Rupee to rally on growing bets Fed to cut rates next year

MUMBAI, Nov 15 (Reuters) – The Indian rupee is expected to rally at open on Wednesday after a softer-than-expected U.S. inflation print increased the odds of the Federal Reserve pivoting to rate cuts around the middle of next year.

Non-deliverable forwards indicate the rupee will open at around 83.00 to the U.S. dollar compared with 83.3325 in the previous session.

U.S. Treasury yields plummeted on Tuesday, the dollar index suffered its worst session in a year and U.S. equities jumped after data showed U.S. consumer prices were unchanged in October and the annual rise in underlying inflation was the smallest in two years.

Asian currencies jumped with the Korean won climbing 2% and the Indonesian rupiah and the Malaysian ringgit surging 1.4% and 1.1%, respectively.

There have been “huge moves across asset classes” and the rupee will reflect that at open, a forex spot dealer at a bank said.

“The question will be what happens after that – will the dip (on USD/INR) near 83 sustain or this dip too will be lapped up.”

On the back of the inflation data, the already low probability of a Fed rate hike in December was fully priced out.

What is more important for the rupee and other Asian currencies is the mounting probability of Fed rate cuts next year.

ANZ noted the first Fed rate cut is priced for May earlier than before the data.

“Increasingly it looks as if the level of monetary restraint is having the desired outcome on both inflation and the labour market,” it said.

Futures are pricing in a total of 100 basis points of rate cuts in 2024.

India’s retail inflation softened in October to a four-month low, with the annual retail inflation at 4.87%, down from 5.02% the previous month.

KEY INDICATORS:

** One-month non-deliverable rupee forward at 83.06; onshore one-month forward premium at 4.5 paisa ** Dollar index at 104.14

** Brent crude futures up 0.3% at $82.7 per barrel

** Ten-year U.S. note yield at 4.44%

** As per NSDL data, foreign investors bought a total of $639.2mln worth of Indian shares on Nov. 10 and Nov. 12

** NSDL data shows foreign investors bought a net $378.5mln worth of Indian bonds on Nov. 10

Our Standards: The Thomson Reuters Trust Principles.