Premium trades 24-30 December 2011

Premium trade recommendations for 24-31 December 2011

USD/INR:

Rupee has nicely traded end-to-end of 52.50-53.25 (set near term trading range) and bias is for extended gains into 52.00 in due course. We are short in spot USD/INR at average of 53.00 (current 52.70) and also short March 2012 dollars at average of 54.35 (current 53.75). Let us watch profit target at 52.10 (for spot USD/INR) and 53.35 (March 2012 dollars) with stop at cost. For now, watch consolidation at 52.35-52.85 with overshoot limited to 52.00-53.00. It is good for exporters to sell 3M dollars above 54.00 while importers stay away for move into 52-51 in due course.

EUR/USD and USD/JPY:

EUR/USD is in end-to-end trade between set near term range of 1.2950-1.3200 (low of 1.2980 and high of 1.3197). We recommended to sell in two lots at 1.3075 and 1.3175 (with stop above 1.3225) and advised not to stay “long EUR/USD” below 1.3000. Over all, it was a 150 pip trade between 1.3130 to 1.2990 and 1.3195 to 1.3015. Now, let us watch consolidation at 1.2850-1.3250. Trade recommendation is to buy at 1.2950-1.2850 (with stop at 1.2825) and sell at 1.3150-1.3250 (with stop at 1.3275).

USD/JPY is in tight consolidation mode at 77.50-78.25 (low of 77.66 and high of 78.22). We are already “long” at 77.75 (current at 78.10). Let us continue to hold with strategy to add at 77.25 (with stop below 77.00) for profit at 78.75/79.50.

Bond/OIS:

The rally in 10Y bond lost steam on extension below 8.30% for reversal into 8.40%. Let us watch consolidation at 8.30-8.45%. The strategy is to buy weakness into 8.40-8.50% for 8.30-8.25%. Over all, set short term range of 8.25-8.50% is there to stay till RBI gets into rate reversal mode.

1Y OIS rate found solid support at lower end of set near term range of 7.65-7.80% for sharp reversal (low of 7.65 and high of 7.77) while 5Y rose sharply from low of 6.82% into 6.98%. We are now paid in 5Y OIS at average 6.87% (current 6.98%). The “carry” is very attractive for this trade with overnight MIBOR above 9.75%. Let us watch stop at cost and t/p at 7.05-7.10%. We will “unlock” this “carry” through 1Y received book of 7.85-7.90% (for 1% 1X5 spread).

NIFTY:

The initial weakness below strong support window of 4675-4725 failed at 4531 for sharp recovery into the sell window of 4750-4850 (high at 4763). Now, we are short at 4750; strategy is to sell next lot at 4850 (with stop at 4875) for profit at 4550-4525. Let us continue to watch short term play at 4350-4850. Strategic investors can add the first lot (one-third of the appetite) at 4550; second one at 4400 and final one at 4250 (with stop below 4200) for reversal into 5250-5350.

Gold and NYMEX Crude:

The sharp reversal in USD Index from 80.80 to below 79.80 pushed commodity prices up with Gold moving up to high of 1641 and NYMEX crude into 100.10; thus taking out our stop at 1620 and 98.5 respectively. NYMEX crude has however moved to expectations of finding good support in our earlier buy zone of 95-92 and sell zone of 100-103. Let us watch consolidation in Gold at 1580-1640 and NYMEX crude at 95-103 while having a close watch on USD/Index at 78.50-81.00. No trade at this stage.

Wish you all a merry Christmas and very happy New Year.....

Moses Harding

MARKET PULSE - 19 DEC 2011

Market Pulse – Short term update (Next update in second week of January 2012)

Breaking News: RBI deregulates NRE/NRO rates (FCNR in pipe-line???)

