Reflation trades pummelled as Fed shift resets markets

Abhishek Goenka IFA Global

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.

Download The Full Daily Currency Insight

Author

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.

EUR/USD holds firm above 1.1900 as US NFP looms

EUR/USD holds its upbeat momentum above 1.1900 in the European trading hours on Wednesday, helped by a broadly weaker US Dollar. Markets could turn cautious later in the day as the delayed US employment report for January will takes center stage.

GBP/USD remains above nine-day EMA near 1.3650

GBP/USD recovers its recent losses from the previous session, trading around 1.3680 during the European hours on Wednesday. The technical analysis of the daily chart indicates a sustained bullish bias, as the pair trades within an ascending channel pattern.

Gold sticks to gains near $5,050 as focus shifts to US NFP

Gold holds moderate gains near the $5,050 level in the European session on Wednesday, reversing a part of the previous day's modest losses amid dovish US Federal Reserve-inspired US Dollar weakness. This, in turn, is seen as a key factor acting as a tailwind for the non-yielding yellow metal ahead of the critical US NFP release.

US Nonfarm Payrolls expected to show modest job gains in January

The United States Bureau of Labor Statistics will release the delayed Nonfarm Payrolls data for January on Wednesday at 13:30 GMT. Investors expect NFP to rise by 70K following the 50K increase recorded in December.

S&P 500 at 7,000 is a valuation test, not a liquidity problem

The rebound from last week’s drawdown never quite shook the sense that it was being supported by borrowed conviction. The S&P 500 once again tested near the 7,000 level (6,986 as the high watermark) and failed, despite a macro backdrop that would normally be interpreted as supportive of risk.

Bitcoin price slips below $67,000 ahead of US Nonfarm Payrolls data

Bitcoin price extends losses, and trades below the lower consolidating boundary at $67,300 at the time of writing. A firm close below this level could trigger a deeper correction for BTC. Despite the weakness in price action, institutional demand shows signs of support, recording mild inflows in ETFs so far this week.