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The rush to safe-haven assets on the back of the Russia-Ukraine war has kept the US dollar stronger. The US dollar index has risen and indeed broken above 98, in line with our expectation last week. That, in turn, dragged the euro and the Indian rupee sharply lower last week. The euro tumbled 3 per cent and the rupee was down 1.14 per cent against the dollar last week. The dollar index was up 1.46 per cent last week. High risk aversion in the market is likely to keep the greenback strong in the coming weeks.
Strong job numbers on Friday also aided the dollar index to rise towards the end of the week. The US added 6,78,000 jobs to its non-farm payroll in February as against the market expectation for an addition of 4,40,000. The unemployment rate in the US fell to 3.8 per cent in February from 4 per cent a month ago. For the coming week, the US Consumer Price Index (CPI) inflation data on Thursday will be important to watch. With crude oil prices surging, inflation is likely to remain elevated in the coming months.
US Federal Reserve Chairman Jerome Powell had reiterated that the central bank will go ahead with a rate hike in March. As such a 25-basis point rate hike is now a given from the Fed on March 16. However, it will be important to see how the forecast for the future is going to change on the back of the ongoing Russia-Ukraine war.
Dollar: Can test 100
The strong close above 98 last week has put the US dollar index (98.51) on a strong footing. Support now will be at 97.8. While the index remains above this support, a further rise to 100 is possible in the short term. Note that 100 will be an important psychological resistance that can hold on its first test at least. As such, a pull-back from 100 towards 98.50 or even 98 cannot be ruled out. However, the broader picture will continue to remain bullish. As such the chances are high for the dollar index to break above 100 eventually and rise to 101-102 over the medium term.
From a medium-term perspective, 96 will be a key support. The dollar index will have to fall below 96 to become bearish. Such a fall below 96, though less likely now, can drag the index down to 94 and 92.
Euro: Support ahead
The resistance at 1.1270-1.13 on the euro (EURUSD: 1.0925) held very well as expected. The currency tumbled, breaking below the support at 1.11 and fell below 1.10. There is room to test 1.08 on the downside now. It is to be noted that the level of 1.08 is a very crucial and strong support that can hold on its first test. A bounce from 1.08 can trigger a corrective bounce to 1.10-1.11. However, considering the high risk aversion in the market, the chances of the euro falling below 1.08 cannot be ruled out. Such a break can drag it down to 1.06 and even 1.04 in the coming months. As such the price action at 1.08 will need a close watch.
Yields: Can fall
The US Treasury yields fell sharply last week on the back of the increasing risk aversion in the market. The US 10Yr Treasury yield (1.74 per cent) failed to sustain above the key support level of 1.9 per cent. The 10Yr yield fell sharply, breaking below this support. The immediate outlook is negative. The 10Yr Treasury yield has room to fall towards 1.6 per cent on the downside. But thereafter the chances are high for it to reverse higher and see a fresh rally. The level of 1.6 per cent is a strong support. As long as the 10Yr sustains above this support, the chances of seeing 2.1-2.2 per cent on the upside will still remain alive from a medium-term perspective.
Rupee: Weakens
The support at 75.70 on the Indian rupee (USDINR: 76.16) held well initially last week. However, as expected, the rupee fell, breaking below this support and closed at 76.16 on the spot market last week, down 1.14 per cent. Indeed, the fall had extended in the US session in the off-shore segment after the strong US jobs data release. The rupee in the off-shore had closed at 76.36. As such the chances are high for the rupee to open gap-down on Monday.
The outlook remains bearish. Immediate resistance will be in the 76.10-76 region and the next strong one will be at 75.75. As long as the rupee remains below these supports, a further fall to 76.80-76.85 cannot be ruled out this week. However, on the charts, 76.80-76.85 is a strong support zone. Inability to break below this support zone can see the rupee recovering back towards 76 and 75.75 going forward. As such the price action at 76.80-76.85 will need a close watch.
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