RBI’s extra-ordinary act of imposing strictures in FX operations did not yield desired results. Despite use of the most stringent measures, RBI had to supply dollars to arrest rupee weakness above 53 to guide stability around 52.50; thus the need to trigger the next shot. The move to deregulate NRI rates was expected since deregulation of domestic SB rate. While the impact from blue and white collared NRIs is minimal; significant flows can be pulled in from high net worth NRIs. In the regulated regime, the interest rate for FCNR/NRE deposits was much lower than what high net worth NRIs could get in the off-shore market without dilution in credit/counter-party risk. Now, it is level playing field for Indian banks to compete with off-shore banks. It is estimated that HNI NRIs park major portion of their investments in the off-shore market and it is time to attract when financial system in the developed economies are in downgrade mode.

What is the impact on inflows? Now, there will be interest arbitrage opportunities for NRIs with capability to raise funds abroad at lower cost. NRE rates are expected to be priced at 9.25-9.75% for 1Y tenor; 8.75-9.25% for 3Y tenor and 8.25-8.75% for 5Y tenor. These rates are in line with high value domestic rupee deposit rates. Banks are also expected to have differential rates for low and high value deposits. It would make good investment sense for NRIs to look at 3-5Y tenor NRE Rupee deposits at spot rupee value of over 53. Rupee is not expected to stay weak at 53-56 into the long term. The expectation is for rupee stability around 49-52 in the next 3-5 years. Given the repatriation facility for NRE deposits; rupee stability in 3-5Y time period provides attractive dollar return on NRE rupee deposits to earn higher interest rate with minimal risk on adverse exchange rate impact. This should help bridge the demand-supply gap till FDI issues are resolved. India needs to bridge the current account gap through long term NRI/FDI flows to reduce dependence on hot money flows and to arrest excessive rupee weakness.

What is the impact on currency? The main issue for RBI is to bridge the demand-supply gap to make its intervention effective. To this purpose, RBI has done enough to “cut” the demand and “open up” supplies. With these measures, rupee should stay steady around 52 (within 51-53). Else, RBI may need to remove “cap” on off-shore borrowing limit for Banks. This will open up flow of additional dollar liquidity through foreign banks and foreign branches of Indian banks. This will also help in release of pressure on rupee liquidity. Now that dollar demand from genuine export cancellation and corporate/interbank speculation is taken out; rupee should get back into stability when demand from genuine import hedge is out of the way. Having said these, dollar strength in the near/short term against major currencies (EUR/USD into 1.20) and weak stock market (NIFTY into 4250) are risk factors to this expectation. But, importers need to take comfort from RBI’s strong intention to protect rupee weakness beyond 53-54. RBI is expected to protect this level till headline inflation dips below 7%.

Currency market

Let us look for stability in spot rupee at 52-53 with bias for move into 51. At this stage, we can safely assume that RBI will protect excessive weakness beyond 53 and run-away gains below 51. Rupee having moved to its fair value; it is important to prevent getting back into over valuation to retain export competitiveness. This is essential to address widening gap in the trade account. Given the current market dynamics, strategy for exporters is to cover 6-12M receivables on spot weakness into 52.75-53.25 while importers stay away for move into 52-51 to cover up to 6M payables. It is good for companies to shift rupee liabilities into US Dollar for 3-5/10Y tenor for good interest “carry” with minimal risk of depreciation on the underlying asset net of carry earned. In the near term (for next three weeks); let us prefer consolidation at 51.75-52.75 with overshoot limited to 51.50-53.00.

EUR/USD has held well at 1.3000-1.2950 support but losing momentum on correction into 1.3050-1.3100. The end-to-end move within the set 1.2850-1.4150 is met and preference into the near term (for next three weeks) is for consolidation at 1.2750-1.3250. It would need strong positive news from the Euro zone to get the investors into risk-off mode to shift the appetite for non-dollar currencies. Strategy is to play end-to-end moves with tight stop on break thereof. USD/JPY is in consolidation mode at 77.50-78.25 for long time now since break out of earlier resistance at 77.25. The bias is for shift into higher base for near term consolidation at 78.25-79.25. Strategy is to stay “long” dollars with stop below 77.25 for 79.25-79.50.

