Dollar rally runs out of puff as yields ease

Inflation as measured by headline CPI rose by much lower than expected 4.59% in December (against exp 5%) primarily on lower vegetable prices. Food inflation eased to 3.51% yoy in December from 9.5% in November. The inflation print will ease some nerves in the domestic bond and money markets which have been spooked recently by an uptick in crude prices, US treasury yields and on announcement of resumption of normal liquidity operations by the RBI.

The IIP contracted 1.9% yoy in November, compared to an expansion of 4.9% in October primarily on account of contraction in mining and manufacturing output. The contraction was more than consensus estimates and could raise concerns over deceleration in growth momentum. It could lead one to question whether the strong numbers in September and October were on account of pent up demand and inventory stocking ahead of the festive season. High-frequency indicators, therefore, need to be tracked closely to ascertain signs of whether the growth impulse is sustainable or is at risk of fading away.

USDINR continued to encounter resistance around 73.50 for the second straight session yesterday. The Dollar completely reversed overnight on comments from two Fed officials that "it was too early to talk about tapering of asset purchases with the pandemic still raging." The US 10y yields dropped 6bps overnight after touching a high of 1.18% yesterday. The Dollar index is back below 90.

Asian currencies are trading stronger against the US Dollar. We expect the Rupee to trade in the 73.05-73.40 range. The Nifty continues to print new record highs. FPI inflows into domestic equities continue, albeit at a slower pace compared to November and December. SGX is indicating a 30-40pt gain 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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