Dollar pokes higher as US soft data sours mood, China GDP in focus
|The latest high frequency data from the US such as jobless claims and retail sales seem to suggest that there has been a notable deceleration in the pace of economic recovery. With unemployment rate still elevated and expected to decline only gradually, there seems to be limited upside in inflation expectations from current elevated levels. This would imply limited down side for US real rates and therefore for the US Dollar too. The latest CFTC data indicates that the short positions in the US Dollar are the highest since 2018.
The RBI governor in his latest speech made it clear that building up Reserves is crucial to insulate the economy from external shocks. Being put on the monitoring list for currency manipulation by the US treasury is therefore not likely to act as a big deterrent in continued accumulation of Reserves by the RBI.
Bonds will be closely tracked heading into the budget on 1st February. The 10y yield had ended just shy of 6% on Friday. The RBI did announce a Rs 10000crs OMO post market hours to soothe sentiment. Sell off in the shorter end of the curve is permeating into the farther end as well. RBI absorbed liquidity of Rs 2 lakh crs through the variable rate reverse repo auction on Friday. The cut off was quite high compared to the weighted average, which indicates RBI absorbed liquidity quite aggressively. Nevertheless, the forward curve is extremely dislocated at this point (with 1y yield close to 4.8%) and looks attractive to receive. Any measure to correct the dislocation in the forward curve could result in a sharp move higher in spot.
The major event this week is the ECB monetary policy on Thursday. President Biden's inauguration ceremony is on the 20th.
For the week we expect the RBI to trade a 72.90-73.60 range with upside bias. Today is a US holiday and therefore no cash transactions would be possible. For the day Rupee is likely to trade in a 73.10-73.40 range with upside bias. SGX is indicating a 20-30pt cut for Nifty on open.
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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