Aggressive dollar buying by RBI, nationalized banks could have a China angle

By Abhishek GoenkaThis week, the rupee managed to break out of the 73.30-73.50 range it had been stuck in for the last few sessions. What surprised was the aggressive buying of dollars by nationalized banks, despite a broad weakness in the global dollar market. The rupee weakened even as the domestic equity and bond markets recorded gains.While the yuan strengthened against the dollar, the rupee weakened, resulting in the rupee depreciating past the 11 mark against the yuan for the first time since September 2013.There are several hypothesis behind the aggressive dollar purchases by the central bank, but the narrative gaining traction is that it could be an attempt to disincentivize cheap Chinese imports and give a fillip to domestic manufacturing. To extend the narrative a bit further, the ploy to weaken the rupee could be part of a multi-pronged strategy to apply pressure on China given the geopolitical tensions. Customs had introduced 100 per cent physical checks of Chinese consignments.The SEBI too, this week, sought information on beneficial owners of foreign portfolio investments from China.Impact of US election on dollarIn the coming week, the focus will be on US politics as the US presidential election draws closer. The possibility of a pre-election agreement on fiscal stimulus between Democrats and the White House looks remote now. The election outcome would, therefore, be viewed through the lens of what it would mean in terms of the contours of the stimulus package. The outcome that would be most positive for risk would be a Biden victory and Democrats gaining control of the Senate. This makes a larger stimulus package, which the Democrats are in favour of, easier to pass. The US dollar is likely to weaken under this scenario.While betting odds and opinion polls are indicating a comfortable victory for Biden, the Senate race is likely to be a close finish. If Republicans manage to retain control over the Senate it could lead to a knee-jerk sell off in risk assets and could be positive for the US dollar.In case of broad USD strength, 74.30 is expected to be the first resistance for USDINR. On the down side, 72.50 is an extremely critical support. A breach could trigger several stops and open up the possibility for a bigger down move. For the week, rupee is expected to trade in the range of 73.50-74.30.Strategy: Post onshore close, USDINR has spiked offshore with implied spot at 73.88. Exporters are advised to hedge through risk reversals. Importers are advised to keep a stop loss above 74.30. Month-end exporters selling could cap an upside in USDINR. The October F&O expiry falls on Tuesday.(Abhishek Goenka is Founder & CEO of IFA Global. Views are his own)
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