2022 appears to start with a sense of global risk that continues despite a surge in COVID cases across the world. Although US nominal yields have risen in the short end, real rates remain deep in negative territory. This weighs on the dollar which has weakened overall except against the JPY which is more sensitive to US nominal rates. The JPY was the worst performing G10 currency in 2021. The Euro is trading near the high end of its recent 1.1260-1.1360 trading range. The British pound fell back to 1.35 from around 1.1340 during the Asian session. Commodity currencies, the Canadian dollar in particular, are showing strength. The CAD was the only G10 currency that appreciated against the dollar in 2021.
Basic sector output rose 3.1% in November, a sign that domestic growth is under pressure. However, the TPS collections for December amounted to 129000crs, just slightly below the November collections. Given strong direct and indirect tax collections, the budget deficit from April to November was only 46% of that budgeted for the full year. Foreign exchange reserves held steady at $ 635 billion at the end of the week of December 24.
The Nifty gained 0.9% on Friday to close at 17354. US stocks ended modestly in the red on Friday. Asian stocks are also trading mixed.
Bonds and rates
The benchmark and floating rate bond auction was canceled on Friday. The benchmark return fell 4 basis points from the day’s highs to end at 6.45%. The 14d VRRR has seen low adoption as the liquidity of the banking system is still low due to higher government cash balances with the RBI.
USD / INR
The rupee had strengthened to 74.10 against the dollar on month-end exporters’ sales and dollar cash sales by foreign banks on Friday. USD / INR, however, experienced a short aggressive hedge towards the end of the session, which allowed the pair to close at 74.34. The 73.90-74.10 area is strong technical support.
Strategy: Exporters are advised to hedge increases to the 75.50 levels. Importers are advised to hedge dips towards the 74.30 level. The 3M range for the USDINR is 73.80 to 76.00 and the 6M range is 73.50 to 76.50.
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