Rupee poised to extend rally on speculative, debt flows
The rupee is likely to open higher on Monday, on bets chasing the currency rally on the currency and on debt inflows, traders said.
Non-deliverable forwards indicate the rupee will open at around 82.82-82.84 to the US dollar compared with the close of 82.9225 in the previous session.
The rupee is on an eight-day winning run, managing a near-uninterrupted rally from 83.35. On Friday, it climbed to its highest level since late September.
That USD/INR weakening below 83 and holding there is a “big deal” and will “motivate” new short positions while existing positions will be patient, a fx trader said.
“Seeing a bit of ECB (External Commercial Borrowing) flows, which probably is adding to the downside pressure (on USD/INR).”
The rupee at open will be supported by a further slide in US Treasury yields after the producer price index (PPI) data boosted the odds of a Federal Reserve rate cut in March. U.S. producer prices unexpectedly fell in December, pushing the 2-year Treasury yield to the lowest since May.
“Financial markets are keen to lap up any sign that inflation will continue to fall in the U.S.,” ANZ said in a note. “Markets liked the small undershoot in US PPI inflation.”
The odds of a rate cut at the March meeting are now at nearly 80%. The 2-year yield dropped 25 basis points last week.
Focus this week will be on Fed Governor Christopher Waller’s speech on Tuesday.
“Recall he set off the rally (on U.S. Treasuries) in late November with definition on a timeline and a path to cut rates, which essentially began the Fed pivot and the year-end risk rally,” Chris Weston, head research at Melbourne-based Pepperstone, said.
Meanwhile, India’s annual inflation rate rose less than expected in December, reinforcing expectations that the Reserve Bank of India will change its stance to “neutral” in the next quarter.