US-China phase 1 trade deal review scheduled to take place over the weekend was called off. Tensions between US-China continue to remain elevated. Taiwan formally signing a deal to purchase military jets from US would not go down well with Beijing. However, the markets seem to be disregarding this at this point. Most of the US data including Friday's retail sales have been coming in better than expected and that is holding risk sentiment up. Even a stalemate on the passage of the second stimulus does not seem to be weighing on sentiment.
RBI's FX Reserves rose another USD 3.6bn to a record USD 538.2bn. Central bank's Reserves have risen for seven straight weeks now. Recent price action in USDINR despite significant inflows seems to suggest the Central bank is continuing to relentlessly shore up it's Reserves further. Trade deficit for July came in at USD 4.8bn compared to a surplus in the previous month. Imports have risen faster than exports. Pick up in imports is a sign of domestic demand picking up.
The US Dollar has started the week off on a weak note. US real rates are still deep in negative territory and that could continue to weigh on the US Dollar. Asian currencies are stronger against the USD. Rupee is likely to continue to trade sideways. Likely range for today is 74.75-75.00.
Nervousness in bond markets after MPC keeping rates on hold is evident as the 10y security got devolved on PDs in Friday's auction. RBI refraining from announcing OMOs is weighing on sentiment in the bond market.
Strategy: Exporters are advised to cover through Risk reversal strategy. Importers are advised to hold with a stop loss of 75.35. The 3M range for USDINR is 73.60 – 75.90 and the 6M range is 73.00 – 77.00.
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