Inflation continues to remain in focus across the globe. The US September Retail sales data on Friday beat estimates. The beat was however more on account of the higher value of sales rather than volume of sales. Inflation is, therefore, more entrenched and enduring. It is not as transitory as believed earlier. This has caused US inflation expectations to shoot up. 5y inflation expectations are close to their highest levels since 2006. Long-term inflation expectations as measured by 5y5y breakevens are at 2.37% Elevated inflation expectations have pushed US real rates lower, causing the Dollar to weaken across the board. The Dollar is underperforming only against the carry currencies i.e. EUR and JPY and CHF. The market is now pricing in one full hike by September next year but even if that hike materializes, it would still be inadequate to pull real rates up significantly, given the current inflation expectations. Overall risk sentiment is upbeat. Crude prices have inched higher with WTI now at USD 83.5 per barrel. Bitcoin has surpassed the USD 60000 mark as US regulator approved Bitcoin futures ETF.
After a record close on Thursday at 18338, the Nifty is likely to open higher around 18420 today. US equities had ended higher on Friday. Asian equities are however trading soft with Shanghai Composite down 1.5% after China Jul-Sep GDP print came in at 4.9% against expectations of 5%. The ongoing property slump and energy crisis have contributed to economic activity decelerating in China.
We may see the domestic bonds come under pressure today on higher US yields and higher crude prices. The yield on the 10y benchmark had ended at 6.33% on Thursday.
The Rupee was underperforming on Thursday amid broad Dollar weakness, ending the session at 75.25. There were strong bids In USD/INR around 75.20, likely related to specific Dollar buying (oil or defense-related). The Rupee however strengthened in the offshore market. A slew of IPOs are lined up and inflows would likely prevent runaway depreciation of the Rupee. 1y forward yield had ended at 4.47% and 3m Atmf vols ended at 4.98% on Thursday.
Strategy: Exporters are advised to cover at the current level. Importers are advised to cover on dips towards 74.50 The 3M range for USDINR is 73.80 – 76.00 and the 6M range is 73.50 – 76.50.