By Dharamraj Dhutia and Nimesh Vora
MUMBAI, Nov 4 (Reuters) - The direction of Indian rupee and government bonds this week will be dictated by the U.S. elections, the outcome of which is expected to have major implications for the dollar and U.S. Treasuries.
The Nov. 5 U.S. election has entered its final stretch, with opinion polls showing a neck and neck race between Republican candidate Donald Trump and Vice President Kamala Harris. In the betting market too, Trump and Harris are nearly deadlocked.
A victory for Trump is expected to push up U.S. Treasury yields and lead to a rally in the dollar, according to analysts, which in turn would pressure rupee and other emerging market $(EM)$ currencies.
"If Vice President Harris wins the U.S. presidential election, she would be more likely to stick to policy continuity, and EM risk premia would remain low. If former president Trump is elected, we would expect an initial adverse reaction in EM markets," Capital Economics said in a note.
The extent of how the U.S. elections impact the rupee will depend on the Reserve Bank of India. The central bank, like it has done in the past, is widely expected to not allow any excessive volatility.
Thanks to the RBI, the rupee has been holding a narrow range in the last two weeks. The rupee's range last week was limited to 84.0650-84.0900, just 3.5 paisa.
The U.S. Federal Reserve's Nov. 6-7 policy meeting will be on the radar alongside the U.S. elections. The central bank is expected to cut rates by 25 basis points, and market participants will be on the watch out for cues on what comes next.
The rupee ended last week at 84.0650. Meanwhile, India's 10-year benchmark government bond yield closed at 6.8469%.
Traders expect the rupee to move in the range of 83.80-84.50 for the week, while the 10-year benchmark bond yield is seen in a 6.80%-6.92% band.
"There is caution in the Indian bond market with regards to political as well as monetary policy developments in the United States," said VRC Reddy, treasury head at Karur Vysya Bank.
KEY EVENTS:
India
** HSBC India October manufacturing PMI - Nov. 4, Monday (10:30 a.m. IST)
** HSBC India October services PMI - Nov. 6, Wednesday (10:30 a.m. IST)
U.S.
** U.S. September factory orders - Nov. 4, Monday (8:30 p.m. IST)
** U.S. September international trade data - Nov. 5, Tuesday (7:00 p.m. IST)
** U.S. October S&P global composite PMI final - Nov. 5, Tuesday
(8:15 p.m. IST)
** U.S. October S&P global services PMI final - Nov. 5, Tuesday (8:15 p.m. IST)
** U.S. October ISM non-manufacturing PMI - Nov. 5, Tuesday (8:30 p.m. IST) ** U.S. initial weekly jobless claims week to Oct. 28 - Nov. 7, Thursday (7:00 p.m. IST)
** U.S. Federal Reserve policy decision - Nov. 7, Thursday (12:30 a.m. IST, Nov. 8, Friday) (Reuters poll: 25 bps cut) ** U.S. November U Mich sentiment - Nov. 8, Friday (8:30 p.m. IST)
(Reporting by Dharamraj Dhutia and Nimesh Vora; Editing by Rashmi Aich)
((Dharamraj.dhutia@tr.com))
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