US 10y-2y spread has steepened to 71bps from 55 bps 7 days back, because of which I would abandon the dollar weakness view for now, although against JPY it should lose because of the growing risk off sentiment. The reason why the fears of increasing rate hikes gripped the market harder on Friday is the average hourly earnings growth number which was revised higher and the print was higher than expectations. This is concerning the equity markets which adjust to higher borrowing costs and lower present values. Last few times when equity markets fell, the FED delayed rate hikes and cajoled the markets. But that time fiscal purses were tight and inflation was less of a concern. But still if equity markets continue to fall then March rate hike might soon be off the table, the FED would not normalise at the expense of its main benchmark, i.e., (in my view) equity markets. Today Draghi’s speech will be important where he describes the outlook for Euro area economy along with the US services ISM print.
USDINR 1m NDF is 5p right while KRW is trading at 1090 (2% higher than Friday’s open). CNH perhaps is trading differently as it shifts its stature from the EM basket to something like a Euro (remember CNH getting into SDR then Germany announcing more reserves to Yuan assets). Even during the recent CNH appreciation KRW and INR were not impacted as much. Equity markets should continue to fall as people are still long and in the money, and profit taking is an easy decision. The global concern should continue till the time the yields cool off, which I think can happen only if the FED verbally intervenes and says that there would be lesser number of hikes. USDINR can head towards 64.50 levels this week wherein the majority of the move will come overnight as Nationalised banks should continue to sell the pair during the day. CMP 64.16, Range 64.10-64.30.
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