We have seen some volatility return across asset classes, as one would have expected with Trump winning the US presidential election and Republicans taking control of both the House of Representatives and the Senate.
The latest economic data suggests that the US economy is resilient. It will be interesting to see whether the Fed cuts rates again in the December policy or pauses. The progress on the inflation front has stalled and given that Trump’s policies are likely to be expansionary, there could be upside risks to inflation.
The US Fed may therefore opt to wait and see how the inflation dynamics evolve. The market is pricing in an 86% chance of a 25bps rate cut in the December Fed policy, which is up from 64% a month ago.
Eurozone and Chinese economies continue to exhibit weakness on the other hand. The European Central Bank (ECB) is expected to cut rates by 25bps this week and China is likely to impart further fiscal and/or monetary stimulus in early 2025. There is a possibility that the Bank of Japan may not hike next week.
Therefore, there is definite growth divergence between the US and other economies and that could translate into policy divergence as well. This has caused the Dollar to strengthen against most major currencies.
Amid overall Dollar strength, a recent warning by president-elect Trump that if BRICS nations were to adopt a common currency, they would lose access to US markets for exports putting further pressure on BRICS currencies. The Yuan has been weakening but the PBoC has been expressing its discomfort with a weaker Yuan by fixing the onshore Yuan stronger than expected.
The Rupee has outperformed its Asian peers as the central bank has been intervening to arrest a downslide. Nevertheless, it too has slumped to new lows against the Dollar. Q2 GDP print was a huge disappointment.
The RBI revised the FY25 growth projection lower and the inflation estimate higher. The RBI cut the CRR by 50bps to infuse durable liquidity into the banking system. With the new governor taking over, the CRR cut could be followed by a 25bps repo rate cut in the next policy.
Prospects of RBI turning dovish could keep the Rupee under pressure. With the government committed to bringing down the fiscal deficit, the monetary policy has to eventually turn accommodative to ensure that growth does not take a hit.
Amid the above factors causing the Rupee to weaken, what comes as a bit of a respite is that the FPI flow picture in domestic equities seems to have turned around in December following two months of outflows.
As a result, the benchmark Nifty index has seen a smart recovery of close to 6% from recent lows. Domestic rates and bonds too have rallied on rate cut expectations.
Going forward, we expect the Rupee to trade with a slight weakening bias. Equities could see a period of consolidation with Nifty likely trading sideways in 23800-25200. Another 10-15bps of downside in bond yields and Rates is possible from current levels which could provide an opportunity to exit long positions.
In conclusion, the volatility that we have seen in the last month post Trump’s election is what we can expect to see more of, as he assumes office. The low volatility period that we had been in for quite some time could be behind us.
(The author is Founder and CEO IFA Global)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
