Article / 19 May 2014 at 5:18 GMT

3 Numbers: USDINR, 10-Year Treasury yield, EURUSD

editor/analyst /
United States

• Indian rupee may correct in election aftermath
• US benchmark yield dips as demand picks up
• Euro faces headwinds amid heightening ECB expectations

Monday is virtually bereft of economic reports, which means that the markets will have a free rein for shaping expectations today. One number that deserves close attention: USDINR. In the wake of India’s historic elections last week, the rupee’s recent strength against the US dollar may be due for a correction. Meanwhile, keep an eye on the benchmark 10-Year Treasury yield, which has recently fallen to its lowest level since last July. In Europe, EURUSD will be closely watched as the market focuses on rising expectations that the European Central Bank will roll out a new stimulus programme in early June.


What fate for India's rupee following Narendra Modi's decisive election victory? Photo: SiakatP / iStock

USDINR: It’s been clear for weeks that the Hindu-nationalist Bharatiya Janata Party (BJP) was poised for victory in last week’s national elections in India, and now the expectations have been confirmed. The early counting shows that the country’s next prime minister, Narendra Modi, has scored an impressive victory in routing the long-dominant Congress Party. India’s stock market doesn’t seem to mind. The Bombay Stock Exchange Sensitive Index (BSE 30) has been trending higher since early February, and took off like a rocket late last week. Meanwhile, the rupee has been running hot relative to the US dollar. USDINR dipped to its lowest level since last summer.

“Counting shows the BJP is poised for a majority win, which has boosted the rupee,” Manis Thanawala of Greenback Forex Services in Mumbai told Bloomberg on Friday. “The sharp surge in local stock indexes is also a positive for the rupee.”

But the strength in the rupee and India’s equity market look overextended at the moment. The BSE is well above its 50-day and 200-day moving average. Momentum in the short run looks frothy too. The current 20-day return for BSE is at the 70th percentile rank, which suggests above-average odds for a correction for the near term.

The recent strength in USDINR is even more extreme, with the latest 20-day return dipping below the 10th percentile rank. The supporting narrative is the new prime minister, who was elected on an aggressive pro-growth, pro-business platform that's designed to juice India’s economy. Maybe so, but now that the election is over the week ahead will test the ancient trading wisdom that it’s best to buy on the rumour and sell on the news. 



US 10-Year Treasury Yield: The appetite for Treasuries is on the rise again. The rise in demand is still moderate, but it’s been enough to push the yield on this benchmark for interest rates down to 2.50 percent last week—the lowest since last July. This could be a sign of trouble for the economy, or at least the crowd’s perception that stronger macro headwinds are blowing. But one reason for thinking that it’s not a warning sign is the ongoing stability in the market’s forecast for inflation.

Using the yield spread for the nominal 10-year Note less its inflation-indexed counterpart puts future inflation at around 2.20 percent. That’s more or less middling for the range we’ve seen this year. As long as the estimate of future inflation remains anchored in the low-two-percent neighborhood, a modest decline in the 10-year yield looks like just one more run of market volatility.

Nonetheless, the market’s expectation for inflation bears close attention this week. A dip below two percent would be troubling. For now, the economic news has been upbeat, including last week’s better-than-expected update on new residential housing construction for April. But if market projections for inflation start heading lower, another slide in rates won’t be so easy to ignore.


EURUSD: Did the euro finally cry “uncle”? EURUSD has been trending higher for nearly two years, briefly trading at just below 1.40 earlier this month. But if the euro is finally set to weaken against the greenback, that would be a reasonable reaction after last week’s flash estimate of Q1:2014 GDP for the Eurozone.

The euro area posted its fourth straight quarter of growth in the first three months of this year vs. the previous quarter, although the real quarter-over-quarter 0.2 percent advance was just half of the consensus forecast. Even worse,  Germany was responsible for most of the forward momentum. By contrast, GDP in France was flat in Q1 and Italy posted a slight decline. Spain managed to grow GDP by 0.4 percent in the first quarter, although this may due to a “statistical mirage,” as one analyst warned. “We are not seeing real recovery anywhere apart from Germany, and the picture becomes more troubling the more you drill into it,” Simon Tilford at the Centre for European Reform told The Telegraph late last week.

In any case, EURUSD has lost its upward bias lately. Since May 8, when a euro bought almost USD 1.40, the single currency has fallen nearly two percent as of late Friday in New York trading. With rising confidence that the European Central Bank will announce a new (i.e., more aggressive) monetary stimulus package at its June 5 meeting, the euro may come under additional pressure this week. 

In addition to a sluggish recovery, another reason for thinking that the ECB will be forced to act next month is the bank’s new inflation forecast via a survey of economists, who predict that consumer prices will average just 0.9 percent this year—down a bit from February’s 1.1 percent outlook.



— Edited by Clare MacCarthy


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