US yields have come off to 3 week lows which can put dollar
on the back foot. USDJPY is trading in a range of 111.50-112.50 and I would
continue to enter from the short side in the pair.
I got the RBI policy stance wrong as RBI surprised the
market driving 10 Y India yields from 6.44 to 6.77 currently. There are two
significant market takeaways from the policy. First being that RBI mentions
currency as an upside risk to inflation in 2017. Theoretically currency is
always a risk but mentioning it at this juncture when INR has been stable and
under control for last 3 years while dollar strength doesn’t seem to be as big
a risk as it seemed two months back, makes me feel that RBI’s own currency
projections are of INR depreciation. This could be an outcome of government’s
desire to correct REER this year.
Second being that with yields higher by 30 bps, India might
see bond inflows. Post Trump’s victory as global yields rose, due to
demonetization Indian yields fell and consequently investors took money out of
India, chasing higher yields elsewhere. Now with higher yields we might at some
point of time see these bond investments coming in which might explain the INR
move yesterday night and today morning. We have seen foreign banks in selling.
USDINR 1m NDF continues to trade 5p left while EM currencies
are mostly flat since yesterday. DM equities seem to have lost momentum while
Asian equities are mildly in the green today. I did not expect USDINR to trade
below 67 and stubbornly now I would not expect it to sustain at these levels,
but the risk of bond inflows remain. CMP 66.97, Range 66.88-67.20.
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