GS assigns a 35% chance to a government shutdown in the US where the senate votes tonight on the spending bill. Yields might go up and safer currencies might gain against riskier ones but equity markets aren’t likely to give ground in the event of a shutdown. US 10 y surpassed 2.6% and is likely to inch higher as talks of infrastructure bill (spending of USD 1.85 tr) gains momentum. To reiterate the yield differential theme is not working for 6 months in EURUSD and more recently it has stopped working in USDJPY either. Dollar yesterday was not able to break the resistance at 91. Euro should remain capped at 1.23 today ahead of the 21st Jan vote by coalition partner in Germany which would decide whether Merkel is able to form a government sooner or later. In the event the vote goes through the Euro might surge while losses might be limited in the event of an adverse outcome.
USDCNH continues to appreciate and has moved from 6.54 to 6.39 in the last 9 days. USDINR 1m NDF is trading 2p left now. Basis last 1 month EM currency movement USDINR should be below 63 levels but before the budget on 1st of February substantial INR appreciation might not happen. The government till now has shown signs of respecting market sentiments about rising fiscal deficit and therefore I would expect the line of 3.5% of GDP to be maintained in the budget. Equity inflows from FIIs seem to have picked up as results season shows a pick up in the economy. CMP 63.64, Range 63.71-63.57.
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