Dollar extends rebound as investors await US stimulus details
|President Trump has been impeached by the House of Representatives. This is the first time that a president has been impeached twice. Since the Senate trial won't happen until inauguration, Trump would not be removed from office.
US core CPI rose 0.1% MoM in December compared to 0.2% in November. Lower than expected core CPI has caused the US 10y yield to come off further from recent highs around 1.18%. Comments from Fed members that it is too soon to talk about tapering of asset purchases has also stemmed the selloff in US treasuries. The US Dollar has strengthened against Euro and Sterling which continue to get resisted at 1.2250 and 1.37 respectively. The US Dollar is weaker against commodity currencies and EM currencies. President elect Biden is likely to present details of a USD 2tn Coronavirus relief package today. US yields have come up 3bps overnight.
The CPI led uptick in domestic bonds was short lived with the yield on the 10y benchmark bond ending at 5.94%. We expect the RBI to announce an OMO soon to manage sentiment in the bond market. The forward curve onshore continues to get more and more dislocated. Cash Dollar selling is keeping cash-spot points elevated at 4%. 1y forward is at 4.65%. A USD glut on account of persistent inflows and an uptick in money market rates has contributed to forward getting paid across the curve. However if the RBI uses other instruments to suck out liquidity such as Term Reverse Repos or CMBs, it would not have to sterilize it's FX intervention. This should eventually cause the forward curve to normalize. An elevated forward curve makes shorting the Rupee against the Dollar expensive. Rupee is likely to trade in a 73.05-73.35 range intraday.
Strategy: Exporters are advised to cover a part of their exposure on upticks to 73.80-73.90. Importers are advised to cover through options. The 3M range for USDINR is 72.50 – 74.40 and the 6M range is 73.00 – 76.00.
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