US political risks ahead of the midterm elections on 6thNovember, seem to be getting priced into US equity markets. US10Y yields and dollar index also cooled off as risk aversion reflected on the equity markets first. There doesn’t seem to be any US data that would have triggered the 3% selloff in Dow while the IMF cuts to growth forecast day before yesterday could be a catalyst. US CPI and ECB minutes today could be significant for the dollar index but having been rejected at 95.7 the dollar index can register 2-3% down move over the next fortnight.
EM currencies depreciated along with equity selloff. One might argue that INR was depreciating when equity was making new highs and therefore INR should not depreciate now. The move up in equities was led by domestic investors while FIIs are the major sellers in the last 15 days therefore the selloff in equities is likely to adversely affect INR. The positives for Rupee in this risk aversion move, is the correction in oil prices accompanied by a possible cool off in the dollar index which should ensure that pace of Rupee depreciation slows down in spite of equity outflows. Nifty looks like headed to 9950 now. The medium term outlook for USDINR remains clouded by confusion over policy. CMP 74.41, Range 74.25-74.75.
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