Morning INR update

This USD strength is showing signs of spooking commodities and EM currencies as equity markets look toppish, in the absence of clarity on US fiscal road map. In the recent past, whenever USD interest rate outlook has led to a risk off, the FED has toned down its hawkishness to comfort the markets. For the meeting next week, a hike is priced in at 100% and therefore the FED need not meet to decide whether to hike or not. What they can do is perhaps tone down the market expectations of 2 more rate hikes in 2017 to comfort risk assets. Today we have the NFP which can further push the dollar index higher as Feb print has historically surprised on the higher side. Average hourly earnings will be the most important number as a print below 0.2% can result in dollar correction.

As I had expected yesterday EURUSD delivered a bounce to 1.06+ yesterday post the less dovish ECB, in spite of the dollar strength. I would look to now sell the pair given the overall trend for a move towards 1.0490.

USDINR 1m NDF trades 5p left like yesterday. Most EM currencies like KRW and CNH are trading weak. The other EM currencies like ZAR, MXN and BRL are all showing signs of weakness. CNH 1 Y forward points have increased from 2000 to 2500 in the last 3 days. Exit polls indicate a BJP victory in UP but the market impact of the same has been limited, showing that markets were already expecting this. An actual victory can have moderate impact on equities and INR next week while a surprise defeat can have more than moderate adverse impact on the other hand. Depreciating EM currencies will prevent USDINR from breaking 66.60 levels easily. Over the weekend I would stay square given NFP and election results together is difficult to factor. CMP 66.68, Range 66.60-66.76.