Murmurs that the US is considering restarting talks with China has put trade sanction concerns on the back burner even though equities still seem to be factoring in the long term impact of such measures. Italy appointed two anti EU politicians into key finance roles which led to increase in Italian yields and should continue to weigh on the Euro. US 10-2Y spread is at 35 bps and at the same time German 10Y yields have fallen to 34bps from 62bps a month back. This makes it confusing whether currencies will look at the interest rate differential or the steepness of the curve for US and Germany. In the short term I think the yield difference favours the USD over EURO while in the medium term the flattening US yield curve will prevent dollar from appreciating further. Gains on the USD therefore should be capped at 96 (CMP 94.80).
Oil prices suggest that markets are pricing in a significant increase in oil production at the OPEC meeting today (~ 1 mio bpd). Consequently USDINR has come down to 67.82 levels. Considering Iran’s souring relationship with the US, it is unlikely to cooperate with Saudi Arabia, so the base case could be of a disappointment. USDINR NDF 1m has come down to 26p from 32p yesterday morning while other EM currencies have appreciated from yesterday, even though CNH and KRW are at similar levels. I would expect USDINR to take support at 67.80 for most of the day. Oil prices can move in the second half as we start hearing from Vienna leaving the range wide for the pair for the day. CMP 67.83, Range 67.63-68.20.
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