Trade View: Dollar firm, Oil above $80 pbl
The dollar index closed 0.3% higher at 100.76 yesterday, reversing the sell-off triggered by the soft inflation report earlier this week. The DXY Index drew support from strong US economic data as well as some safe-haven demand. US retail sales grew by 0.2% in June, despite a drop in gasoline prices, suggesting consumer demand continued to hold up. Furthermore, weekly jobless claims fell to 208K, less than the consensus estimate of 216K.
EUR: The EUR/USD pair has gained 0.5% so far during the week and stood at 1.144 at the time of writing. After the recent flare-up in the US & Iran conflict, European gas prices have risen to a 15-week high, which has led to an increase in rate hike expectations by the ECB later this year. For the upcoming meeting next week, the market expects the central bank to deliver a hawkish pause. On the FX front, we expect the EUR/USD to trade in a range of 1.135-1.15, in the run-up to ECB’s meeting due next week.
GBP: The cable is hovering near a two-month high against the dollar and closed at 1.345 yesterday. The GBP/USD pair benefited from easing fiscal concerns after the PM candidate Andy Burnham indicated his preference for a fiscally conservative FM. Looking ahead, the pair could continue to draw support from easing political uncertainty. However, high crude oil prices, and weak economic activity could limit the gains. In the near term, we expect the pair to trade in a range of 1.340-1.350.
INR: The USD/INR pair closed marginally lower at 96.35 yesterday. The rupee has recently come under pressure due to rising oil prices, FII outflows and dollar demand from importers. Looking ahead, we expect the pair to continue trading with a depreciation bias if the West Asia conflict continues to escalate. We expect a near-term trading range of 96-97.
Domestic bonds: After crossing the 6.80% mark earlier during the week, the domestic 10Y benchmark yield has cooled off a bit. Following some softening in US yields and a pickup in demand, the domestic 10Y yield closed 3 bps lower at 6.75% yesterday. Looking ahead, we expect the domestic 10Y yield to trade in the range of 6.70-6.80% in the very near term.
Domestic liquidity: The banking liquidity balance stood at a surplus of INR 1.31 lakh Cr, as of 15th July. The RBI continued to manage liquidity conditions and conducted an overnight VRR operation worth INR 75,000 Cr, out of which only INR 18,425 Cr was subscribed. Ahead of the GST-related outflows due early next week, the RBI will conduct a 3-day VRR operation worth INR 75,000 Cr today.