The Indian rupee ended a three-day decline against the US dollar as USD/INR eased towards 95.62, tracking a slide in long-dated US yields after the Treasury said it would at least double buybacks for longer-dated nominal securities. The US Dollar Index hovered near a seven-week low of 98.77 set on Wednesday. Thirty-year Treasury yields fell almost 2% from Tuesday’s close to about 5.18%, while 10-year yields stayed near 4.64%, levels that reduced dollar support and lifted demand for higher-risk currencies.
The Treasury’s buyback cap is set to rise from $2bn per operation to at least $4bn, a move aimed at restraining borrowing costs. July Federal Open Market Committee minutes showed many officials still saw scope for rate increases if inflation stays elevated, though some preferred to wait. FedWatch pricing implied a 67% chance of no change in September, up from 64% on Tuesday, as recent data showed the labour force down 23K and June Nonfarm Payrolls revised lower, alongside moderate headline and core CPI. USD/INR traded at 95.6350, above its 20-period EMA at 95.55, with RSI at 51.72; support sits at 95.55, 95.29 and 94.83, while resistance is 95.76 then 96.00.
Derivative Market Outlook and Trading Strategies
We suggest derivative traders prepare for a period of consolidation in the USD/INR pair as the US Treasury’s plan to double its bond buybacks to $4 billion cools off long-term yields. With the US 10-year yield dropping to 4.64% and the Dollar Index hitting a seven-week low of 98.77, the immediate upward pressure on the pair has eased. Traders should look to capitalize on this temporary weakness in the US Dollar by setting up short-term short-dollar positions.
Market pricing now reflects a 67% probability that the Federal Reserve will hold interest rates steady in September, up from 64% earlier in the week. This shift is backed by recent cooling in US economic data, including a 23,000 reduction in the labor force and a downward revision to June payrolls. We recommend utilizing short-dated options to exploit this pause in Fed hawkishness before the next policy meeting.
Risks and Technical Considerations
However, we must remain cautious as the Indian Rupee’s upside is heavily restricted by elevated crude oil prices, with Brent crude currently trading near $80 per barrel. Because India imports over 80% of its crude needs, high oil prices will keep importer dollar demand strong and prevent the Rupee from strengthening significantly. Consequently, we advise against aggressive long-Rupee bets and suggest keeping profit targets tight.
From a technical standpoint, USD/INR is hovering just above its 20-period exponential moving average of 95.55, with the Relative Strength Index sitting at a neutral 51.72. We recommend range-bound strategies, such as selling strangle options with a lower bound of 94.80 and an upper bound of 96.00. This approach allows us to collect premium while the pair consolidates between key support and resistance levels over the coming weeks.
