US policy: The US jobs data suggests that the US economy is performing better than expected and reduces the need for further sharp rate cuts by the Fed for the time being. However, this weeks’ US inflation report is likely to confirm that inflationary pressures continue to moderate, providing space for a continuation of the rate cut cycle. We continue to see a 25bps rate cut in November and December policy for now
RBI Policy: On the domestic front, the focus is likely to remain on the RBI policy and the CPI print (early next week). While we do not expect the RBI to start its rate cut cycle, the possibility of a change in stance to neutral is on the table. Although it remains a close call and the RBI could very well deliver a no change policy while only changing its tone towards the dovish side. On economic data, the CPI print for September is expected to rise to 5.14% amid waning of a favourable base effect and higher food inflation.
Rupee View: The USD/INR pair is expected to trade with a depreciation bias this week amid an uptick in the US dollar, volatility due to Middle East tensions and a rise in crude oil prices. We expect the RBI to intervene and cap losses in the rupee. The Rupee closed flat at 83.97 on Friday, deprecating by 0.3% on a weekly basis.
FX View: The DXY rose by 0.5% to 102.52 on Friday and is trading further higher at 102.45 in morning trade today supported by a strong jobs report and safe-haven demand amid rising tensions in the Middle East.
JPY and the Euro view: Increase in the dollar weighed on DM currencies – the Euro fell below the 1.10 mark while the JPY depreciated to 148.71 against the dollar on Friday.
Crude oil prices rose to USD 78.05 pbl, recording an 8.8% increase in October 2024 till date, amid escalating tensions in the Middle East. However, gains moderated after U.S. President Joe Biden's advice to Israel against targeting Iranian oil facilities. Iran produces approximately 3.2 million barrels per day, representing about 3% of global output, and disruptions to its oil supply pose a risk to future prices. Nevertheless, OPEC has sufficient spare capacity to offset any loss from Iranian supplies, which should help limit further price increases. Additionally, easing supply concerns in Libya, with all oilfields and export terminals reopening after resolving a leadership dispute within the central bank, are likely to keep oil prices in check.
US Inflation: Market expectations indicate that the US CPI is likely to ease to 2.3% year-over-year in September, down from 2.5% previously. This data, arriving on the heels of Friday’s strong jobs report, is expected to influence forecasts regarding the size and timing of Fed rate cuts in the coming months. Additionally, producer price inflation data on Friday is anticipated to further indicate a moderation in inflation.
The USD/JPY pair has depreciated by 3.4% in Oct-24 till date. The yen's underperformance can also be attributed to comments made last week by new Prime Minister Shigeru Ishiba that raised expectations that rate hikes in Japan are still some time off. We expect the USD/JPY pair to remain volatile in the near-term as traders adjust for a less dovish Fed and a more dovish Bank of Japan. Expected trading range: 140-150 in the near-term. The EUR/USD pair has depreciated by 1.45% in Oct-24. The pair is trading at 1.0973 in morning trade today. Expected trading range for the week: 1.09-1.10.