Bank of Canada becomes first to signal exit from stimulus
The risk sentiment in the Asia session holds after the end of the Dow with gains of nearly 1%. US yields have fallen 3 to 5 basis points across the curve, with the 30-year yield at 2.23%, 10-year now at 1.53% and the 5-year yield at 0.78%. The US dollar weakened overnight with the euro, aussie and pound up about 40 pips.
The Bank of Canada reduced its weekly asset purchases and advanced its rate hike forecast. The Canadian dollar appreciated after the policy. The BoC became the first major central bank in the G10 to withdraw its housing. It will be interesting to see how far the other major central banks follow suit.
The focus today will be on the ECB’s monetary policy. The ECB is likely to maintain a status quo, but a shift to a slightly more hawkish stance is possible given improving economic conditions in the eurozone and a vaccination program that is now on track to vaccinate 50% of the population by June. The ECB is expected to indicate that asset purchases will continue at the current pace until June. 1.1980 is now crucial support for the euro. Weekly jobless claims in the United States are also due today.
Indian assets are expected to underperform as more states have introduced tighter restrictions to deal with Wave 2. 14100-14200 is an extremely strong support area for Nifty, a breakout of which could translate to a drop to 13650. Domestic bonds could rebound from lower US yields and lower crude prices. We expect the 10yr to trade a range of 6-6.20% over the next few sessions. The pressure of offshore development continues.
The rupee traded implicitly spot 75.50 in NDF. The recent underperformance of the rupee has caused the Cross / INR to rise sharply. We expect the rupee to trade a range of 75.10-75.50 intraday with a downward bias. We could see the central bank intervening to contain intraday volatility. The offshore pressure caused a reversal of the forward curve. The forward return for the next month is higher. Exporters are advised to reserve short-term hedges, as long-term futures contracts are phased out.
Strategy: Exporters are advised to hedge a portion of their short term exposure to increases to around 75.50. Importers are advised to cover forward transfers in the event of a dip to 74.50. The 3M range for USDINR is 73.50 – 76.00 and the 6M range is 73.00 – 76.50.