We had set up near term range play at 6.5-7.5% in 3M and 4.5-5.5% in 12M and looked for test/break of lower end not to sustain but to pick up momentum for move into higher end. This expectation was based on strong upward momentum from exchange rate play tracking lower USD/INR and release of dollar liquidity squeeze in the system. The interest rate play provides decent support given RBI’s serious concern on inflation. The reverse from below the set lower end for close at 6.8% (3M) and 4.8% (12M) was swift. Let us now look for consolidation at 6.5-7.0% in 3M and 4.5-5.0% in 12M. The bias will be into higher end tracking stability in spot rupee at 51.50-52.50. Let us not chase rally beyond the higher end at this stage.

Fixed Income/Bond/OIS market

The draw down from Repo counter touched Rs.1.5 Trillion (around 2.5% of NDTL); call money rate hit 9.5% and 3M money market rate into 10.00-10.25%. The timing of meeting these set objectives was perfect triggered by advance tax outflows on shift into new reporting fortnight. The tight liquidity is there to stay into the first week of new reporting fortnight starting 17^th December. We need to see how RBI would be able to bring the system shortfall into its comfort level of minus 1% of NDTL. RBI chose to avoid injecting liquidity through CRR cut considering this as start of monetary reversal cycle. RBI continues to stay in USD sell mode in the FX market. It has to be seen how RBI is able to release liquidity pressure with use of only OMO operations without triggering excessive rally in the Bond market.

Bond market derived comfort from RBI’s preference of OMO operations. RBI expressed concerns on growth and inflation but the bias has shifted clearly towards growth pressures. It was not a surprise to see post policy rally in 10Y bond into 8.37%. Over all, the strategy to stay invested on weakness into 8.50-8.55% has worked well as rupee driven weakness in bond market was supported around 8.51%. Now that rate cut action is distant away (April to June 2012), it is not fair to expect extended rally in 10Y bond yield beyond 8.35-8.25% despite OMO purchases. The bond supplies from RBI will stay at elevated levels through rest of the FY12. So, consolidation at 8.35-8.45% (within 8.25-8.50%) would be in order. Strategy is to play end-to-end of this range. Strategic investors can stay invested at 8.45-8.50% for June 2012 target at 8.10-8.0%.

OIS market has nicely traded end-to-end of 7.70-7.85% in 1Y and 6.90-7.15% in 5Y during pre and post policy period for close at 7.72% and 6.92% respectively. While RBI has shifted its bias towards growth; its concerns on inflation continues to remain valid. So, it is not clear whether test/break of lower end of this range will sustain. The risk-reward for staying “received” at current levels is not attractive. The option therefore is to either stay square or stay light by absorbing extension below 7.70% in 1Y and 6.90% in 5Y for pull back to 7.85% and 7.05-7.15% in 5Y.

Commodity market

Gold has traded end-to-end of technical support at 1560 and resistance at 1600. Having reversed quickly from 1754 (high of 8/12), it is in order to lose momentum on move into 1560 triggering short squeeze. Now that USD has got into stable mode, we may need to allow for consolidation at 1560-1620 with bias for test/break of lower end into 1500 in due course.

NYMEX crude has come off nicely from resistance zone of 100-103 (high of 101.25) into support zone of 93-90 (low of 92.5). The downtrend is firmly in place for test/break of 90 for move into 85-80 in the near/short term. For now, let us watch consolidation at 90-95 with overshoot limited to 87-98.

NIFTY

NIFTY has nicely traded end-to-end of set near term range of 4650-5150 for gradual reversal from 5100 to 4628 before close at 4651. The trend since August 2011 remains unchanged. The investor preference is for fixed income assets as market continue to stay in risk-off mode. All asset classes (except bond market) are in down trend since then. Now, the near term range stands revised to 4350-4850 not ruling out extension into 4250. Strategy is to sell at 4750-4850 for gradual move into 4350-4250. Time is not yet right to trade from “long” mode; need to buy only to square shorts for profit booking. Strategic investors can afford to buy one-third of the appetite at 4350-4250 and track fresh cues thereafter.

