Sharp Rise in US Yields and Higher Oil Prices Led to an Upside Bias in USD/INR

  • Forex Analysis
  • Editors Pick

USD/INR opened the week almost unchanged from its Friday’s close, despite the steep rise in US yields. The higher global oil prices shall compensate for the huge dollar inflows expected to come into the market in the coming weeks, thus keeping the currency pair to hold the resistance at 73.80.

The rupee is trading with a weaker undertone but its support at 73.80 level holds. Investors are of the view that growing divergence between the monetary policy stance of developed economies and emerging economies in the post-covid-19 scenario can dent appetite for riskier assets and weigh on emerging market currencies including the rupee. However, the rupee is well supported at close to 73.80 level encouraged by the surge in local equities and consistent dollar inflows into the market. Currently, there is no specific trigger for the rupee to breach the 73.80 support to test the next solid support at the 74.30-50 level.

The dollar is trading at a 1-week low at 93.23 level as investors digest the latest FOMC statement. Fed reinforced tapering could soon begin. The Central Bank also signalled interest rate hikes could follow earlier-than-expected but left the door open to more stimulus if the economy needs it.

On the back of strong global cues, the domestic equity benchmarks soared to record new lifetime highs on Friday last week. BSE Sensex and Nifty 50 registered an all-time high of 60,333 and 17,947.65 respectively. At over the 60,000 level in the BSE Sensex, the investors have become cautious and feel that the rally has been overdone fuelled by a higher liquidity surplus in the market.

Euro/USD is holding onto its upside above 1.1700 despite the firmer yields and downbeat euro area preliminary Markit PMI report. ECB said that higher oil prices are temporary. German IFO survey and Fed Chair’s speech will be in focus. Sunday’s German election could keep the euro traders wary.

Yuan is trading slightly lower at 6.4600 and PBOC has injected a net CNY 460 billion of short-term cash into the banking system in the past five working days to maintain high liquidity in the market. Risk appetite return as China pumping more money into the system at a time of uncertainty over Evergrande payments.

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