The Indian Rupee depreciated on Friday and had its worst week against the dollar in six months, tracking a rise in long-term U.S. Treasury yields on worries that surging crude oil prices would worsen the inflation outlook.
The Rupee ended at 74.99 compared with 74.78 in the previous session. It had fallen to 75.16 earlier in the session, the lowest since Apr. 22.
For the week, it was down 1.2%, its sharpest drop since Apr. 9, extending a near-1% fall in the last two weeks.
Of course, the currency has been factoring in inflation worries as Brent crude climbed above $80 and with OPEC and its allies taking no fresh steps to increase output, oil at $90 seems a real possibility.
So, dollar and the benchmark bond yields have been factoring in a rise in inflation and the possible impactions to the economy and what the Fed will have to do to rein in inflation.
The U.S. Federal Reserve will meet in the 1st week of November to decide whether they should withdraw support to the economy.
Many recent polls suggest that they will announce a withdrawal of support to the economy. Currently the US Fed is currently buying bonds worth $120 billion ($ 80 billion of Treasury Securities and $40 billion of mortgage-backed debt) since March 18, 2020.
Market participants expect that the Fed will announce anywhere between $15-20 billion per month reduction of bonds. The Fed could bring forth the interest rate hike cycle to the end of 2022 rather than the 1st quarter of 2023.
The dollar ended flat this week, but the bond yields ended above the 1.6% level, first time since the mid-week of May kept appreciation bias capped.
Meanwhile, U.S. employers added just 194,000 jobs in September, well below expectations. However, the unemployment rate dropping to an 18-month low of 4.8%.
But there were signs of labour market tightness. Wage gains accelerated further, permanent job losses decreased and fewer people were experiencing long spells of unemployment.
The Dollar did witness a brief fall after the report, however as investors came to terms with the possibility the Federal Reserve could still announce something this year, dollar recovered from the lows.
India's Monetary Policy Committee today kept interest rates steady as expected.
However, the central bank will increase its absorption of banking system liquidity to six trillion rupees in 14-day variable rate reverse repos from four trillion rupees.
It also paused its government bond purchases through the so-called government securities acquisition programme.
India's foreign exchange reserves fell for a 4th consecutive week to $637.48 billion as on Oct. 1 from $638.65 billion in the previous week, data from the Reserve Bank of India showed.
Foreign currency assets declined to $575.45 billion from $576.73 billion in the prior week.
Looking ahead, the dollar could continue to move higher taking cues from rising bond yields.
The dollar and the bond yields found support because investors remain focused on U.S. monetary policy.
Although September's nonfarm payrolls missed expectations, the markets are pricing in that the Federal Reserve is on track to shift its monetary policy, and that will continue to weigh on gold prices.
Looking ahead, markets could remain volatile ahead of the Fed meeting in the first week of November.
On the macro economic front, U.S. CPI and retail sales data will the major trigger for prices.
Rising inflation provided support to the benchmark yield and the dollar because it is leading market players to price in more aggressive action from central banks. The CME Fed Watch Tool already shows that markets are pricing in a small chance of a rate hike by June 2022.
Additionally, we expect that the crude oil prices could soon hit $90/barrel which will lead higher inflation and the Indian central bank will have to take steps to curb inflation
So, the Rupee could continue to remain under pressure in the short run.
Domestically, CPI, IIP and WPI number could move the markets.
On the charts, the USDINR Spot pair on a Weekly chart has given a breakout of Falling Channel formation where 74.30-73.80 will hold a strong support for further upside breakout rally up to 75.65-76.36 levels.
In the overseas markets, technically, the Dollar Index the is struggling near $94.00-$94.50 level but a breakout above 200-Weeks Moving Average at $94.70 level will continue its bullish momentum up to $96.00-$97.29 levels. Support is at $93.60-$92.30 levels.
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