The FOMC minutes showed that the FED is thinking about
reducing reinvestments sooner than market thought (by the end of this year
itself). This should have resulted in higher US yields and stronger dollar but
that was not the case perhaps due to slightly negative equities on account of
Trump’s meeting Xi and below expectation print for Services ISM in the US;
Nevertheless I cannot rationalize the price action. A break of 2.3% on the
lower side in US 10 year yield (weekly close), technically looks like a bearish
signal which can take it to around 2% and at the same time create a risk off
environment globally.
Today we have the RBI policy wherein the rate decision is a
consensus of no action. What would be interesting is how RBI handles the excess
liquidity floating in the system. A CRR hike reduces bank profitability and I
would think that the government would not want PSU bank profitability to reduce
currently (given that most liquidity resides there), which could prevent RBI
from hiking CRR substantially (1% CRR hike sucks out 100k crore of liquidity
only). Therefore an additional interest paying measure is what I would expect.
If the liquidity problem is addressed then RBI will not be forced to pay
forwards in case of its interventions from the buy side, perhaps facilitating a
lower move in forwards.
USDINR 1m NDF trades 8p left while EM currencies have
depreciated on the news of FED balance sheet reduction by the end of this year.
Yesterday the markets saw bond inflows of Rs. 5k crores which drove USDINR
lower although we saw moderate bids from nationalized banks. Immediately USDINR
might face tough resistance near 65.20 levels but at the same time a break of
64.80-70 levels looks more unlikely now. CMP 65.02, Range 65.20-64.95.
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