Rising US Yields Sparked Breach of 73.80 Resistance in USD/INR But Seems Defended

  • Forex Analysis

USD/INR opened the day a tad weaker at 73.7950 registering a loss of 4.50 paise/USD over its Monday’s close. Rising US yields contained the currency pair to trade within the 73.80 resistance.

The rupee is trading on a steady note even as the yield on 10-year US Treasury continues to rise after the Federal Reserve said last week it would start tapering its massive USD 120 billion bond purchases soon. If labour markets continue to improve as expected Fed could start raising rates by the end of 2022. In the event, Fed starts to raise interest rates soon, it would weigh on emerging market currencies including the rupee. As the market expects one rate hike by the end of 2022 and two rate hikes in 2023, the impact on the rupee will be limited to 75.00-75.30 level till the end of the current financial year.

After worries about China’s Evergrande Group resurfaced the rupee may track the Chinese Yuan closely. Local stock markets remained unaffected by the financial stress caused by Evergrande. BSE Sensex and Nifty 50 registered marginal gains on Monday. The Chinese Stocks index has corrected over 15% this year as fear of Government impositions see a huge outflow of foreign funds. Some of the funds have been diverted to the local stock markets taking the stocks to dizzying heights in a short span of time.

Adding to the net CNY 320 billion last week, PBOC injected on Monday a net CNY 100 billion into the financial system as fears of widespread contagion from China Evergrande eased. As a result, the dollar index is trading a tad lower at 93.30 level. Rupee’s trading range is confined to the 73.60-80 level and a breach of 73.80 support is quite unlikely this week, while the possibility of the rupee to test the resistance at 73.30-40 is very much there. The sharp rise in global oil prices had no impact as yet on the rupee.

Forwards rose marginally higher across the maturities providing the advantage to exporters to obtain a favorable forward exchange rate against their medium-term receivables. The 3-month and 6-month forward dollar premium is currently quoted at 3.70% and 3.92% per annum respectively. The receiving interest in the swap market is limited to short-term maturities upto end-December 2021. Importers prefer to keep their exposures unhedged to save on the hedging cost and to benefit from possible rupee appreciation during the tenor of the short-term liabilities.

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