• The Indian rupee erases yearly gain in the week gone, it depreciated % against dollar index marking the biggest weekly losses since December 9, following the dollar demands from the oil importers and bargain buying. The fall in Asian currencies, risk-averse sentiments, absence of central bank’s intervention and gain in the crude oil prices weighed on the Rupee.
• The Indian rupee, coming off its worst weekly performance in over a month, helped by the decline in the dollar index and near-maturity Treasury yields after US payrolls rose less than expected.
• The rupee came under significant pressure last week as premiums dropped to their lowest in over a decade on worries that US rates could rise more and remain high for longer.
• On July 7 specifically, the Indian rupee depreciated 23 paise against the US dollar, reaching a six-week low and logging its worst performance in seven weeks. The depreciation was driven by concerns over potential interest rate hikes by the Federal Reserve and losses in Asian currencies. The rupee closed at 82.74 per dollar, down from the previous close of 82.51.
• Surge in crude oil prices supported by OPEC production cuts also weighed on the Rupee. However, a soft US Dollar and FII  inflows and the strength of the Indian capital market prevented a sharp fall in Rupee.
• India’s foreign exchange reserves have shown a positive trend as it rose by $1.85 billion to $595.051 billion in the week ended on June 30.

Dollar Index lost to 102.27, down by 0.62% last week against previous week’s close of 102.91

• The dollar index registered the first weekly decline in three to settle at 102.27. Among the major trading currencies, the pound and yen surged the most among the G10 currencies while the euro gained half a per cent in the week gone.
• 2-year yields last hit the level of 5.11% before closing at 4.94% the levels of 2007, indicating a hawkish Fed Reserve. The rally in 10-year yield did little to prop up Dollar Index.
• Previous week’s major highlighted economic indicator were ADP Non-Farm payroll and NFP, hourly earning and employment change. Despite the release of robust job data, the dollar underperformed this week, The rally following ADP report proved short-lived, as the index experienced a sell-off shortly after non-farm payroll release.
• US non-farm payrolls came in at 209k against 225k expected. The previous months’ data was also revised 11k down. Other aspects of the data release – the unemployment rate and wage growth – came in line with expectations. While the headline number shows the lowest job additions since 2020, the wage growth figure at 4.4% is too high for Fed’s comfort.
• Despite the slower job growth, robust wage growth and the slight decline in the unemployment rate are likely to keep the Fed on track to raise interest rates in their upcoming July meeting.

What lies ahead?

Rupee spot (CMP: 82.59) remains in boarder range on higher side, ahead of CPI data awaited for both India & US

• The week will bring a heavy load of data releases, kicking off with China’s inflation report on Monday, and India and the US CPI on Wednesday. In India, we see inflation picking up again likely giving the central bank reason to keep its guard up. Inflation in the US likely continued to soften in June but a key measure of underlying price pressures is still running at an uncomfortable pace that keeps the Federal Reserve tilted toward resuming interest-rate hikes this month.
• We believe the central bank may intervene in the coming week as the pair reaches a psychological level of 83. Until then  USDINR could continue in this range for a few more days to go but the range has now broaden from 81.90 it has taken inch higher towards 82.20 and upside 82.90 is remained intact on closing basis wherein there are chances of RBI intervening and not letting further depreciating rupee.
• For India domestic front this week’s India CPI  which is expected to come higher on back of food inflation on high side on back of higher agro commodity prices, which is major component in CPI data,  will be crucially watched which could deciding factor for RBI rate which has be pause up till now. For now the question is uptil when the pause could help to tame down the inflation to target levels.
• Meanwhile, dollar index remain but stringent to move lower as it still has to catch up with recent market dynamics with higher US rates and the scope for further dovish repricing in the USD curve is not broad. This week’s US CPI is undoubtedly a risk event.
• Consensus for YoY core CPI reads to 0.3% which should keep providing encouraging news on the disinflationary story but should still fall short of tweaking the Fed narrative or convincing markets to price out a July hike.