Moses Harding          

Premium trades - 19 DEC 2011

Premium trade recommendations for 19 December 2011

Open trades:

1. Short March 2012 dollars at 54.65 (current 53.70). Add second lot at 54.00 with stop at cost and t/p at 52.65
2. Bought USD/JPY at 77.75 (current 77.80). Add second lot at 77.25 with stop at 77.00 and t/p at 78.75/79.50
3. Short Gold at 1590 (current 1598). Add second lot at 1620. Stop at 1630 and t/p at 1565/1515
4. Short EUR/USD at 1.3075 (current 1.3045). Add second lot at 1.3175. Stop at 1.3225 and t/p at 1.2950/1.2875
5. Short NYMEX crude at 95 (current 93.75). Add at 97. Stop at 98.5 and t/p at 90/87

Fresh initiations:

1. Sell spot USD/INR at 52.75-53.25 with stop at 53.50 and t/p at 51.50
2. Buy spot USD/INR at 51.50-51.00 with stop at 50.75 and t/p at 53.25
3. Buy 12M forward dollars at 53.50-54.00 with stop at 53 and t/p at 56
4. Sell 3M forward dollars at 54.00-54.50 with stop at 54.75 and t/p at 52
5. Receive 3M FX premium at 7.0% and pay 12M at 4.5% (for ALM play)
6. Sell NIFTY in two lots at 4700-4725 and 4825-4850. Stop at 4875 and t/p at 4350-4250
7. Receive 1Y OIS at 7.80-7.85 and pay 5Y OIS at 6.90-6.85% (for ALM play)

 

Closed out trades:

1. Long USD/INR entered at 51.35. Took profit at 52.35
2. Long USD/INR entered at 51.70. Took profit at 52.28
3. Paid 5Y OIS at 7.0%. Took profit at 7.05% (through trail stop; missed t/p at 7.15%)
4. Received 5Y at 7.05%. Took profit at 6.97%
5. Short EUR/USD at 1.3400. Took profit at 1.3295
6. Short NIFTY at 4900. Took profit at 4755
7. Received Feb/Nov at 152 out at cost after seeing low of 137
8. Short NYMEX crude at 100. Took profit at 97.50
9. Short NIFTY at 4800. Took profit at 4680
10. Paid 5Y OIS paid book at 7.01. Took profit at 7.05 (through trail stop; missed t/p at 7.15%)

Good luck....................Moses Harding

Post monetary policy update

No surprises....concern over issues on growth; inflation and rupee remain valid

RBI delivered to expectations leaving CRR/SLR and policy rates unchanged. The guidance on the way forward was also to expectations. The end of the rate hike cycle was reiterated while highlighting the issues concerning significant downside risks to growth and strong headwinds on downtrend in headline inflation. RBI also stressed downside risks on rupee that would dilute its actions on inflation.

RBI also ensured post policy price stability by playing to the gallery. 10Y bond yield was steady around 8.45% taking bullish cues of RBI resorting to OMO operations to inject system liquidity on need based basis. Given the current liquidity squeeze of over 2% of NDTL; there will be steady flow of OMO purchases to limit weakness in 10Y bond yield above 8.5% despite pipe-line bond auctions and higher demand on slippage in fiscal deficit. The guidance on the way forward expressing concerns both on growth and inflation is negative for equity market. NIFTY will look heavy over 4850 and taking cues from the external sector, test/break of recent low of 4639 may be on cards for further extension into 4350-4250. RBI’s aggressive measures on the FX market will provide stability in rupee at 52-54. This level is seen as fairly valued for exporters and will not be considered as inflationary with good signs of downtrend in commodity prices.

What next? RBI is expected to stay in pause mode till March 2012. The external sector is still vulnerable with the belief that worst is still ahead. RBI will stay prepared for reversal of rate hike cycle by Q1 of FY13 post March 2012 inflation and growth numbers. The downtrend in growth momentum and headline inflation below 7% would trigger CRR and/or rate cuts. The risk to this expectation will be on headline inflation remaining stubbornly over 7.5-8.0%. While there is clarity on downtrend in growth momentum into 7.0-6.5% by 2013; concerns on inflation continue to stay valid with mix of supply side issues and high input cost of imports. Over all, the worst for money market is already behind while timing of easing cycle is uncertain at this stage. The system continues to be on “risk-off” mode to divert investment flows into fixed income from other asset classes.

