Yesterday was a critical day as far as the dollar story is concerned. US10Y yields sustained above 3.05% while 10-2 spread broadened to 49bps currently from a low of 42bps 2days back. This is something that a structural dollar bear like me did not expect and therefore if I get a weekly close confirming the same, I would bite the bullet and change my view to medium term dollar strength. The reason for this change in market sentiment perhaps is the fact that US growth continues while Europe and Japan have showed continued signs of weakness.
If dollar strength starts when USDINR is at ~68 then by the time dollar index reaches 95+ (CMP 93.25) levels, INR could easily hit new lows (but let’s wait for the weekly close). USDINR 1m NDF is trading 13p right while all EM currencies have appreciated since yesterday 7-30PM IST. Equity markets are now showing signs of rising US yields. RBI intervened aggressively with intent for the first time in this up move, bringing down USDINR from 68.13 to 67.80, but one can only wonder if the intent has come a tad late. India 10Y yield show no signs of respite (we can expect more aggressive OMO purchase announcements). USDINR volatility is likely to go up but it should be traded looking at overall dollar strength/weakness plus oil prices. Since RBI has shown conviction today USDINR might find it difficult to go higher than 67.95 today while other factors might keep it higher than 67.75. CMP 67.81, Range 67.75-67.95. I would want to go overnight long looking at US yields.
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