Fed minutes point to more rate hikes that go further than the market anticipates

USDINR 77.52 ▲ 0.05%.

EUR/USD 1.0701 ▲ 0.20%.

GBP/USD 1.2588 ▲ 0.19%.

India 10-Year Bond Yield 7.298 ▼ 0.10%.

US 10-Year Bond Yield  2.752 ▲ 0.19%.

ADXY 103.33 ▼ 0.09%.

Brent Oil 111.48 ▲ 0.32%.

Gold 1,849.18 ▲  0.16%.

NIFTY 50  16,040.30 ▲ 0.09%.

Global developments

US durable goods orders and business investment rose by lower than expected in April. Minutes of the Fed meeting indicated most Fed members were of the view that the economy was strong, labor markets were tight and inflation was high, and that the Fed needed to move expeditiously to neutral rates. Most Fed members felt 50bps hikes at the next couple of meetings were appropriate. Many also said it would be appropriate to consider the sale of Mortgage-Backed securities.

US Q1 GDP revised estimate and core PCE data are due today.

Price action across assets

US yields are flat post the FOMC minutes. The Dollar has weakened a bit. Euro had come off highs around 1.0740 to 1.0660 but has recovered some lost ground to get back to 1.07. S&P500 ended about 1% higher. Crude prices are steady with Brent at USD 114 per barrel. EIA data indicated stockpiles fell more than expected.

U.S. core capital goods orders growth slows in April; shipments increase.

Domestic developments

India has capped sugar exports and even for exports within the cap, prior approval would be required. The government has announced a slew of measures to ward off inflationary pressures in recent times. We believe this is a better way of addressing supply-side inflation. There is little the monetary policy can do to contain this kind of inflation.

Government officials said that the government does not need to go for additional borrowing at this point.

USD/INR

It was yet another narrow range day for the Rupee yesterday. USD/INR had broken 77.50 on the downside but recovered to end flat at 77.53.

3m ATMF implied Vols have come off drastically after governor Das' comment that RBI would not allow runaway depreciation of the Rupee. 3M ATMF implied volatility ended 30bps lower at 5.85%. 1y forward yield was unchanged at 3.84%.

Bonds and rates

Domestic bonds and rates rallied, cheering the fiscal side measures taken by the government to contain inflation. These measures would reduce pressure on the MPC to keep tightening aggressively. 5y OIS dropped 10bps to 6.83%. The yield on the benchmark 10y ended 6bps lower at 7.30%. Lower US yields also fuelled the rally.

Equities

The Nifty slid lower through the session and ended 0.6% lower at 16025. IT stocks were among the major laggards and dragged the index lower. 

Strategy

Exporters are advised to cover on upticks towards 77.90. Importers are suggested to cover on dips towards 76.80. The 3M range for USDINR is 75.50–78.30 and the 6M range is 75.00–78.90.

German economy dodges recession as war, pandemic weigh.

FX outlook of the day

USD/INR (Spot: 77.54)

It was yet another narrow range day for the Indian rupee yesterday. The USDINR pair had broken 77.50 on the downside but recovered to end flat at 77.53. Domestic bonds and rates rallied, cheering the fiscal side measures taken by the government to contain inflation. US yields are flat post the FOMC minutes. The Dollar has weakened a bit. Minutes of the Fed meeting indicated most Fed members were of the view that the economy was strong, labor markets were tight and inflation was high, and that the Fed needed to move expeditiously to neutral rates. The pair is expected to trade with a sideways bias. Focus to be on the US Q1 GDP revised estimate and core PCE data due today. The intraday range for the pair is expected to be between 77.40-77.70.

EUR/USD (Spot: 1.0702)

EURUSD stays on the way to reverse the pullback from a monthly high, picking up bids to 1.0685 during the Asian session. The US dollar’s failures to cheer the latest FOMC Minutes contradict the Euro’s ability to cheer hawkish speeches by ECB members supporting the pair. ECB policymakers were more hawkish and underpinned the bloc’s currency despite the economic fears raised by the region’s Financial Stability Review (FSR). FSR warned about an abrupt increase in real interest rates suggesting it could induce corrections in the real estate market. On the other hand, ECB Chief Economist Philip Lane reiterated on Wednesday that it was appropriate to normalize the monetary policy. There is no macro data to be released from the bloc. The pair is expected to trade in the range of 1.0650 to 1.0740.

GBP/USD (Spot: 1.2957)

The British pound recovers some ground on Wednesday during the US session, bouncing near weekly lows around 1.2480s and back above the 1.2550 figure grinding higher. As per the Fed meeting minutes, policymakers endorsed the 50 basis points (bps) of rate hikes for the next couple of meetings. However, statements like, “it would be appropriate to consider sales of mortgage-backed securities,” seemed to have raised doubts about the rate increases past September, which in turn weighed on the US dollar after release. US April’s Durable Goods Orders grew at a slower pace than foreseen but kept positive. In the absence of any macro data and major trigger from the UK, market participants will be looking forward to US GDP data being released later during the day. The pair is expected to trade in the range of 1.2540 to 1.2630.

USD/JPY (Spot: 127.39)

The USDJPY pair surrendered its modest intraday gains and was last seen hovering near the lower end of the daily trading range, just below the 127.00 mark. The market sentiment remains fragile amid growing concerns about softening global economic growth amid the prospects for a more aggressive move by major central banks to constrain inflation. BOJ Governor, Kuroda stated that in Japan, households' pent-up demand and wage growth have been modest compared with the United States and European countries. He repeatedly stressed the BOJ's resolve to keep monetary policy ultra-loose on the view a recent rise in Japan's inflation will be short-lived, and that the country's fragile economy still needs monetary support. The pair is expected to trade in the range of 126.90 to 127.80.

Japan to urge moving ahead with 'green' GDP indicator - draft.

Economic calendar