The US Dollar reversed sharply yesterday as US rates shot higher. Recent US data has persistently come in above expectations. Consumer confidence and business sentiment have improved markedly. The Virus has relented. However, the Fed has been downplaying the recovery citing downside risks and has not been acknowledging the improvement in economic conditions. Persistently solid US data is now causing markets to believe that the recovery is now too strong for the Fed to not acknowledge it.     

The strongest evidence of this is the yield on the 2y US treasuries which spiked 6 bps in a couple of sessions. Thus far, though the longer end had been rising, the shorter end had remained well anchored due to ultra dovish Fed communication. US 2y yield had barely budged and had been confined in a 0.10-0.12% range. Rising short-term US yields are a definite sign of caution for short Dollar positions.

Yesterday US jobless claims were lower than expected and January Durable goods data beat estimates. The US yields which were already climbing higher, shot up after 7y auction received a tepid response. This triggered a massive unwinding of Dollar shorts. US 5y yield has risen to the highest since March 2020. US 10y yield had crossed the 1.50% mark at one point. The 10y break-evens on the other hand are at 2.16% only. This implies a 10y US real rate of -0.65% which was about -1% not too long ago. Higher US real rates make it more expensive to hold riskier assets.

The rupee was the worst-performing currency in trade yesterday on account of the LEF relaxation granted by RBI. 1y forwards fell by 20p (The 1y forward yield fell 25bps to 5.05%). Cash-tom points also normalized to 0.85p from 1.20p the previous day. Ld-Fd points cooled off to 16p from 22p.  

Post the onshore close, the Dollar reversed across the board. USD/INR too saw massive short covering in NDF, spiking to above 73.  

Domestic Q3 FY21 GDP print is due today post-market hours, alongside Jan core sector data.   

Strategy: Exporters are advised to cover a part of their exposure on upticks to 73.40-73.50. 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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