Morning INR update

March rate hike probability is touching 80% now which means it is consensus. On the other hand Q1 GDP tracking for the US is below 2% for major economists globally. FED members continue to talk hawkish while the US Manufacturing ISM data came in strong at 57.7 (highest since Aug 2014) with pre orders painting a rosy picture for the economy going forward. Core PCE for the US (the primary measure of Inflation for the FED) is at 1.7% pa which means that the economy has some room to heat further given the low GDP growth in Q4 2016 and Q1 currently looking unimpressive. The hawkish FED commentary is to ensure that the FED has the window open to hike rates, while going into the meeting, but a probability greater than 70% would mostly mean that FED doesn’t have an option but to hike. To reiterate, given the debt ceiling impasse which should play out in Q2, which in turn could impact fiscal spends and therefore GDP growth, I would think that March rate hike chances from here should fall to 50%-60%. Consequently USDJPY at 114 levels currently looks like a good sell for a move towards 112 levels.

Dow, Dax and Asian equities celebrated Trump’s infrastructure and tax cut plans even if they were at best half baked. Consequently , I got stopped on my tactical Nifty short bet yesterday. With Dow above 21k and DAX rallying along, risk seems very much on the table which could accelerate INR appreciation. Since state election results are still 9 days away, the event risk should not come in the way of domestic risk assets rallying for the time being.  Nats continue to be on bids in USDINR which would make me run overnight shorts in the pair. CMP 66.78, Range 66.86 – 66.60.