Chinese yuan strengthens past seven mark

Markets seem to be disregarding the simmering US-China tensions. Some advisors in the Trump administration are in favor of stifling Hong Kong's access to US Dollars in retaliation to China imposing the national security law. HSBC stock has taken a beating as a large part of its income comes from Hong Kong. While at the moment the lower end of the 7.75-7.85 peg of USDHKD is under threat, if the Trump administration does go ahead with restricting USDHKD Convertibility, the Hong Kong Monetary Authority would have to defend the upper end of the peg. 

Nationalized banks have been absorbing Inflows and paying forwards to sterlilize liquidity. This has resulted in the forward curve getting dislocated. While a 3m T-bill fetches 3.17%, doing a B-S swap and parking USD outside would yield 3.75%. Aggressive intervention by nationalized banks has skewed sentiment in the Rupee. It is sending a clear signal that the central bank is not comfortable with a strong Rupee. So far it has put to rest any doubt market participants would have had about aggressiveness of intervention post its balance sheet date. 74.50 is a strong support and we can see a move like we saw on break of 75.40 if it gets tested again. USDINR is likely to trade 74.75-75.10 range intraday. Yuan has strengthened past the 7 mark again. Shanghai composite has gained for 8 straight sessions now 

Globally, the USD has weakened overnight. Gold took out stops above 1800 to print a 9 year high. US weekly jobless claims data is due today. 

Strategy: Exporters are advised to cover between 75.00 - 75.40 through forwards. At lower levels only cover through option strategy. Break below 74.50 may possibly take rupee to 73.80. Importers are advised to hold maintaining a stop loss of 75.50 or cover through risk reversal option strategy. The 3M range for USDINR is 73.60 - 76.50 and the 6M range is 73.00 – 77.00.

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