The US dollar index continues to oscillate within its 97.70-99.45 range for the fourth consecutive week. However, the major focus of the market is now shifting towards the US yield curve inversion. Last week, the US 30Yr Treasury yield first fell below the 5Yr on Tuesday and then rose back. However, the 30Yr yield came below the 5Yr again on Friday to close the week. The market’s much watched indicators, the 10Yr and 2Yr yield, also got inverted on Friday, thereby raising concerns of a possible recession in the coming months.
A strong surge in the short tenor yields (2Yr and 5Yr) after the US jobs report on Friday triggered the inversion in the yield curve to end the week. The US added 4,31,000 jobs to its non-farm payroll in March. The job addition in February was revised higher from 6,78,000 to 7,50,000. The US unemployment rate fell to 3.6 per cent in March from 3.8 per cent a month ago.
Previously there was a short-lived 10-2Yr inversion in 2019. Prior to that, in 2016, there was a prolonged inversion.
Reports say that yield inversion does not imply that a recession is definite. But the previous recessions were always preceded by yield curve inversions. So, this is adding fuel to the prevailing concerns of the Russia-Ukraine war, higher oil prices and rising inflation.
Can the inversion steepen?
On the charts, the US 2Yr (2.46 per cent) Treasury yield has to sustain above 2.4 per cent to move further up. If it does so, it may have potential to rise up to 3 per cent and even 3.4 per cent from here in the coming months. On the other hand, the 10Yr (2.39 per cent) has good support in the 2.3-2.2 per cent region. It has room to test 2.6-2.65 per cent. If it manages to breach 2.65 per cent, then the upside can extend up to 2.9 per cent.
So, considering the possible rise in the yields mentioned above, the 10Yr and 2Yr spread (-0.13 per cent now) has potential to fall up to -0.75 per cent. The average fall could be around -0.4 per cent.
Dollar: Stable
The Russia-Ukraine peace talks gave some relief to the markets initially last week. Russia announcing that it would reduce its military troops around the Ukraine capital to aid the process of the peace talks dragged the US dollar index sharply lower initially. The dollar index (98.57) fell sharply from around 99.3 to 97.69. But thereafter the index managed to bounce back to close the week at 98.57. As such the 97.7-99.45 range continues to remain intact.
View remains the same. A breakout on either side of 97.70-99.45 will give a clear cue on the next move. A break above 99.45 will be bullish to see 100-101 on the upside. On the other hand, a break below 97.70 can drag it to 97 and 96.5.
Euro: Rangebound
The euro (EURUSD: 1.1047) broke above 1.1150 but failed to sustain. It made a high of 1.1185 and has come off from there. 1.09-1.1150 (narrow) or 1.08-1.12 (broad) will be the range of trade for some time. A break above 1.12 can ease the downside pressure and take the currency up to 1.13 and even 1.15. On the other hand, a break below 1.08 will keep the broader downtrend intact and can drag the euro down to 1.06-1.04.
Rupee: Can strengthen
The Indian Rupee (USDINR: 75.79) strengthened against the US dollar last week. The domestic currency broke above 76 and rose to a high of 75.63 on Tuesday. It closed the week at 75.79 on the spot market on Thursday and 75.96 in the offshore market on Friday. The Indian markets were closed on Friday on account of bank holiday.
The short-term outlook remains positive for the rupee. Strong supports are at 76 and then in the 76.15-76.20 region. Resistance is in the 75.75-75.70 region. As long as the rupee remains above 76.20, it can break above 75.70 and strengthen towards 75.20 initially. It will also keep the possibilities high of the rupee rising towards 74.50 in the coming weeks.
The rupee will have to fall below 76.20 to come under pressure again. Such a fall followed by a break below 76.50 will be bearish. In that case, the rupee can fall to 77.20.