Technical Analysis

Stimulus hope in the US keeps risk appetite high

Gurumurthy K | Updated on January 09, 2021

Equities surge, US Treasury yields lend support to the dollar

The new year began with a sharp sell-off in equities. The Dow Jones Industrial Average tumbled over 1 per cent on Monday. But that was short-lived as the index recovered all the loss thereafter and surged to record highs.

The Democrats winning the run-off elections and gaining control of the US Senate has increased the prospects of getting more stimulus from the new government that will take over later this month. This has overshadowed the riots in Washington to disrupt the election results.

The Dow surged to a record high and closed on a strong note at 31,097.97, up 1.61 per cent, for the week. The US 10-year Treasury yield broke above the key level of 1 per cent to close the week at 1.12 per cent. The rise in the yields has given a breather for the dollar. The US Dollar Index bounced from the low of 89.12 and closed at 90.06.

More stimulus

US President-elect Joe Biden had earlier promised for more stimulus after taking over, which would be higher than the $900-billion package announced last month. His party’s victory in the run-off elections last week could make the path easy for it.

In a latest development on this front, Biden said on Friday that the next stimulus package will be in the trillions and will include a payment of $2,000 to American citizens. The earlier stimulus had a direct payment of $600.

Dow surges

The Dow Jones Industrial Average (31,097.97) surged to a record high of 31,193.40 on Thursday. However, a crucial resistance is coming up near 31,500 which will need a close watch this week.

Inability to breach 31,500 and a subsequent fall below 31,000 will give an early sign of a top in place. Such a fall below will increase the downside pressure and drag the Dow lower to 29,000 or even lower in the coming weeks.

Yields rise

The hope for more stimulus has taken the bond yields also higher. Weak jobs data released on Friday has also strengthened the case for an increased stimulus from the new government.

The US Non-Farm Payroll declined by 140,000 in December as against the market expectation for an increase in payrolls by 70,000.

The US 10-year Treasury yield (1.12 per cent ) rose above the key level of 1 per cent last week.

The positive sentiment in the market can continue to keep the yields higher.

The 10-year yield can move up further towards 1.25 per cent in the coming weeks.

However, thereafter, we expect the yields to reverse lower again.

Dollar gets support

The rise in the yields is aiding the dollar. The US Dollar Index (90.06) fell to a low of 89.12 initially last week, but managed to bounce from there. The room for a further rise in the US yields can take the index higher in the near term.

As long as the index sustains above the 89.50-89.00 support zone, there is a strong likelihood of seeing a further rise to 91 and 91.50 in the next couple of weeks. Thereafter, a fresh fall is possible.

Rupee weakens

The rupee opened last week on a strong note and strengthened to a high of 72.90 on Monday. However, it failed to sustain higher and reversed sharply below 73 to make a low of 73.45 on Friday.

However, the currency has recovered from the low to close the week at 73.2450. A strong support is at 73.50, which is holding well for now. The rupee might remain in the range of 73.00-73.50 this week.

In case a break below 73.50 is seen, the rupee can weaken further to 73.60-73.70.

From a bigger picture, the weakness in the rupee could be limited to 73.50-73.70 for now and the chances are high for it to break 73 and strengthen towards 72.80-72.75 in the coming weeks.

The writer is Chief Research Analyst at Kshitij Consultancy Services

Published on January 09, 2021

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