Currency Market 14-Jan : Yields surge as CPI breaches target range

Globally, US decided to remove China from list of currency manipulator ahead of US-China phase 1 deal. Consequently, Chinese Yuan rallied to six month high levels of 6.87 and USDJPY surged above 110.0 handle on improving risk sentiments. This move confirmed that currency manipulation tag was just a negotiation tool. On other hand, GBP/USD slipped below 1.30 levels after release weak manufacturing production numbers, which contracted by 1.7% on a monthly basis.

On domestic front, Retail inflation breached upper limit of RBI’s inflation target (4%-6%) with a reading of 7.35% in December-19. Higher retail inflation can be attributed to 14% food inflation and unfavourable base effect. It is noteworthy that CPI inflation was at just 2.19% in December-18. Consequently, Domestic 10 year bond yield surged nearly 10 bps to 6.69% against previous close of 6.59%.

Yesterday, RBI notified that it has switched GOI securities worth INR 41,920.23 Cr. RBI sold various bonds with tenure less than 1 year and bought back bonds in 2027 and 2030 maturities. This operation should reduce the gross borrowing of government in next fiscal and should support the yields. On other hand, this operation should reduce the likelihood/quantum of ‘operation twists’, thus lead to bond sell off.

On currency front, Rupee could not sustain its overnight gains amid sell off in bond markets. USDINR pair is currently trading at 70.90 levels. USDINR pair has support at 70.70 levels and USDINR pair has resistance at 71.05 levels. The Range for the day seen as 70.75 to 71.05.