The reason for the Euro selloff seems to be worries surrounding Italy’s next year budget which can lead the country to a fresh standoff with the EU, which wants the country to reduce debt. Italy 10Y yield have jumped by 20bps in the last 2 days and a meeting on 8th August would be the next event in this emerging theme for the single currency. The NFP report (U6 unemployment specifically) seems to suggest that US economic growth is picking up further creating an increasing divergence with other DMs like EU and Japan. A convincing break (weekly close or 1% higher) of 95.37 (200 WMA) on the dollar index (cmp 95.3) should indicate further up move and would lead to an all round dollar strength.
On Friday evening PBOC impost a 20% reserve requirement on forwards (from the earlier 0%). This was a signal that PBOC is not willing to allow a further selloff in Yuan. The first such signal to have come since June mid when the slide started. This week Chinese trade and CPI data would be critical to market expectations of further liquidity easing thereby driving the currency. USDINR 1m NDF is trading 3p left which should prevent large up move in the pair. FII outflow pressure has alleviated from the rupee. A break of 96 on the dollar index could take USDINR higher than 69. Medium term range 68.30-69.10. For the day CMP 68.61, Range 68.55-68.75.
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