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The US Dollar Index continued to consolidate in the 93.50-94.50 range for the second consecutive week. The greenback began the week on a positive note and saw a rise to 94.56 by Tuesday. But thereafter the index lost momentum and turned lower. The fall accelerated on Wednesday after the inflation data release. A strong pull-back in the US Treasury yields also weighed on the index. In recent times, the correlation between the two has been positive.
On the data front, the US Headline Consumer Price Index (CPI) inflation increased to 5.4 per cent (year-on-year) in September from 5.2 per cent (YoY) in August. The Core CPI inched up slightly to 4 per cent (YoY) in September from 3.98 per cent in August. Data released on Friday showed that retail sales in the US increased in the month of September. The sales rose 0.7 per cent (month-on-month). For the coming week, the US Index of Industrial Production (IIP) and Capacity Utilisation on Monday and Housing Starts numbers on Tuesday are the important data releases to watch.
The minutes of the US Federal Reserve’s September meeting was released last week. The minutes showed that the central bank would likely begin the asset purchase taper by middle of November. The taper could be wound down completely by July next year. Currently the Fed is doing an asset purchase of $120 billion per month. This includes $80 billion in Treasuries and $40 billion in mortgage-backed securities.
Dollar Index: Range bound
The near-term outlook for the dollar index is mixed. A breakout on either side of 93.50-94.50 will determine whether the index can go up to 95 or fall to 93 this week. We will have to wait and watch to get a clear cue.
However, as mentioned last week, the broader trend is up. Cluster of supports are poised around 93 and then at 92.75. The greenback will come under pressure for a fresh fall only if it breaks below 92.75. Such a break can drag the index down to 92 and even lower. But as long as the index stays above 92.75, the broader trend will remain up. It will also keep the chances high of the index breaking above 94.50 and moving up to 95-96 in the coming weeks. As such, a break and fall below 93.50 if seen just now would be short-lived and limited to 93-92.75.
Treasury Yields: Fall back
US Treasury yields came off sharply at the far-end (10Yr and 30Yr) last week. The resistance at 1.65 per cent mentioned last week had held very well. The US 10Yr Treasury yield touched this resistance on Tuesday and fell back sharply to close the week at 1.57 per cent. A further fall to 1.5 per cent is possible this week.
However, we reiterate that the 10Yr yield will have to break below 1.5 per cent to become bearish and see a deeper fall to 1.4 per cent and 1.3 per cent again. Inability to break below 1.5 per cent can keep the 10Yr yield in the range of 1.5 per cent 1.65 per cent for some time. It will also keep the chances alive of the yield breaking above 1.65 per cent, which will then open doors for a fresh rise to 2 per cent and even higher levels.
Euro recovers
The euro (1.1595) found support just above 1.15 as expected and witnessed a bounce-back in line with our expectation. However, the currency seems to lack a strong follow-through rise above 1.16. The broader view remains bearish.
As mentioned last week, the upside of the current relief rally could be capped at a maximum of 1.17. The euro is likely to fall back towards 1.15 again either from here itself or after an extended rise to 1.17.
Eventually, the euro can fall to 1.14 or even lower in the coming weeks. A strong rise past 1.17 is needed to negate the risk of seeing 1.14 on the downside.
Rupee: Resistances ahead
The Indian rupee extended the fall to 75.66 on Tuesday and then recovered from there to close the week at 75.26 on Thursday in the spot market. Indian markets were closed on Friday on account of a public holiday.
However, the rupee recovered further on Friday in the offshore segment. It made a high of 74.86 on Friday and gave back some of the gains to close the week at 75.01 in the offshore market. 74.85-74.80 is an important resistance to watch this week. The rupee will have to surpass 74.80 to strengthen further towards 74.60-74.50 this week.
Inability to break above 74.80 can drag it down to 75.20-75.25 again this week.
It will also keep the rupee under pressure to extend the fall beyond 75.25 towards 75.60-75.75 again eventually.
From a bigger picture, the Indian rupee will have to break above 74.50 to ease the downside pressure and turn the trend up completely.
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