Powell confirmed the need for rate cuts and told us that the
US growth slowdown (in the shadow of a trade war) is the FED’s focus and not US
labor market specifically. July rate cut chances are at almost 100% now with
September rate cut chances at 75%. The watch now is for the 3rd rate
cut where market is pricing in a chance of 58%.
Slowing US and global growth, softer FED and trade war are
the three themes driving the market. The markets COULD at some point start
selling the USD when trade war rhetoric rises, which would be a diametric change
from the market reaction till now. This is still an expectation only, basis
Trump’s last couple of comments directly demanding a weaker USD accusing China
and EU of currency manipulation. Larger view remains of a softer USD.
Brent has moved higher this week from 64 to 67 but market is
not following small moves in Brent now. Market assumes that Brent is going to
stay in and around $65, till such time that this assumption is broken with a
breakout Brent could be ignored for short term USDINR movements. Empirically it
seems that not many participants are sitting short USDINR therefore I would
think that short USDINR is still not a crowded trade. As expected for the last
fortnight 68.30 target has been achieved. On the other hand nationalized banks seem
to buying USDINR aggressively here, therefore this might not be a good level to
create fresh shorts. A convincing break of 68.30 should lead to stop sells on
the pair. Otherwise one could get around 68.45-50 to create fresh shorts. The
larger view till September 2019 remains of 67. CMP 68.35, Range 68.50-68.25.
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