By Gaurang Somaiya
The rupee tested lifetime lows last week in the wake of strength in the dollar against its major peers. The dollar rose to the highest level in a year amid better than expected economic numbers from the US, and after the Fed Chairman in his first semi-annual testimony said the central bank is on course to raise rates twice this year.
This apart, the yuan weakened sharply against the dollar on escalating trade war concerns. But strength in the dollar was short lived after the US President criticised the Federal Reserve policy and raised concerns over the impact of a faster rate increase on the US economy and a stronger dollar.
President Trump was quoted as saying “Chinese currency was dropping like a rock” and the strong US dollar “puts us at a disadvantage”. Later in the day, some clarification did come in from the White House that Trump respects the Feds independence and was not interfering with its policy decisions.
This week, on the domestic front, no major economic data are expected to be released, but escalation of the trade dispute and further weakness in the Chinese yuan could continue to keep the rupee under pressure. For the week, the rupee is expected to quote in the range of 68.40 and 69.25 (spot).
The pound last week came under pressure and volatility continues to remain high, with Brexit reports taking the centre-stage. Over the last couple of weeks, two ministers from Theresa Mays Cabinet have resigned and now speculation over No Brexit deal is keeping most market participants on the edge.
UK Prime Minister Theresa Mays plans to keep a close trading relationship with the EU backfired and put her government in a crisis. There is speculation that she could face a leadership challenge after two of her most senior ministers, including Boris Johnson, resigned in protest.
The possibility of leaving without a trade deal has increased, with May facing rebellion in different factions of her party. She only narrowly won a series of votes on Brexit in Parliament last week.
This week, market participants will be tracking how May tries to persuade her ministers to believe that her strategy is the best step forward. Broadly, volatility in the pound is expected to remain high and quote in the range of 1.3050 and 1.3275.
Indias 10-year yield this week fell to the lowest level in two months after the RBI conducted a surprise OMO (Open Market Operations). Drop in global crude oil prices has been one of the factors that has supported Indian bond prices.
Yield curve in Asia is flattening alongside expectations of slowing global growth, driven by a tighter monetary policy trend in the developed market. For India, market participants are expecting more tightening following higher global crude oil prices that could lead to higher inflation.
This week, yields are expected to remain soft and could quote in the range of 7.70 per cent and 7.92 per cent.
(Gaurang Somaiya is Currency Analyst at Motilal Oswal Securities)
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