There is hope of reaching the light at the end of the tunnel soon!

Moses Harding

Premium trades - 16 DEC 2011

Premium trade recommendations for 16 December 2011

Open trades:

1. Sold NIFTY at average 4800 (current 4746). Add at 1.4830 with stop at 1.4860 and t/p at 4680 (missed earlier t/p of 4650 by 23 points; low of 4673)
2. Short March 2012 dollars at 54.65 (missed second lot of 55.35 by 5 paisa; low of 55.30). Add second lot at 54.15 with stop at cost and t/p at 53
3. Bought USD/JPY at 77.75. Add second lot at 77.50 with stop at 77.25 and t/p at 78.50/79.00
4. Paid 5Y OIS at average 7.01 (current 7.10%). t/p at 7.15 and trail stop at 7.05%
5. Short Gold at 1590. Stop at 1610 and t/p at 1530

Fresh initiations:

1. Sell EUR/USD in two lots at 1.3075/1.3150 with stop at 1.3175 and t/p at 1.2790
2. Buy 12M forward dollars at 53.50-54.00 with stop at 53 and t/p at 56
3. Sell 3M forward dollars at 54.00-54.50 with stop at 54.75 and t/p at 52
4. Sell NYMEX crude at 94-96 with stop at 97 and t/p at 91

Closed out trades:

1. Long USD/INR entered at 51.35 exited at 52.35
2. Long USD/INR entered at 51.70 exited at 52.28
3. Paid 5Y OIS at 7.0% out at 7.05%
4. Received 5Y at 7.05% out at 6.97%
5. Short EUR/USD at 1.3400 out at 1.3295
6. Short NIFTY at 4900 out at 4755
7. Received Feb/Nov at 152 out at cost after seeing low of 137
8. Short NYMEX crude at 100 out at 97.50

Good luck....................Moses Harding

MARKET PULSE - 16 DEC 2011

Breaking News: RBI imposes FX strictures to defend Rupee

We discussed the need for RBI to think of measures other than intervention to prevent rupee weakness beyond 54. RBI’s intervention (how aggressive it may be) was ineffective in a highly dollar demand driven mode. The earlier measures to open up inflows through FII/ECB/NRI route did not yield desired result. Hence, the need is to explore ways and means to cut the dollar demand from the system and get the market into neutral mode to make RBI’s intervention effective. That’s what has been done now. The demand for dollars is now reduced significantly through blocking export cancellations; corporate speculation through performance based limits (mainly NDF trades) and limiting intraday/overnight exposure of Banks. The market was in heavily over-sold position with exporters covering most of receivables and importers/FC borrowers maintaining large open positions. The chance of exporters to cancel the existing contracts with intention to reinstate at better levels is now blocked; thereby cutting huge demand through export cancellations. RBI’s ineffective intervention resulted in widening arbitrage between off-shore NDF and on-shore OTC; thus generating huge dollar demand in the domestic market. This is also cut now. Other measures such as cutting the exposure limits for Banks are not very significant. Over all, the huge gap in days’ demand-supply is bridged and expected to stay in either neutral mode or shift into supply driven mode; thus bringing the Rupee exchange market in firm control of RBI. While many will advocate that these steps are not fair-play; RBI did not have any other option to arrest spread of currency woes into inflation and the economy. It was the last weapon as RBI cannot go the SNB way (to open up dollar sales counter at predetermined rate). It was discussed in earlier reports that rupee weakness beyond 54 will push the Indian economy into low growth; high inflation mode which would be economic disaster. It would need exchange rate stability at 51-54 till inflation worries are out of the way. Post that and firm downtrend in commodity prices, RBI would allow the rupee to float along with USD strength. Now, RBI can afford to turn into dollar “buy mode” to release rupees into the system without CRR/OMO route. So, focus is back to the 51-56 short term range play while 54 remains firm in the near term. Rupee fall from 44 to 54 since August 2011 is excessive and it would have been in order if the market had shifted into supply driven mode at 54-56 to provide rupee stability at 51-54. When rupee woes are imported from external sector on which RBI did not have any control; use of these options can be considered as prudent (and sensible) if it could arrest rupee impact on inflation. Let us welcome these moves with pinch of salt for the good of the Indian economy.   

