I posted the Trade Idea to pay forwards on Oct 25. Simply put, Forwards are the interest rate differential between U.S rates and India Rates and if forward expectations for US rates were to move lower, the spread would widen and hence paying on the long end of the curve made sense.
The hypothesis was that Dec 24 implied Fed Fund pricing is finding resistance at 4.80% - 4.85% level and the bar for market pricing to converge towards guided Fed Path of 5.10% is higher. Hence, Risk reward favors a move lower on the market pricing of FFR, esp in light of lower inflation prints in the US.
Markets have a way of surprising as interest rate differentials are not the only determinants of the forward curve. Global Economic Policy uncertainty, Banking system liquidity and intervention in forwards also drives forward premia.
We have seen a sharp move lower in forwards driven by the front end of the curve as Cash Tom (C/T), Tom Spot (T/S) and Cash Spot (C/S) points collapse. C/S points fell to as low as 13 bps on USD cash demand.
Dec 23 Forwards are 28 bps lower while the long end of the curve has fallen 13 - 15 bps.
Stops on the trade are below 1.50%. I still like the idea behind the trade and expect it to perform once USD cash demand stabilizes. Closely watching the C/T points for direction. Also bear in mind the INR system liquidity continues to be tight with LAF uptake on Oct 31 at 106K Crore and WACR trading near 6.77%.
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