The lack of upward momentum in dollar index played out as expected driving it lower than 94 (CMP 93.88). Technically the next target could be 93.17 and 92.89. This has been accompanied by a mild risk on as the trade sanctions kicked in (as it was already well priced in). The other reason for equity markets to celebrate could be the flattening yield curve (sounds absurd!), as markets would now expect the FED to slowdown and therefore monetary conditions would become more accommodative. The first seeds of this FED rate hike slowdown has been sown by Atlanta FED President by starting a debate around the flattening yield curve. Strong job creation in the US accompanied by lack luster wage increase perhaps also helps the argument that the Fed need not be so worried about inflation. A decline in short term yield curve should have a negative impact on the dollar, i.e., as and when the market prices a step back from the Fed. Today we have Draghi speaking while this week we will get the inflation number from the US which will be the most important.
USDCNH has cooled off post the event date of trade tariffs. USDINR 1m NDF points have come lower to 27p as compared to most of last two weeks 35p and current onshore’s 26p. The dollar index and mild risk on climate is the driver for the half a percentage overnight INR appreciation, which in line with most EM currencies globally. During the day we expect aggressive buying from importers as markets still see INR weakening over the medium term. Broadly USDINR should trade in a range of 68.25-69.10. A daily close outside this range will call for a sharp move in the respective directions. FII outflows continue on a regular basis but dollar weakness currently could outweigh the buying. Since morning we have seen aggressive bids which can reverse during the European session. CMP 68.67, Range 68.75-68.45.
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