USD Index continues to trade in a range of 88.5-90.5 unless either breaks on a weekly basis. US 10-2 spread has eased to 67bps from its peak at 78bps (a week back), generally a higher 10-2 spread leads to dollar strength as a steepening US yield curve attracts money into the US and indicates an ever increasing interest rate expectation. A weekly close above 25400 (2% higher than yesterday’s close) on the Dow would indicate that risk sentiments are back on track.
The buyer’s credit availability in the Indian trade credit market has noticeably shrunk on the back of the LOU scam. This would lead to partial unwinding of short term external debt for the country as a whole. Thus if we assume that the total short term debt for the entire economy is USD 80 bn with an average maturity of 3months, then on a weekly basis USD 6bn comes in for rollover. Of this USD 6bn if 20% is wound down then it increases the weekly dollar outflow by USD 1.2bn. Meanwhile the need for generating dollar funds would increase receive side pressure on the forwards market which we witnessed yesterday. Anecdotal evidence suggests that this pressure on spot and forwards should last for another week at least.
USDINR 1m NDF is trading 3.5p right while EM currencies have eased off overnight on the back of mild dollar weakness. Asian equities are moderately in the green. A weekly close below 64.87 on USDINR would take the upward pressure off the pair. CMP 64.86, Range 64.78-65.00.
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