be linked to increased dollar demand from oil companies and importers, citing a routine industry practice.
- The decline in the offshore Chinese Yuan, even momentarily, may have contributed to the Indian Rupee's descent, as a close relationship between the two currencies has been observed in exchange rate dynamics.
- Analysts at ANZ have taken note of the potential downside risk to USD/INR, but they also warn that the Reserve Bank of India (RBI) might be cautious about allowing the Indian Rupee to outperform significantly, especially against the Chinese Yuan.
- The recovery of the CNY/INR cross rate from its nearly nine-month low last week could be attributed to the RBI's wary stance on excessive Indian Rupee richness against the Chinese currency.
- The RBI's response to managing the Rupee in situations where the Yuan weakens can impact the Rupee's value, with a more passive approach potentially leading to further depreciation.
- The weaker Yuan can make Chinese exports cheaper and more competitive, potentially leading to a weaker Rupee due to the competitive pressures in export markets.
