View: Strong dollar, weak yuan to weigh on rupee

By Bhavik Patil

The Dollar index is sitting near the highs. Dollar is the world’s reserve currency and its index is not far below its recent high.

Chinese renminbi has breached the 7 level against the greenback. Weak Chinese yuan will depreciate other Asian currencies such as the rupee.


Clearly, we are following USD-CNY and that is why our rupee is depreciating in spite of recovery in the equity market.

Strong dollar and weak Chinese yuan is a deadly potent for the domestic currency.

As we can see from the chart, USD-CNY came close to breaking the 7 level during 2015-2016, but Chinese authorities intervened heavily in the forex market and spent nearly $1 trillion to make their currency strong.

Now because of a trade war, they have let their currency weaken. This will affect our rupee as in the chart below we can see that Indian rupee generally follows USD/CNY and during mid July that we were appreciating in spite of weak USD/CNY and strong US Dollar.

But our currency depreciated considerably fast when USD/CNY breached the 7 as seen in the chart.

Historically we have seen that USD/INR typically underperforms both dollar and USD/CNY. During September-November 2018 we saw the rupee underperforming massively when it was trading at 74 before recovering and outperforming during July 2019 before again starting underperforming.

Going ahead, we see Chinese Yuan remaining weak and dollar is best looking beast in the barn when it comes to world’s foreign exchange instruments.

More than a decade of accommodative policies by world central banks have weakened their fiat currencies. The only economy, which has seen the least amount of slowdown is US economy so naturally their currency is strong. During risk off environment, dollar and Japanese yen are preferred safe haven currencies and so their demand will remain strong.

More Fed cuts may not weigh on the dollar and we expect USD to remain strong thus making our currency weak. So weak Chinese yuan, strong dollar will make our currency more vulnerable to weakness. We expect Rupee to test levels of 72.20 soon.

(Bhavik Patil is Senior Technical Analyst at Tradebulls Securities. Investors are advised to consult financial advisers before taking an investment calls based on these observations)