Core Insights - Emerging market currencies are performing well, particularly in Latin America, with the Brazilian real returning 4.5% in 2026 and the Mexican peso returning 4.3% [2][12] - Carry trades, which involve borrowing in lower-yielding currencies to invest in higher-yielding ones, are up 1.3% this year, building on last year's 18% rally [12] - High real interest rates in developing countries are supporting carry strategies, as many central banks maintain tight monetary policies despite slowing inflation [12] Latin American Currencies - The Brazilian real has seen a significant return of 4.5% in 2026, following a 23.5% return last year, with interest rates at 15% [2][12] - The Mexican peso's carry trade has also performed well, returning 4.3% this year, with Deutsche Bank maintaining a bullish outlook [2][12] - Citi strategists recommend buying the Brazilian real against the dollar and also favor the Turkish lira [3] Underperforming Currencies - The Indian rupee, which was the worst performer last year, is down about 2% in carry terms this year [4] - The Indonesian rupiah has also resulted in losses for investors [5] Market Conditions and Predictions - The record for carry strategies was in 2003 with a 25% return, but current conditions require the dollar to weaken further and emerging currency volatility to remain low [9][12] - BofA strategist Alex Cohen suggests that carry trades will continue to outperform if volatility remains suppressed, although geopolitical risks could pose challenges [10][11]

Core Viewpoint - The Indian rupee is experiencing its largest annual decline in three years, primarily due to record equity outflows and the absence of a U.S. trade deal, with recovery prospects linked to future trade agreements [1][3]. Currency Performance - The rupee is currently quoted at 89.8650 per U.S. dollar, reflecting a 4.74% decline for the year, marking its worst performance since 2022 when it fell nearly 10% [1]. - Throughout the year, the rupee has repeatedly hit record lows, surpassing the 91 level at one point, indicating sustained depreciation pressure [2]. Economic Context - India's balance of payments has slipped into a historical deficit of approximately $22 billion between April and November, highlighting external economic strains [3]. - A potential trade deal with the U.S. could provide temporary relief, possibly lifting the rupee to around 88.50 by March, although underlying pressures are expected to persist [3]. Capital Flows - The rupee's underperformance relative to peers is attributed to significant equity outflows and a slowdown in capital inflows, with foreign investors withdrawing a record $18 billion from Indian equities in 2025 [5]. - Prolonged negotiations with the U.S. have further complicated capital flow challenges, reducing predictability regarding India's trade outlook [5][6]. RBI's Approach - The Reserve Bank of India (RBI) has adopted a more flexible approach to currency management under Governor Sanjay Malhotra, allowing for currency weakness while focusing on managing depreciation expectations [7]. - This shift became evident when the rupee fell past the 91-per-dollar mark, prompting heavy RBI intervention to manage speculative pressures without defending a specific exchange rate level [8]. Currency Valuation - India's trade-weighted real effective exchange rate has declined to 97.5 in November from 104.7 in January 2025, indicating that the rupee is now considered undervalued [9]. - A weaker Indian rupee may benefit local exporters by cushioning their currency earnings, providing some relief amid challenging economic conditions [10].

Market Performance - India's frontline indices Nifty and BSE Sensex ended positively, with Nifty closing at 24,894.25, up 57.95 points or 0.23%, and Sensex at 81,207.17, rising 223.86 points or 0.28% [1][12] - The Nifty breadth was slightly bearish, with 26 stocks in the green and 24 in the red [2][12] - Among the top gainers were Tata Steel, Axis Bank, and Larsen & Toubro, while the top losers included Max Healthcare Institute, Tech Mahindra, and Maruti Suzuki [12] Sector Performance - Out of 17 Nifty sectoral indices, 14 finished in the green, with Nifty Metal, Nifty PSU Bank, and Nifty Consumer Durables closing up by 1.8%, 1.12%, and 1.09% respectively [5][12] - Nifty Auto fell marginally by 0.06%, while Nifty Realty and Nifty Healthcare were down by 0.12% and 0.22% respectively [2][12] Technical Analysis - Technical Analyst Vatsal Bhuva noted that the Nifty index showed strength after closing above its short-term resistance, with crucial support near the 100-day EMA at 24,750 [6][12] - Heavy put writing at 24,800 indicates a support base, while the highest open interest concentration at 25,000 highlights a strong resistance zone, suggesting a mildly bullish trading range of 24,750–25,100 [6][12] Global Market Influence - Asian markets were largely positive, with Japan's Nikkei 225 gaining 1.8%, while China's Shanghai Composite and FTSE Straits Times Index rose by 0.5% and 0.4% respectively [7][12] - European markets also showed positive action, with Germany's DAX, Spain's IBEX, and French CAC 40 rallying between 0.8% and 0.1% [7][12] Currency and Commodities - The Indian rupee closed slightly weaker at 88.7725 against the U.S. dollar, remaining close to its all-time low of 88.80 [8][9][12] - Crude oil prices increased after four consecutive declines, with US WTI oil contracts trading at $60.88, up by $0.40 or 0.66%, and Brent oil futures at $64.51, higher by $0.40 or 0.62% [10][12]