|

Reflation trades pummelled as Fed shift resets markets

Global developments

Rising short-term yields in the US have dampened long-term inflation expectations. As a result, the US yield curve has flattened. While 2y yield has risen to 0.26%, 10y yield is now below 1.40%.5y inflation expectations which were close to 2.3% before the policy are now close to 2.10%. The US Fed, therefore, has succeeded in getting the long-term inflation expectations to converge to its target of around 2%. It would not want to let it dip much further for fear of growth stalling. Therefore we may see Fed officials step in to prevent the yield curve from flattening further through verbal intervention. Fall in inflation expectations has caused the US real rates to harden at the longer end and that is fuelling Dollar strength. The focus this week would be on the BoE policy on Thursday.

Domestic developments

The RBI minutes were dovish and MPC members felt it was necessary to prioritize growth over inflation in the wake of the jolt to the economy on account of the second wave.

Equities

Dow and S&P had ended with cuts of around 1.5% on Friday. Asian equities are also trading weak. 15400 is an extremely crucial support for the Nifty followed by 15030. We do not see 15030 getting broken in this swing.

Bonds

The G-sec auction went through reasonably well on Friday. The 2026 security was partially devolved on PDs. The yield on the benchmark 2030 security had ended at 6.01%. We may see long-term yields come under pressure, tracking long-term Yields in the US and on dovish MPC minutes.

USD/INR

Given the dent in risk sentiment, Asian currencies are trading around 0.4% weak against the Dollar. It will be interesting to see if 74.30 holds on a closing basis. Tracking the offshore onshore 1m spread will be crucial to gauge panic if any. 

Strategy: Exporters are advised to cover a part of their near-term exposure between 73.80-74.30. Importers are advised to cover through forwards on dips towards 73.30. The 3M range for USDINR is 72.50 – 75.50 and the 6M range is 73.00 – 76.50. 

fxsoriginal
fxsoriginal

Download The Full Daily Currency Insight

Author

Abhishek Goenka

Abhishek Goenka

IFA Global

Mr. Abhishek Goenka is the Founder and CEO of IFA Global. He pilots the IFA Global strategic direction with a focus on relentlessly improving the existing offerings while constantly searching for the next generation of business excellence.

More from Abhishek Goenka
Share:

Editor's Picks

EUR/USD makes a U-turn, focus on 1.1900

EUR/USD’s recovery picks up further pace, prompting the pair to retarget the key 1.1900 barrier amid further loss of momentum in the US Dollar on Wednesday. Moving forward, investors are expected to remain focused on upcoming labour market figures and the always relevant US CPI prints on Thursday and Friday, respectively.

GBP/USD sticks to the bullish tone near 1.3660

GBP/USD maintains its solid performance on Wednesday, hovering around the 1.3660 zone as the Greenback surrenders its post-NFP bounce. Cable, in the meantime, should now shift its attention to key UK data due on Thursday, including preliminary GDP gauges.

Gold holds on to higher ground ahead of the next catalyst

Gold keeps the bid tone well in place on Wednesday, retargeting the $5,100 zone per troy ounce on the back of modest losses in the US Dollar and despite firm US Treasury yields across the curve. Moving forward, the yellow metal’s next test will come from the release of US CPI figures on Friday.

Ripple Price Forecast: XRP sell-side pressure intensifies despite surge in addresses transacting on-chain 

Ripple (XRP) is edging lower around $1.36 at the time of writing on Wednesday, weighed down by low retail interest and macroeconomic uncertainty, which is accelerating risk-off sentiment.

US jobs data surprises to the upside, boosts stocks but pushes back Fed rate cut expectations

This was an unusual payrolls report for two reasons. Firstly, because it was released on  Wednesday, and secondly, because it included the 2025 revisions alongside the January NFP figure.

XRP sell-off deepens amid weak retail interest, risk-off sentiment

Ripple (XRP) is edging lower around $1.36 at the time of writing on Wednesday, weighed down by low retail interest and macroeconomic uncertainty, which is accelerating risk-off sentiment.