By Dilip Parmar
The dollar index could continue to climb early in the week, as US yields rise after soaring US inflation ahead of the Fed meeting on Wednesday. If recent experience is any guide, looking at the past five Fed meetings, chosen to cover the period after front-end rates had started to reprice, the Dollar Spot Index rose an average of 0.3% from the previous Friday’s close until the close prior to the Fed decision-rising on all 5 occasions. It gives up almost all of these gains by the end of the day following the decision falling on four occasions. The 2-year yield rises by 6bps and the 10-year by 5bps in the run-up, but, on average, moves no further after the decision.
Based on the June Fed Fund future, markets are pricing around an 18% chance of a 75bps hike in the policy rate. The US CPI shock will get a few more to jump on the hawkish bandwagon, but it’s hard to see anything greater than 30% being priced in given how clear a 50bps hike has been for Wednesday’s meeting.
Back to the domestic market, the Indian rupee has been relatively calmer in the week, even after a whopping 1.97% gain in the ICE dollar index. In comparison, the local unit depreciated merely 0.27% to 77.84 on the back of possible central bank intervention. However, it will be difficult for even banks to change the direction of the rupee as broad-based dollar demand and capital outflows will limit the interventions.
From the data docket, we have inflation and trade data which might be encouraging for the rupee as the inflation reading could be above RBI’s mandate and the trade deficit could widen amid sharp rally in energy prices.
This week, spot USDINR is expected to cross the hurdle of 78 and head towards 78.30 while support will shift to 77.50.
(Dilip Parmar, Research Analyst, HDFC Securities. Views expressed are the author’s own.)