US 10 Y yield went higher to 2.89% with the 10-2 spread widening to 27bps. This was perhaps on the back of Powell’s reassurance that gradual rate hikes are the best way forward. A weekly closing in the dollar index above 95.25 tomorrow should boost the greenback again and bring other G7 currencies under pressure.
Oil moved higher to 72.8 levels (Brent) from 71.5- yesterday taking the positivity out of Indian bonds and INR partially. My expectation that USDCNH would remain well supported at 6.70-6.72 has gone wrong as the Yuan depreciated to 6.77 today. This would ensure that INR appreciation is stalled till the time Yuan reverses. On the other hand the vulnerability of INR on the back of CNH depreciation has seemed significantly less in the last 1 week. Oil would therefore remain the primary driver for INR followed by overall dollar strength weakness which would be reflected in CNH as well. Another interested correlation is that between CNH and EUR which seem to be moving in tandem with a lower beta on the Euro. USDINR 1m NDF is trading flat today as compared to 2p left for the most of this week indicating that offshore selling pressure on the pair has faded. Broad range for USDINR continues to be 68.85-68.25. For today, CMP 68.74, Range 68.85-68.70.
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