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Higher Bond Yields and Dollar Index to Weigh on Rupee - HDFC Securities

Indian rupee expected to open with dip cut following overnight gain in US dollar and US Treasury bond yields. The strengthening dollar is looks like it could be a hedge against higher yields and reflation trade.

UST yield on benchmark 10-year US Treasuries surged to 1.31%, the highest since February 2020, helping global bonds extend their worst start to a year since 2013. Accelerated selling pressure across the Treasury complex pushed the 10- and 30-year yields to 1.3% and 2.08%, respectively, leaving the 2- vs. 10-year spread at its widest since March 2017 while the gap between the 5- and 30-year yields remains at its broadest since fall 2015. U.S. stocks pulled back from records as investors weighed how the increase in yields could impact risk assets

Elsewhere, oil held above $60 a barrel while gasoline futures surged as a deepening energy crisis in the U.S. crippled the petroleum industry.

On Tuesday, Indian rupee closed with a paise loss to 72.70 a dollar, erasing earlier losses following foreign fund inflows and recovery in domestic equities. Technically, spot USDINR is having support 72.40 and resistance at 73.05. While overall bias remains bearish, short covering bounce can’t be ruled out following recovery in dollar index and higher bond yields.

India’s 10-year bond yields little changed at 6.02% and yield on most-traded 5.77% 2030 bond also steady at 6.10%. India’s sovereign bond traders await a sale of 190b rupees ($2.6b) of treasury bills to gauge direction of short-term rates. The 10-year bond yield is likely to stay above 6%, but a large move up is also unlikely as the RBI could provide some support via OMOs, Operation Twist or by allowing interbank liquidity to normalize only gradually

USDINR

USDINR February futures formed bullish candle after doji candle suggesting short covering bounce in today’s trade. For the trend reversal, it needs to close above falling channel resistance 73.15.

The pair has 20 DEMA resistance at 73.10.

Momentum oscillator on daily chart reversed from oversold zone suggesting exhaustion in downward momentum.

Overall trend for USDINR February futures remains bearish until it closes above 73.15 while on downside selling below 72.60 will open for 72.40 and 72.

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