US10Y-2Y yield spread has widened to 36 bps which is the highest in the last 4 months indicating improved market confidence in long term inflation outlook for the US. Ongoing Italian budget concerns has resulted in Italy 10y yields touching 3.62% (up 90 bps in the last 1 month). US10 Y yields have broken the multiyear crucial level of 3.11% and is currently at 3.24%. In spite of all this USD index is unable to sustain above 200WMA at 95.7 currently. As we go near the US midterm elections on 6th November there is a possibility that political risks start getting priced in the greenback resulting in a 2-3% pullback. Consensus estimates currently indicate that Trump’s Republicans will retain the Senate while the House of Representative will have a democratic majority. The view of USD getting sold on the back of these political risks fails if we get a weekly closing above 96 on the dollar index.
USDINR 1m NDF is trading 15p right and oil continues to trade above 84 levels. EM currencies have been stable since the week opened yesterday morning except for a mild depreciation in CNH on the back of PBOC rate cut on Sunday. RBI on Friday indicated that interest rates would not be raised to protect the currency and since then RBI has more aggressively defended 74 levels. FII outflows have picked up substantially, October MTD outflows is $2.3bn as compared to $2.9bn for the whole of September 2018. RBI is likely to defend 74.20 aggressively during the day but overnight USDINR could see higher levels as oil remains at elevated levels along with an overhang of dollar strength across. RBI’s monetary policy stance gives more reason for speculators to bet against the Rupee. Even if we see dollar weakness ahead of the US midterm elections we will see limited INR appreciation as buyers would line up at lower levels. CMP 74.05, Range 73.85-74.20.
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