INR update: Rising yields scare currency markets domestically as additional borrowing reduced

The next major event for Euro is the coalition partners vote to join Merkel’s camp or not on the 21st Jan. Till then Euro should trade in a range of 1.22-1.23 and next week we can see an upside run if the government gets formed while the downside could be lesser in case of a failure (given the prevailing dollar weakness). On the other hand the pressure on Yuan to appreciate further is increasing as the German Central bank announced that its going to start investing its reserves in Yuan. Yuan has a share of 11% in the SDR basket and a similar allocation gradually from various central banks, as dollar weakens can bolster the Renminbi. Trump reiterate to Xi that US’s trade deficit with China is not sustainable.

 

INR yesterday reacted to the slide in local bond yields for the first time, as RBI indicated that it’s not going to take care of yields to comfort investing institutions. The positioning in the market where participants were all short USDINR did not help either. Technically the pair can get resisted at 64.13 and then 64.40. With global dollar weakness INR would not stand out and weaken continuously unless the macros weaken surprisingly from here, therefore the top should be between 64 and 64.40. On the other hand in the current environment if USD index registers a sharp correction then USDINR can also surprise us on the higher side, therefore stops for shorts should be tight and disciplined.

 

Just now the economic secretary tweeted that the additional borrowing program will be reduced from Rs. 50k crs to Rs. 20k crs. This can be seen as a measure to calm market sentiments. Immediately USDINR moved lower from 64 to 63.80 levels. Apart from government bond yields there was no other reason for USDINR to move higher. The growing trade deficit was mostly anticipated and is priced in. I would think the top for USDINR is behind us as we start following global dollar weakness again while mirroring moves of other EM currencies. KRW and CNH are mostly flat since yesterday. CMP 63.89, Range 63.98-63.68.