Policy expectations:

CRR: UNCHANGED. RBI has now has the option to inject liquidity through OMO purchases in the bond market and dollar purchases in the FX market; hence no need at this stage to cut CRR for the purpose to address tight liquidity above RBI’s comfort level of minus 1% of NDTL.

Repo rate: UNCHANGED. The moderation in growth momentum below 7.5% and headline inflation stubbornly above 9% will keep RBI in pause mode into January 2012 monetary policy review.

Guidance: NEUTRAL. RBI may not choose to sound dovish at this stage. Rupee woes are not completely out of the way. RBI has already exhausted all its options including strictures in FX operations. RBI will look for improvement in the external sector to get the worries on inflation and rupee out of the way before shift into dovish stance.

Currency market

We discussed that rupee weakness beyond 54 can push the economy into low growth; high inflation mode considered as disaster when RBI struggles to balance both growth pressures and inflation worries. Now that RBI has cut the demand, rupee is expected to be in consolidation mode at 51-54 with immediate bias into 52.50-51.50. Given the fact that rupee value around 51 is fairly valued, it makes sense to keep rupee bit undervalued for the benefit of exporters who have paid for these FX strictures losing their freedom to un-do past mistakes. So, providing stability around 52.50 will be in order. RBI would now have the option to operate from “buy side” to supply rupees into the system. It is important for RBI to keep rupee exchange rate in its grip till inflation eases into 7%. The shift into low growth; low inflation (around 7%) will enable RBI to take dovish stance on monetary policy. We advised exporters to cover 1-3M receivables on extended weakness into 54 with 3M forward dollars looking attractive at 55.00-55.50. We saw a high of 3M dollars at 55.25 to bring in supplies which made RBI intervention effective to drive rupee from low of 54.30 for close below 53.70. We also asked importers to stay away for 53.50-52.50; now importers will get to buy cheaper dollars around 52.50. Having said these, fundamentals continue to remain weak. USD Index is bullish for gradual move into 89 in the short term tracking economic woes in the Euro zone and better economic performance out of the Euro zone. USD Index is expected to form a strong support base around 79.80 and prepare momentum to take out 81. Domestic stock market is also weak tracking growth pressures. Let us now look for consolidation in rupee at 52-53. It is important for importers to hedge on extended reversal below 52 where RBI is expected to get into dollar buy mode. On the other hand, exporters can sell 1-3M dollars on weakness into 53. Over all, 3M forward dollar above 54 will be good for exporters and 12M forward dollar below 54 will be good for importers.

EUR/USD is able to hold its weakness at 1.2950-1.3000 but the bounce from there lacks momentum and has held at 1.3050. Our strategy to exit short EUR/USD positions at 1.3000-1.2950 for bounce into 1.3050/1.3150/1.3250 is valid. We continue to watch consolidation at 1.2850-1.3150 with bias for extension into 2650. Our short term target continues to remain at 1.20-1.18. Strategy is to sell EUR/USD correction into 1.3050-1.3250 for 1000 pip dollar rally into the short term.  USD/JPY is in tight consolidation mode at 77.75-78.25. It is matter of time before see extended dollar strength into 79.00-79.50.

FX premium spiked to 7% in 3M and 5% in 12M (higher end of set near term range of 6.0-7.0% in 3M and 4.5-5.0% in 12M) before close at 6.75% and 4.9% respectively. RBI’s sale of forward dollars arrested test/break of higher end. Now, it is important for RBI to allow a bull run in FX premium to shift forward market into supply driven mode; leading exporters’ supplies and lagging importers’ demand. We will revise the near term range into 6.5-7.5% in 3M and 4.5-5.5% in 12M with bias into the lower end. This will also help release of dollar credit to exporters at affordable cost. RBI may need to keep FX premium high through purchase of forward dollars to arrest excessive reversal in spot rupee below 52.

