Sharp Uptrend In USD/INR Due To Squeezing of USD Short Positions in the Market

Sharp Uptrend In USD/INR Due To Squeezing of USD Short Positions in the Market

The opened the day a lot firmer at 74.0975, mostly unchanged from its previous days close. The fall in global stocks and the rise in the US dollar against the major currencies and Asian currencies stimulated the currency pair to rise and test the resistance level at 74.30 before any retreat can be seen in the coming weeks.

US Federal Reserve unexpectedly delivered a slightly hawkish stance on its monetary policy announcement on Wednesday. The hawkish tone of the Fed influenced the to register a high of 91.9950 on Thursday and now trading a lot higher at 91.90 which has led to a decline in emerging market currencies. The US 10-year yield jumped to 1.5940% on Thursday and now trading a lot lower at 1.5160%. The US yields are expected to remain volatile after the Fed’s median projection showed that officials may raise the benchmark rate to 0.60% from the current range of 0 to 0.25% by the end of 2023 which is sooner than what the Fed officials had previously indicated.

The global risk-on-sentiment was seen disappearing as demand for US Treasuries picked up. On Wednesday, the NDF market traded the rupee at 73.70 and the weakening of the euro, pound and Yen against the dollar triggered a down move in the rupee and the domestic currency touched a low of 74.27 so far in the day. The sharp weakness in Chinese to 6.4502 also trigged a fall in the rupee.

For the local stock markets, it is the liquidity that is material and that is likely to remain strong as long as the US does not embark on aggressive tapering. Hence the local stocks can be expected to recover all their recent losses incurred in the coming week. The robust position of portfolio and other capital inflows shall support the rupee to recover from the 2-month low of 74.27 and expected to trade in the range between 73.50 to 74.50 before the end of June 2021 with the firmer bias.

Due to sharp weakness in the rupee exchange rate, the forwards fell across the maturities. The 3-month and 6-month forward dollar premia are currently quoted at 4.20% and 4.30% per annum respectively. We strongly feel the current spot level of the rupee is attractive to sell medium-term receivables. The forward dollar premium for the 6-month maturity prevailing now overstates the expected level of rupee depreciation from the current spot level over the corresponding period, which calls for hedging the 6-month anticipated receivables to achieve higher export realization. The unhedged short-term payables of the importers pose a concern and if the internal benchmark rate is comfortable for such short-term payables (upto 2-month maturities) the hedging decision on a gradual scale can be taken at close to the spot level of 73.80 or so in relation to the ascending maturity schedule of the import payments.

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