
The market started the week on a risk-on note as the contagion risk around a possible Evergrande default abated somewhat. Evergrande group failed to make payments, to some of its bond holders, due last Thursday entering the 30 days grace period to make the payment. However, the further injection of liquidity on Sunday by PBoC of 100 billion yuan after last weeks’ infusion of 320 billion yuan helped ease market fears. In addition, several local governments recently set up special custodian accounts for Evergrande property projects with an aim to protect funds from being diverted.
The DXY was caught between a hawkish US Fed (last week announced taper could begin as early as November) and moderating risk of a default by Evergrande. At the time of writing, the dollar index stood at 93.22 (previous close of 93.3). US yields have jumped up to 1.45% levels after markets priced in interest rate increase by the Fed to come in sooner than earlier expected. Most Asian FX pairs were trading up today while safe haven currencies (like the Yen) were down.
In the commodity market, crude oil price jumped up to a 3-year high, trading at 79.38 pbl in early session today in anticipation of an improvement in demand (as delta risks abate) and continued supply disruptions.
Heading into the week, speeches by central bank chiefs, including Powell (on Tuesday) will be of interest. In the US, besides Powell other Fed members are also scheduled to make public appearances. The market would be watching out for their views on labor market conditions, timing of tapering and interest rate hikes.
In the domestic market, the USD/INR pair is likely to come under some pressure today due to the sharp rise in oil prices. Although the risk-on tone in the Asian markets is likely to cap the losses. We expect the pair to trade in a range of 73.60-74.30 in the near-term. Domestic bond yields could also trend up today (likely range of 6.15-6.20% this week). However, with the second half borrowing calendar (likely to be released this week) likely to show lower government borrowings for H2, yields might find some support. Looking at recent trends in Government’s fiscal position, we estimate second half borrowings to be lower by INR 0.5-1.2 lakh crores (ex. compensation cess) from the current 2H target of INR 4.9 lakh crores.
FX View
- DXY: The dollar index closed lower at 93.33 on Friday. After the US Fed policy, two of the Fed members (Esther George & Loretta Mester) supported tapering in their recent statements. For this week, besides Powell’s Congress testimony on Thursday, other Fed members’ speeches (Williams, Brainard, Evans, Bullard) could influence the dollar movement.
· EUR/USD: After recovering on Thursday, the EUR/USD pair lost its momentum on Friday ahead of elections in Germany. The pair declined by 0.19% to 1.171 in the last session. The final outcome of German election and ECB Chief Lagarde’s speech due today and later this week (Wed, Thu), respectively are likely to be the next key catalysts for the pair. In addition, Euro Zone’s CPI due on Friday would also be watched out (Consensus Estimate: 3.3% for Sep-21).
· GBP/USD: The cable lost 0.25% and slipped below $1.37 mark in the last session weighed down by a rise in the UK’s virus-led death tolls and manpower shortages due to the Brexit. The focus is likely to shift towards BoE Governor’s Bailey speech scheduled on Tuesday and Wednesday this week. We expect the pair to consolidate around $1.365-$1.370 levels.
· USD/INR: The pair closed marginally lower at 73.70 vs. 73.64, previously. However, on a month to date basis the pair has lost ~0.95% in September so far.
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Bond View
- India: Tracking US yields, domestic yields moved up in the last session. While the 5Y yield hardened by 7 bps to 5.65%, 10Y yield increased by 4 bps to 6.18%. For this week, the focus is likely to be on 2H central government borrowing calendar along with RBI’s GSAP auction due on 30th September. The RBI has announced to purchase G-secs worth INR 15,000 Crore under G-SAP 2.0. However, to maintain liquidity conditions, the RBI plans to simultaneously sell short term securities of the same amount.
o On Friday, the Central Government raised INR 31,000 Crore in the 5Y, 12Y, 13Y and 29Y tenures. In FYTD-22, the Central Government has borrowed INR 7.02 lakh crores vs. its 1H target of INR 7.2 lakh crores and full year target of INR 12.1 lakh Crores.
· US: In response to rate hike expectations, the US 10Y yield closed above 1.4% mark for the second consecutive session on Friday. While the 10Y yield rose by ~2bps on an intraday basis, it went up by ~9bps on a weekly basis.
Commodity Update
- Oil: After closing at USD 78.09 pbl in the last session, brent crude price was trading at USD 79.38 pbl in the early trade session today. Improvement in demand conditions, a slow increase in supply from OPEC+ and disrupted supply from the US (due to hurricane Ida) are supporting oil prices.
o In addition, a switch from natural gas towards oil also boosted oil. Natural gas price has increased significantly with Europe facing supply shortage.Data Releases
- US: ISM manufacturing, consumer confidence index along with oil inventories release would be eyed in the US. In addition, voting on bipartisan USD 1 Trillion infrastructure bill might also take place this week.
- UK: Monthly GDP is expected to remain flat at 4.8% MoM in the UK.