Rise In Dollar Index Favours A Minor Uptick In USD/INR Over The Short-Term

  • Forex Analysis
  • Editors Pick

USD/INR opened the day a lot firmer at 73.4650 up by 23.50 paise/USD over its Friday’s close. The sharp rise in US 10-year T-bond yield and a significant rise in dollar index influenced an upmove in the currency pair. We do not expect the USD/INR to strengthen on a sustainable basis beyond the 73.80 level over the short-term.

Abundant liquidity in the global financial system, as well as a sharp rise in US T-bond yield, may drive the foreign portfolio investors towards emerging markets such as India. US 10-year Treasury yield jumped almost 20 basis points last week to 1.12%, the biggest weekly rise since June.  Till 8-1-2021, FII equity inflow was about USD 4.8 billion and most of the inflows were absorbed by RBI through their intervention in their effort to prevent the rupee from strengthening beyond 73.00 level. Overall, we are looking for the 73.00 resistance level to hold and a test of 74.00 level is quite possible before the end of this month.

Forex reserves surged by USD 4.84 billion in the week ended 1-1-2021 and the forex reserves stood at USD 585.32 billion as of 1-1-2021. The sharp increase in forex reserves reflects the position of surging portfolio inflows into the market and active intervention from the Central Bank to mop-up the dollar surplus from the market.

US non-farm payrolls dropped by 140,000 jobs last month, while the data for November was revised up to show 336,000 jobs added instead of 245,000 as previously reported. The US unemployment rate stood at 6.7%. Though the US Dollar Index Futures has recovered to currently trading at 90.30 from the low of 89.18 registered last week, the broad market view is that the dollar will weaken against major currencies going ahead due to larger fiscal stimulus and covid-19 vaccine program.

Asian stock indices are trading mixed with Jakarta exchange up by 2% and Taiwan weighted index rose by 0.43%. Asian currencies fell due to the dollar’s stellar recovery in the past three days. Indonesian Rupiah fell by 1.40% followed by a drop of 0.75% in Korean Won. The Asian currencies are expected to end the day lower. Yuan also fell to 6.4780 level today.

Due to huge paying interest in near-term forwards and the RBI’s action to drain the surplus liquidity from the market by way of undertaking 14-day reverse repo auction at 3.35%, the 3-month forward dollar premium spiked higher to trade at 4.50% per annum as of now. The forward curve between the 6-month to 12-month maturities shows an inversion at the long-end.

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