Rupee strengthened
this week on the back of nascent optimism regarding a U.S.-Iran
peace deal but renewed hostilities threatened to yet again sway
the outlook for Asian currency.
Volatility expectations for the rupee drifted higher as
investors remained on tenterhooks for the next chapter in the
more than two-month-long war that had upended the macroeconomic
outlook for oil importers such as India.
A flare-up in fighting occurred on Thursday as Washington
awaited a response from Tehran to its proposal to end the
conflict. U.S. President Trump said a ceasefire is still in
effect.
The rupee declined nearly 94.70 to the dollar
before paring losses to end the session at 94.40, up 0.4%
week-on-week.
The currency declined 0.2% from the previous close while the
1-month implied volatility for the dollar-rupee rose to 5.7%,
the highest since mid-April.
Price action on Friday had a “swing like feel to it with
support (for USD/INR) consistently emerging around 94.40 while
state-run banks were active around the 94.70 mark,” a trader at
a foreign bank said.
If optimism on a U.S.-Iran deal is misplaced yet again, the
dollar would have plenty of upside room to recover with “a good
chance investors will prove more cautious and won’t jump as
aggressively into de-escalation trades,” analysts at ING said in
a note.
India is among the most exposed to economic risks arising
around prolonged conflict in the Middle East as it imports a
majority of its energy needs. Brent crude was at $100.7, down
nearly 7% this week.
Shares in Mumbai declined 0.6% while the yield on
the 10-year benchmark note rose 4 basis points.
Investors await a key U.S. labour market report due later in
the day. Next week, the focus will be on India’s consumer
inflation data for April, alongside news-flow surrounding the
Iran war.