Bond/OIS market

The initial gains in the market tracking lower US Treasury yields could not sustain getting the focus back into domestic cues. The initial rally found strong support at 8.45% (10Y bond); 7.75% (1Y OIS) and 7% (5Y OIS) before close at 8.49%; 7.79% and 7.10% respectively. RBI’s actions in the FX market will provide great relief. The fear is of RBI extending its pause mode in monetary policy on shift of currency woes into inflation; growth and fiscal deficit. This relief will provide kind of stability in Bond/OIS market. Let us look for consolidation at 8.40-8.55% (10Y bond); 7.65-7.80% (1Y OIS) and 6.95-7.15% (5Y OIS). The strategy is to play end-to-end as test/break either-way is not expected to sustain.

Commodity market

Gold found support above 1560 (low of 1564) held at upper end of set 1500-1600 range (high at 1593). There is no change in expectation of extended weakness below 1560 for 1520-1500. In the meanwhile NYMEX crude failed close to higher end of set near term range of 90-97 for move below 95 and looks good for extension into 90. Let us now watch 90-95 with bias into the lower end.

NIFTY

The initial weakness in NIFTY held at the immediate support at 4675 (low of 4673) for decent bounce into 4773 before close at 4746. RBI’s actions in the FX market will provide bit of relief to domestic stock market to provide consolidation at 4675-4825 with overshoot limited to 4650-4850.

Moses Harding

my article in today's DNA MONEY

Rupee.....the spoilsport

It all began from the financial crisis in the Euro zone since July 2011. The financial crisis extended into monetary and economic crisis lead to sovereign rating downgrade with fear of sovereign default in most countries in the Euro zone. Since then, rupee is down from 43.85 to 53.88. The concern is the rate of depreciation at an alarming rate of 23% since August 2010. The primary cause for such a steep fall is not from domestic cues. The crisis in the Euro zone and the resultant shift of safe-haven to the US and the greenback drove the USD Index up from 73.50 to 80.50; down by just 9.5%. In the meanwhile EUR/USD was down from 1.4939 to 1.2964; down by 13.2%. The downward pressure on growth momentum pulled down all asset classes and money shifted into safe-haven sovereign bonds. The investor appetite was low given the risk of depreciation in the asset value with loss of time value on the investments. Cash and sovereign Fixed Income became the most preferred assets. These external woes caused sharp fall in domestic stock market with NIFTY down from 6338 to 4639 since August 2011; down by 26.8%. It is obvious that the worst losers are the rupee and domestic stock market. This brings the domestic factors into focus.

The huge dependence on external capital; liquidity and consumer demand was exposed. Exchange rate stability is dependent on adequate flows into capital account to bridge the deficit in the trade account. The dollar liquidity squeeze from the external sector widened the current account gap. The resultant shift of credit demand from foreign currency to rupees caused stress on the domestic rupee liquidity. The sharp fall in external demand for India’s goods and services exerted severe downward pressure on growth momentum. During this time, Indian economy shifted from high growth; high inflation to low growth; high inflation scenario. Over all, the fundamental issues of widening trading deficit; reduced capital flows and higher fiscal deficit pulled down the confidence on the domestic currency.

Another major concern is from the structural issue. The market was heavily one-sided till the Euro zone crisis. Market stake holders took comfort from the rupee stability to stay heavily short on dollars through uncovered imports; fully hedged exports; un-hedged short term carry trades from trade account and shift of medium/long term rupee liabilities to foreign currency for interest cost advantage without exchange rate cover. The forward market was also in supply driven mode tracking high forward premium of 6.5-7.0% on 12M tenor. It was not making sense then to pay 7% premium for 1Y dollar when rupee was expected to stay in consolidation mode around 44 with expectation of further appreciation into 39. The structural positioning of the stake holders were heavily one-sided unmindful of risk of sharp reversal. This is where the market was caught on the wrong foot. The market is now in demand driven mode with importers running for cover and exporters holding back their receivables; and it will be extremely difficult for RBI to reverse the trend with sporadic supply of dollars. At best, it could arrest the momentum to the fall with rupee bearish undertone firmly intact.

