ECB perhaps realizes that there is no escaping a higher EURO given the global construct and therefore it did not try to talk it down. Noteworthy is that sometime back market expected a September tapering, hawkish ECB interest rate outlook with higher Euro yields. Now Euro yields have edged lower substantially, September tapering has been postponed to October or later and ECB has asserted that rates are going to remain low till the end of asset purchases. In spite of this Euro continues to move higher which shows that it is independent of interest rate theories and the move is more of a structural dollar weakness and consequent reserve allocation into Euro. Euro appreciation will be more than expected and will continue at least till markets start bracing up for surprises in Italian elections in May 2018. The appreciation could be even sharper post that, of course with a favourable EU outcome.
Trump has toned down his NK war mongering after he realized that a President also needs to rationalize his decisions. Yuan continues to appreciate perhaps along with Euro. EM currencies gained sharply as dollar weakness accelerated along with improved risk sentiment. NK might test a bomb on founders day but I don’t think markets would now care. USDINR 1m NDF is trading 5.5p left while EM currencies show that basis last 1 month INR should be between 63.10 and 63.50. Large life insurance companies are hitting the capital markets with their IPOs and the same should attract FPI flows. RBI continues to buy aggressively but at some point it could stop allowing INR to catch up with other EM currencies. USDINR could see a new low below 63.50 next week subject to NK risks not escalating which is my primary view. CMP 63.89, Range 63.95 – 63.65
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