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A coincidence is helping Indian banks tame NPAs, not for the first time

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A swift bond rally triggered by a fall in interest rates and a fiscally-responsible Budget has come to the rescue of beleaguered Indian banks, which are in the throes of a deleveraging cycle.

India's 10-year bond yield have fallen over 150 basis points from their highest point this year.

Bond yields and prices are inversely correlated as a fall in yields makes older bonds yielding higher interest rates more attractive.

So investors holding bonds in a falling-yield environment see a notional gain. For banks, this means that bad loans become smaller as a proportion in an overall book that has been repriced higher.

The fall in bond yields, combined with a generous Rs 70,000-crore cash infusion by the government, would help exacerbate pressure on Indian banks, which are battling their worst NPA crisis in two decades.

Every basis point fall in bond yields benefit banks by an overall $50 million, given the size of their portfolio, an Economic Times article quoting an estimate by ICRA said.

The bond rally has been further bolstered by India's proposal last month to issue its first overseas bond.

Further, the Reserve Bank of India’s (RBI) rate-cutting panel will again meet on August 7 to decide policy rates.

India is among few countries with an investment-grade rating to offer yields of more than 5 percent, Manu George, director of fixed income at Schroder Investment Management Ltd. in Singapore, told Mint. “Indian bonds offer good value in a low-yielding world and have the potential to rally further."

In a recent interview, Romesh Sobti, chief executive officer at IndusInd Bank, pointed out that even in 2002, around the time the NPA cycle peaked out, it was a fall in bond yields that had come to the rescue of banks.

Hence, this is not the first time that a strong bond rally helped in dealing with the bad debt hovering over India’s financial system.

“While this time around the drop in the sovereign bond yields is not as dramatic, the quantum of bond holding is way higher,” Sobti said in the interview. “Gains will be handsome enough to enable banks to start cleaning up the books faster."

AUD/USD at the Possible Fragile 0.6800 Support

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Long-term perspective

The steep decline that came after the confirmation of the double resistance etched by the upper line of the descending channel and the 0.7055 with 0.7013 resistance area managed to bring the price under the 0.6858 major support level, pausing at the 0.6800 psychological level.

This movement, besides taking out the previous low that falsely pierced the 0.6858 level, is composed of strong bearish candles — the only one which does not have a long body, although is bearish, is the one on July 29, 2019, the reason being that the bulls were trying to halt the decline around an important psychological level, 0.6800, respectively.

From here, the price could consolidate above 0.6800 and then continue the downwards movement. Another possibility is the one of a throwback. In this case, the price might retrace towards 0.6858. This could end up with the actual confirmation of 0.6858 as a resistance, followed by a new leg down. Another possible scenario is a confirmation as a resistance of the projection of the 0.6831 low. Also to be considered is a false break of 0.6858 — the price might get above it but fail to confirm it as a support, with the consequent fall beneath it and the continuation of the decline.

So, as long as the price does not confirm 0.6858 as support, the movement towards south is natural, being the materialization of the impulsive wave that pertains to the descending trend. A first target is represented by 0.6700, with a possible extension on the first run to 0.6650.

Short-term perspective

The price is in a clear descending movement and, as long as it continues or as long as its change prints a continuation pattern, it is expected to continue.

The first sign of a pause could be offered if the price gets above the 0.6865 level — which corresponds to the 23.6 level of Fibonacci retracement. But even in this case the other projections — preferably up to 50.0, which corresponds to the 0.6935 level — are well suited short-term areas from where the price to continue declining. The first target is represented by the 0.6700 psychological level.

Australian Dollar Suffers from Risk Aversion

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The Australian dollar tumbled today. While macroeconomic data, both domestic and from China, was not particularly bad, risk aversion on the Forex market hurt the Australian currency.

The Australian Industry Group Australian Performance of Manufacturing Index climbed to 51.3 in July from 49.4 in June. Climbing above the 50.0 level, the indicator suggests that the sector returned to expansion.

The import price index rose 0.9% in the June quarter from the previous three months, two times less than analysts had predicted — 1.8%. The index fell 0.5% in the previous quarter.

The Index of the Commodity Prices rose 16.1% in July from a year ago. The index increased by 13.9% in June.

The Caixin China Manufacturing PMI was at 49.9 in July, up from 49.4 in June. It was above the level of 49.6 predicted by analysts and just a notch below the 50.0 level of no change.

But risk aversion caused by a tweet of US President Donald Trump about new tariffs on Chinese goods did not allow the Aussie to profit from the relatively positive macroeconomic releases. The news was negative for riskier currencies in general, but especially for those of China’s trading partners, including the Australian dollar.

AUD/USD dropped from 0.6843 to 0.6805 as of 20:16 GMT today. EUR/AUD jumped from 1.6176 to 1.6295. AUD/JPY plunged from 74.42 to 73.09

Earlier News About the Australian Dollar:

  • AUD/CAD Looking for 0.9000 (2019-07-29)
  • Australian Dollar Falls After PMI Releases (2019-07-24)
  • AUD/USD Not Ready Yet for 0.7200 (2019-07-24)
  • AUD/USD Facing an Important Test Before Continuing Towards 0.7200 (2019-07-18)
  • Weak Employment Data Doesn't Prevent Rally of Australian Dollar (2019-07-18)

Forex - Dollar Down vs Havens, Up vs High-Yielders on Tariff News

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 The dollar fell against safe havens such as the yen and Swiss francin early trading in Europe Friday, but was higher against most other currencies after President Donald Trump announced a sharp escalation of the U.S.’s trade war with China.

The yen had its best day against the dollar in two years on Thursday after the announcement of a new 10% tariff on $300 billion worth of imports from China. By 3 AM ET (0700 GMT), it was at 106.95 to the dollar, having risen to its highest since April 2018 against the greenback earlier.

The dollar was also lower against the franc at 0.9880, as traders unwound carry trades in a broad risk-off move across all markets.

Trump’s announcement shattered a fragile truce with China over trade that had been hastily put in place ahead of the G20 summit a month ago. It represents a sharp escalation of the conflict, by extending tariffs to effectively all U.S. imports from China. As such, the risk of them feeding through to higher prices for U.S. consumers is markedly higher.

Analysts from the Peterson Institute in Washington estimated that the move will raise the average tariff on Chinese products to 21.5%, from barely 3% in 2017 when Trump took power.

Trump’s move came only a day after Federal Reserve chairman Jerome Powell had pointed to the trade dispute as the biggest single risk facing the U.S. and global economies – observations that drew criticism from Trump show said that Powell had “let us down.”

“Ironically the Fed’s easing gives the President the breathing space to now play hard ball,” Megan Greene, a senior fellow at the Harvard Kennedy School, said via Twitter.

The dollar surged against high-yielders overnight, hitting a 10-year high against the Aussie and rising sharply against the Korean won and kiwi. It also surged 1% against the offshore Chinese yuan, although China’s central bank restrained the drop in the official rate.

The impact on the euro and British pound was less severe, although reports that Trump may make an announcement on trade with the EU later Friday added to the general sense of unease.

The dollar index, which tracks the greenback against a basket of currencies, hit its highest level since May 2017 at 98.697 overnight, before retracing to 98.105 in European trading.

The escalation of the trade war threatens to overshadow what would normally be the main event of the monthly economic calendar – the release of the U.S. labor market report for July. Nonfarm payroll growth is expected to have slowed to 160,000 from 224,000 in June.

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