The Indian Rupee (INR) recovers on Friday after depreciating to an all-time low of 85.12 in the previous session. The decline in crude oil prices might help limit the local currency’s losses as India is the world's third-largest oil consumer. Additionally, the Reserve Bank of India (RBI) could intervene in the market to prevent excess volatility.However, a hawkish rate cut from the US Federal Reserve (Fed) could spark the US Dollar (USD) broadly and exert some selling pressure on emerging market currencies, including the INR. Looking ahead, traders will focus on the US Core Personal Consumption Expenditures (PCE) Price Index data, which is due later on Friday. Also, the US Michigan Consumer Sentiment Index for December will be released.  

Indian Rupee rebounds amid multiple challenges

"We expect the rupee to trade with a negative bias on global equities following a hawkish Fed and a strong dollar. Concerns over a slowdown in the economy may further weigh on the rupee," said Anuj Choudhary  Research Analyst at Mirae Asset Sharekhan.

India's foreign exchange reserves fell in nine out of the past 10 weeks, hitting a multi-month low. The reserves had been falling ever since reserves touched an all-time high of USD 704.89 billion in September, and now last week the forex stood at USD 654.857 billion, according to the RBI data. 

The US Gross Domestic Product (GDP) grew at a 3.1% annualized rate in the third quarter (GDP), compared to a previous projection of 2.8%, the third estimate of the figures from the Bureau of Economic Analysis showed Thursday. 

The US weekly Initial Jobless Claims in the US declined to 220,000 in the week ending December 14, compared to the previous week's print of 242,000, and came in above the market consensus of 230,000. 

USD/INR maintains a strong uptrend in the longer term 

The Indian Rupee trades firmer on the day. The constructive outlook of the USD/INR pair remains intact on the daily chart as the pair holds above the key 100-day Exponential Moving Average (EMA). Nonetheless, the 14-day Relative Strength Index (RSI) is over the midline near 70.95, suggesting an overbought condition. This means that additional consolidation should not be ruled out before positioning for any short-term USD/INR appreciation.The ascending trend channel at 85.20 acts as an immediate resistance level for USD/INR. A decisive break above this level could see a rally to 85.50.On the flip side, the first downside target is seen at 84.86, the lower boundary of the trend channel. A breach of this level could pave the way to 84.16, the 100-day EMA.

Indian Rupee FAQs

What are the key factors driving the Indian Rupee?

The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.

How do the decisions of the Reserve Bank of India impact the Indian Rupee?

The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.

What macroeconomic factors influence the value of the Indian Rupee?

Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.

How does inflation impact the Indian Rupee?

Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.

Source: FXSTREET

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Sources：Bloomberg

(Dec 20): France’s debt agency kept its issuance plans for 2025 unchanged from an initial target as it awaits a new budget following the ouster of the government earlier this month.

Agence France Tresor, or AFT, said it will sell €300 billion ($312 billion) in government bonds next year, net of buybacks. That’s in line with the forecast in the original plan announced in October, following €285 billion of sales this year.

“If this amount has to be changed later in the year, we will do so and communicate to investors,” AFT Chief Executive Antoine Deruennes said.

France is in political and fiscal tumult after leftist and far-right lawmakers united to topple the government of Michel Barnier over his fiscal plans. The former prime minister planned to narrow the budget deficit to 5% of economic output in 2025 from 6.1% this year through €60 billion of tax increases and spending cuts.

President Emmanuel Macron last week appointed Francois Bayrou to succeed Barnier, but the new premier still has not picked a cabinet to attempt to pass a new budget. In the meantime, France will rely on emergency legislation from January that rolls over the same taxes as last year, allows the government to borrow money and issue spending decrees.

“The special law authorizes the AFT to continue to carry out all the cash and debt operations to ensure the financial continuity of the state,” Deruennes said.

While Bayrou has not detailed his policy priorities, his government may have to make concessions on taxation and expenditure that would swell the deficit to be financed by debt issuance. Moreover, France’s economic prospects have deteriorated sharply amid the political uncertainty, making financial objectives harder to reach.

The political and fiscal uncertainty has sent tremors through French debt markets since Macron called snap elections in June, as investors demanded higher compensation given doubts over the country’s ability to tackle its debt mountain.

The gap between French and German 10-year yields, a proxy for French bond risk, is trading around 81 basis points, nearly double where it was in the first half of the year. The gap hit a peak of 90 basis points in late November, the widest since 2012.

Source: Theedgemarkets

The People’s Bank of China (PBOC), China's central bank, announced to leave its Loan Prime Rates (LPRs) unchanged on Friday. The one-year and five-year LPRs were at 3.10% and 3.60%, respectively.   

Market reaction

At the time of writing, AUD/USD is holding lower ground near 0.6222, down 0.32% on the day.

Australian Dollar FAQs

What key factors drive the Australian Dollar?

One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.

How does the health of the Chinese Economy impact the Australian Dollar?

China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.

How does the price of Iron Ore impact the Australian Dollar?

Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.

How does the Trade Balance impact the Australian Dollar?

The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.

Source: FXSTREET