The Indian Rupee (INR) opens lower against the US Dollar (USD) on Wednesday after a slight relief the previous day. The USD/INR pair rises to near 96.45 as a fresh surge in oil prices due to intensifying fears of further global energy supply disruptions has weakened the Indian currency.
In the opening trade, the MCX Crude Oil contract expiring on August 19 posts a fresh over five-week high at Rs. 8,253.
Currencies from economies, such as India, which rely heavily on oil imports to meet their energy needs, tend to underperform in a high oil price environment.
Yemen Houthis close Bab el-Mandeb Strait
The closure of the Bab el-Mandeb Strait, the southern gateway of the Red Sea, by Yemen's Iran-aligned Houthis that halts oil exports from Saudi Arabia to Asian economies as part of retaliation against the United States (US) blockade on Iranian sea ports, has escalated fears of further energy supply disruption.
According to a Reuters report, the Bab el-Mandeb Strait closure could reduce global oil supply by 7%. This comes at a time when overall energy supply is already squeezed due to the closure of the Strait of Hormuz, a critical chokepoint to almost 20% of global energy supply.
The Saudi-led coalition has strongly criticized Iran’s action, saying, “Such threats are a blatant violation of international law and fall under acts of maritime piracy,” Reuters reports.
Earlier in the day, US Secretary of State Marco Rubio told Southeast Asian foreign ministers that Iranian control of the Hormuz would set a “dangerous precedent with repercussions beyond the Middle East”.
FIIs selling streak halts on Tuesday
Foreign Institutional Investors (FIIs) turned out to be net buyers on Tuesday after remaining net sellers for six straight trading days. On Tuesday, overseas investors pumped an investment worth Rs. 1,650.16 crore. In the July 13-20 period, FIIs offloaded their stake worth Rs. 10,240.80 crore.
However, the sentiment of foreign investors toward the Indian equity market is expected to remain depressed as surging oil prices will increase the import bill of the Indian government, a scenario that diminishes the center’s ability to invest in infrastructure and development.
Technical Analysis: USD/INR sees more upside towards 97.00
USD/INR trades higher at around 96.45, maintaining a bullish near-term bias as it holds above the 20-period exponential moving average (EMA) at 95.7889.
The pair is extending its recent advance, and the Relative Strength Index (14) at 62.38 stays in positive territory, hinting that buyers still retain control.
On the downside, immediate support is located at the 20-period EMA at 95.79, where a pullback could attract fresh buying interest as long as this floor holds. Looking up, the pair aims to revisit the all-time high at around 97.10.
Oil surge stokes inflation and stagflation fears as Red Sea risks escalate
Analysts at Deutsche Bank note that, “with no breakthroughs regarding Iran, the market focus returned to inflation over the last 24 hours,” as Brent crude “closed above $90/bbl for the first time in over a month, reviving fears about a wider stagflationary shock.” They add that “this morning we’ve seen a further rise above $92/bbl, so there’s little sign of oil prices easing as the US confirmed overnight they’d completed an 11th consecutive evening of strikes against Iran.”
Meanwhile, ING highlights that the security backdrop is being compounded by shipping disruptions, with “the Houthis' announced maritime blockade on Saudi Arabia” leaving “shippers nervous, with several tankers moving to avoid the Bab el-Mandeb Strait.” ING warns that this rerouting “would force tankers to enter and exit the Red Sea via the Suez Canal, adding significant time and expense to voyages to Asia,” reinforcing concerns about sustained upward pressure on energy costs.
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