The Oil And Dollar Dependency

Currency movement has taken centre stage in the last few trading sessions. Whereas earlier the fall in rupee was on account of weakness in domestic macroeconomic and political conditions, the decline in recent days has been a result of a strengthening dollar. With the ICE dollar index trading at a three-year high, the rupee was bound to see downward pressure. Yesterday, the markets worried as the rupee touch a new all-time low 61.20 to the dollar. It closed the day at 60.9550 per dollar.

What will now be crucial on the currency front is the expectation around the Federal Reserve’s move to slow stimulus later this year. While global macroeconomic data and pressure on the rupee pulled the markets down yesterday, what will today look like? Will the currency continue to be a drag on the markets?

Global cues have been positive and have resulted in gains across markets.

The focus in the US has been on the employment data. The June jobs report indicated an addition of more jobs than expected and a decline in jobless claims. At the same time, manufacturing improved. The robust data release had equity markets weighed upon because of worries over the tapering down of the Federal Reserve’s easing programme.

But the week started with the US equity markets focussing on upcoming results. Like Infosys marks the start of the results season in India, Alcoa kick-starts it for the US. Alcoa’s earnings topped market expectations and the US markets closed with gains yesterday.

In Europe, the markets rose as European governments agreed to disburse USD 3.9 billion for Greece to keep the debt crisis away. Meanwhile, the backdrop of low rates has been cheering the markets ever since the central bank met last week.

While cues have been positive globally and the markets have been on a rise, what matters for the Indian markets is the movement of the rupee and oil.

The dollar yesterday gained 0.10% against other currencies and US treasury yields fell with the benchmark 10-year yield at 2.64%. This is indicative of a possible continuity in the downward pressures on the rupee today.

However, on the NYMEX, oil futures for August delivery broke a four-day winning streak and fell by 0.11% to end the day at USD 103.14 a barrel. This would provide some relief to the downward pressure on the markets today, nullifying the effect of the pressure on the rupee.

This is likely to result in a day where the Indian markets follow suit and react positively to global cues. A positive opening can be expected on the markets today. However, a close eye needs to be kept on the movement in the rupee and oil as they have the potential to change the course of the markets.