The move in dollar index is largely related to one sided positioning of dollar shorts as the yield curve largely remains where it was with 10-2 spread staying below 50 bps. In this case, EURO longs continue to be large at $18b (4th May) and with 1.1936 breaking convincingly, a further break of 1.18 and could open the door for 1.1554. Meanwhile the positioning for other majors (GBP, JPY and AUD) are near neutral and therefore I would expect bulk of dollar strength against Euro. Similarly the dollar index can now move to 93.6 a break of which can show 94.20. I would not abandon the view of a structurally weaker dollar as yet as the rising US fiscal deficit story seems stronger than the unexplained short term moves meanwhile in the larger picture the move till 94.20 should seem like a correction of the move from 103.82 to 88.25. Meanwhile as expected Trump continues to deliver on his promises without much reaction from the markets.
USDINR 1m NDF is trading 8 p right while debt outflows continue at a more than comfortable pace. Oil trades above 76.5 which would ensure that INR remains under pressure. The reversal in INR will come along with dollar index which could itself move higher by another 1% before moving lower. Therefore in the medium term USDINR looks like it is headed to 68. Recent RBI intervention and policy measures indicate that the policy makers do not want INR to depreciate beyond the other EM currencies spectrum while rupee weakness in tandem with dollar strength has been accepted. Equity markets will find it difficult to rise from here (in the near term) given the scrapping of Iran deal. CMP 67.35, Range 67.27-67.53.
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