Morning INR update: EURUSD capped by ECB as US growth concerns watched

Yesterday Draghi was positive on growth but showed little confidence in inflation reaching its target any time soon. Along with this Draghi said that the committee did not discuss tapering. These developments show that ECB (whose monetary policy has been a currency policy in disguise since 2014) is not comfortable with a higher Euro as of now. EURUSD which has been modelled similar to a Rajan era USDINR, empirically, doesn’t move without ECB’s blessing and therefore should now remain capped at 1.0950-1.10, in spite of French developments and growth outlook.

US durable goods (without aircrafts) and pending home sales order came in weaker. GDP tracking for Q1 is below 1% (consensus at 1.1%) and a lower print today can drive UST yields lower. Q2 GDP tracking is around an aggressive 3% but with debt ceiling and other policy uncertainty, likely downward revisions could weigh on yields further. Thus dollar index as such would have limited upside here as EURUSD should trade in a tight range of 1.07-1.10 until further ECB talk. Lower US yield view could be captured through USDJPY shorts which faces tough resistance around 111.40-111.80 zone (CMP 111.15).

USDINR 1m NDF is trading 4p left as compared to 7p yesterday showing increased demand for the pair. Equity markets in Asia are negative as commodity prices register substantial correction weighing on China particularly. KRW has depreciated on the back of Trump’s security charges demand. This reaffirms my assumption that US intervention in N Korea would be paid back by S Korea and Japan in the medium term through stronger domestic currencies, positively affecting INR. We have witnessed aggressive buying by nationalized banks over the last 2 days. CMP 64.24, Range 64.29-64.15.