Currency Outlook: Treasury Yields Tumble

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The US Treasury yields were knocked down badly last week. The first trigger for the fall came from the US Federal Reserve on Wednesday. The Fed kept the rates unchanged as expected. However, the central bank hinted that a rate cut is possible in its September meeting. This dragged the US 10Yr yield from around 4.15 per cent to 4.03 per cent on Wednesday. The weak US Manufacturing Purchasing Managers Index (PMI) on Thursday and the job numbers on Friday intensified the fall and dragged the yield below the 4-per cent mark.

The Manufacturing PMI fell to 46.8 in July from 48.5 in June. The unemployment rate, on the other hand, rose to 4.3 per cent from 4.1 per cent over the same period. Weak economic data has reignited the fear of a recession in the US.

More fall

The sharp fall below 4 per cent on the US 10Yr Treasury yield (3.79 per cent) has turned the picture very bearish. There is support near current levels. At the same time, there are strong resistances at 3.9 per cent and 4 per cent. The yield has to surpass 4 per cent in order to ease the downside pressure.

As long as the 10Yr Treasury yield remains below 4 per cent, the outlook will remain bearish. There is a danger of seeing a fall to 3.5 per cent in the coming weeks.

At a support

The dollar index (103.20) has an immediate support at 103. Any bounce from here can face resistance at 103.7 and 104.20. The upside is likely to be capped. The outlook is bearish. The dollar index can break 103 if not immediately, but eventually and fall to 102.

Resistance ahead

The euro (1.0908) surged from a low of 1.0780 to 1.09 on Friday on the back of the dollar weakness. But a strong resistance is around 1.0950. Need to see if it breaches this hurdle or not.

Looking at the weekly candle, the bias is slightly positive. That leaves the chances high for the euro to breach 1.0950 and rise to 1.10-1.11 in the short term.

In case the currency turns down from around 1.0950, it can fall back to 1.08 again.

Rupee watch

Rupee has to break 83.60 to see a recovery to 83.40 and negate the fall to 84

More weakness

The Indian rupee (USDINR: 83.75) sustained well below 83.60 in line with our expectation. Also, the weakness in the domestic currency is happening very gradually as expected.

There is no major change in the view. The level of 83.60 will continue to act as a strong resistance now. Some support is near current levels. If that holds, the rupee can see some recovery towards 83.65-83.60. But a strong break above 83.60 is needed to turn the near-term outlook positive. Only then the rupee can recover to 83.40.

But as long as the rupee stays below 83.60, the bias will remain negative. We can see the rupee weakening gradually towards 84 in the coming weeks.