• The rupee depreciated for the 2nd week in a row following foreign fund outflows and higher bond yields. Additionally, the Federal Reserve’s rate hikes, lower carry trade, higher crude oil prices and a strong dollar have undermined the rupee flat to depreciative actions over the week.
• The Reserve Bank of India kept its key interest rate unchanged but struck a hawkish policy tone on Friday, saying inflation needs to be tamed and it may take measures to absorb excess cash in the market, sparking a run-up in the Indian bond yields.
• Rising geopolitical risk could see buying in assets like gold and the dollar, and potentially boost demand for US Treasuries, which have been sold off aggressively. As far as the rupee is concerned, if the Israel-Hamas conflict escalates, RBI would have to decide between whether to keep exhausting reserves to defend the rupee or to let it adjust.
• India’s foreign exchange reserves declined for a fourth straight week to $586.91 billion, the lowest in more than five months, as of Sept. 29, data from the RBI showed on Friday. In the week gone, foreign institutions were net sellers of $616mn in domestic equities.

The Dollar Index lost to 106.04, down by  0.12%  last week against the previous week’s close of 106.17

• For the week, the dollar index was down 0.1% a small part of profit booking, set to snap an 11-week streak of gains that has helped it advance about 6%. The dollar’s recent strength has been underpinned by a rapid sell-off in US government bonds, which sent yields to multi-year highs.
• qUS yields traded stable as did USD with a mild weakening bias. US equities ended flattish to red as risk appetite remains shaky ahead of the US non-farm payroll data today. The hope is that the jobs data presages a moderate slowdown in the labour market, just enough to keep rates under check. Any signs of a sharper dent in labour market outlook can trigger fears of slowdown and risk aversion
• The dollar index witnessed its first weekly decline after Friday’s NFP data. However, weekend geopolitical worries between Israel and Hamas may support the haven dollar in the coming week.
• The dollar has benefited from the Federal Reserve’s aggressive interest-rate increases as well as resilience in the US economy. The Middle East crisis has added an extra geopolitical risk factor to bond trading, though inflation remains the key driver of debt markets.
• With the US dollar in a dominant position heading into Q4, the euro, British pound, and Japanese yen found themselves in a vulnerable state, with a possible inclination toward further depreciation. Their prospects, however, could improve if the Fed begins to embrace a softer posture for fear of a potential hard landing. Traders should therefore keep a close eye on policy guidance.

What to Watch: The uncomplicated September jobs report didn’t settle the debate about whether the Fed is done hiking rates. Minutes of the Fed’s September meeting (Wed.) may provide some insight into the upcoming Oct. 31-Nov. 1 FOMC meeting, which is shaping up to be one of the most difficult from the FOMC’s perspective. Two critical upcoming economic indicators CPI (Thurs.) and the University of Michigan consumer-sentiment survey (Fri.) may give a more definitive read.

What lies ahead?

The rupee spot (CMP: 83.27) continues to remain in a narrow range, with US CPI data in focus for the week.

• Attention now turns to next week’s US inflation data that could offer clues to Fed action going forward. If next week’s US consumer price data pushes yields even higher, we should see safe-haven flows beginning to add to rate differentials in supporting the Dollar.
• Technically, the Dollar index is still in an up trend and the upcoming correction could be the normal retracement. It has resistance at 108 and support at 104.50
• The failing attempt to cross 83.30 creates a chance for a near-term retracement in the USDINR. The negative divergence on the chart, fall in crude oil price and fading 11-weekly rally in the dollar index could push the pair lower in the coming days but chances are less. The pair has support at 82.70 and resistance at 83.35.
• Therefore, the Rupee might continue to trade in a tight range over the coming weeks as the RBI continues to intervene in the market to shield the currency against a strong US dollar. Although most emerging market currencies have taken a hit over the past months as the “higher-for-longer” rates narrative pushed US yields to multi-year highs, the rupee has barely moved over the same period and is down less than 1% this year.
• The Israel situation is not yet serious for markets. If the conflict broadens into a potential Iran war, the global economy will be surely impacted, generating potential risk aversion. As of now, oil is higher from recent lows, but not enough to cause ripples in markets. The next few months will be crucial for geopolitical scenarios to play out, as a potential Middle Eastern war can compound the Russia-Ukraine turmoil or may cause a political tussle in the US regarding the funding for both wars. The Israel conflict could add uncertainty to the Rupee for sure in the coming months.