US presidential election outcome to drive rupee this month

The US presidential election is the event that will drive global currency markets this month, as no other national election is as important as that of the US president.  We all know why the policies of the US administration are important but it is good to put the numbers in perspective.

The US is the world’s largest economy and the only "super power". It is the largest consumer and trading partner of many countries and its trade policy impacts those of the rest of the world.

The US has a military presence in more than 80 countries and its political agenda sets the tone for the global geo-politics.

The US Federal Reserve sets the trend for interest rates and liquidity in the global markets. It prints the world's reserve currency and accounts for more than 55 percent of the world’s market cap. Most capital markets, including that of India, have a direct and positive co-relation with the US markets.

Based on current polls and leads, Democratic candidate Joe Biden is projected to win the race comfortably. Also based on the current polls, there is a likelihood the Democrats could win both the House and the Senate. This will be a huge "blue sweep" for them and that will drive policy changes. Their stated economic positions suggest that the dollar could weaken in the medium term, which could drive commodities and Emerging Market equities higher.

The potential for a delayed or contested outcome to the November 3 US election is the biggest source of uncertainty facing the market. Central bank meetings in the US and the UK this week are also important developments to keep tabs on.

The Fed is unlikely to announce major changes and the Bank of England is expected to increase the size of its bond purchases by 100 billion pounds to support the economy.

The dollar index posted its largest weekly gains since September, up by 1 percent, amid uncertainty around the US elections and renewed lockdowns in Europe. Emerging market currencies, with the exception of the CNY, came under pressure with commodity-linked currencies performing the worst.

India’s forex reserve touched an all-time record of $560.53 billion recently. Our central bank has added $18.51 billion in the last one month in the forex kitty. This was the main reason behind the stable rupee even after a stronger dollar and weaker domestic economic environment.

USD-INR behaved the way we expected and traded well within my indicated range throughout last month. I expect it to depreciate in the early part of this month though it will run into strong resistance near 75.2 range. I do not expect a sustainable move beyond 75.2 this month and the RBI to intervene and supply the dollar freely in case of larger depreciation.

On the other extreme, in case of a strong bout of dollar weakness, the rupee will find support near 73.2. I expect it to trade in these 2 rupees per dollar range—larger than the usual range in light of expected volatility on account of US presidential elections. The expectation of a fiscal stimulus package from the government to support the economy before Diwali will also weigh on the rupee.

(Devarsh Vakil is the Deputy Head of Retail Research at HDFC Securities.)