US 10 y yields broke the multiyear resistance at 3.11% and
is currently trading at 3.21%. This was on the back of continued strong US
economic data (both manufacturing and services ISM now hovering around the 60
level). Consequently the dollar index which has been attempting to break the
200 week moving average at 95.69 is now trading at 96.1. A weekly close above
96 should result in further up move. This dollar up move has been supported by
the ongoing uncertainty of Italian budget which has resulted in Italy 10Y
yields going to 3.32% from 2.7% in mid September.
Till yesterday morning 73.35 looked like a good support for
INR as the expectations for an oil window was ripe before a news flash on
Bloomberg indicated that RBI might be averse to the idea. This was the only
hope the markets had for the rupee and that seems to have been busted for now.
Subsequently in the evening the RBI announced relaxed ECB norm for oil
companies working capital requirement. The problem with these is that companies
will need to be sure that they can take the currency risk plus raising an ECB
for PSUs is a time taking process (7-15 days) and therefore we have seen no
impact on INR.
Tomorrow we have the RBI policy where market is pricing in a
25 bps rate hike. Given the increase in MSPs for Rabi crop the chances of a 50
bps rate hike increases. The fact that RBI has turned down governments proposal
for a oil window also increases the chance of a 50 bps rate hike which can
support the currency. The problem here is that the government would not want
rates to increase by more than 25 bps given the negative impact on growth.
Since mid August the dollar index fell from 96.4 to 93.8 and
in that period INR depreciated sharply. Now that the dollar index is trading
above 96 again with US 10 Y at 7 year highs in terms of yield, USDINR can
accelerate higher. The road ahead will be bumpy with the RBI policy tomorrow
but increasingly 74.5 looks likely. CMP 73.75, Range 73.95-73.60.
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