Rate differentials are a key driver of FX moves, and we look at rate differentials by adjusting
for the effects of both inflation and embedded risk in the market. We do this by looking at
2y nominal-rate differentials, adjusted for CPI and then divided by the implied volatility of an
ATM option on the relevant FX pair. The top-left chart ranks shows our volatility-adjusted
real-rate differentials for the major currencies we track vs the US dollar. At present we can
see that the Indian rupee offers one of the highest real rates differentials.

We like buying INR vs EUR, which negative real rates and is ranked near the bottom of our
rankings. The bottom-left hand chart shows a significant divergence between the rally in
EURINR and the fall in the real volatility-adjusted rate differentials. The EUR also has very
bullish speculative futures positioning (top right chart). Furthermore, the Indian central bank
has been intervening, buying USD to keep the INR from strengthening too much. We can
see that EURINR is testing key resistance levels at around 75-77 (bottom-right chart) and we
would look to short EURINR on a failed break of this resistance level.

Source: Bloomberg, Macrobond and Variant Perception