What next? The market should turn neutral to complement RBI’s intervention actions. RBI is short of dollars in its reserves and system is short of rupees to undertake aggressive dollar sales. The solution to this will be to “lead” export cover and “lag” dollar demand from importers. Exporters have already covered majority of their future receivables. This is evident from huge FX provisions in Q2 results. This will become worse in the Q3 results. On the other hand, uncovered imports (and the resultant loss) are not captured in the Balance Sheet. So, it would need strong reversal signal for importers to hold back their dollar purchases and exporters to sell balance uncovered receivables. The fundamental and structural issues discussed above will stay valid into the short term. Dollar will continue to be in its rally mode and it is important for EUR/USD to hold its weakness above 1.2850-1.3000. It is also important for domestic stock market to stay in stable mode to avoid trigger of FII exit.  NIFTY has to hold its weakness above recent low of 4639. The outlook however is for extended gains in USD into 1.18 against Euro and NIFTY extending its weakness into 4250 driven by severe downward pressure on growth and rupee woes adding to inflationary pressure. The shift into low growth and high inflation economy will keep the equity market in bearish mode for extended period of time.

Over all, there is not a single positive factor at this stage for rupee to get back into its bull phase. It would need quick recovery in the external sector to redress domestic issues. Given the possibility of rupee getting into a 53-56 range in the near/short term; exporters may not enter in a hurry while importers run for cover to cut the loss in cost of import. RBI needs to think other than intervention to get the confidence back on rupee!

Moses Harding

Executive Vice President

IndusInd Bank   

  

Premium trades for 15 DEC 2011

Premium trade recommendations for 15 December 2011

Open trades:

1. Sold NIFTY at average 4800 (current 4763). Add at 1.4830 with stop at 1.4860 and t/p at 4650
2. Short March 2012 dollars at 54.65 (first lot). Add second lot at 55.35 with stop at 55.50

Fresh initiations:

1. Buy spot USD/INR in two lots at 53.50/53.00 with stop below 52.75 and t/p at 54.75
2. Sell EUR/USD in three lots at 1.3050/1.3150/1.3250 with stop at 1.3275 and t/p at 1.2650
3. Buy USD/JPY in two lots at 77.75/77.50 with stop at 77.25 and t/p at 78.50
4. Pay 5Y OIS in two lots at 7.03/6.98 with stop at 6.93% and t/p at 7.40%
5. Sell NYMEX crude in two lots at 97/99 with stop at 100.5 and t/p at 90.5
6. Sell Gold in two lots at 1590/1605 with stop at 1615 and t/p at 1510

Closed out trades:

1. Long USD/INR entered at 51.35 exited at 52.35
2. Long USD/INR entered at 51.70 exited at 52.28
3. Paid 5Y OIS at 7.0% out at 7.05%
4. Received 5Y at 7.05% out at 6.97%
5. Short EUR/USD at 1.3400 out at 1.3295
6. Short NIFTY at 4900 out at 4755
7. Received Feb/Nov at 152 out at cost after seeing low of 137
8. Short NYMEX crude at 100 out at 97.50

Good luck....................Moses Harding

MARKET PULSE - 15 DEC 2011

Market Pulse – 15 December 2011

Currency woes to delay shift into dovish monetary stance

The market was looking for a quick reversal in RBI’s monetary policy stance. The shift from high growth; high inflation regime to moderate growth; moderate inflation called for pause mode ahead of shift into start of rate reversal cycle. The sharp depreciation in rupee by 23% since August 2011 has put the economy to risk of move into low growth; high inflation scenario. The worst for rupee is still ahead; that puts RBI in back foot. The benefit of base effect (for headline inflation) will be significantly diluted on higher input cost of imported items. While the food price inflation has come down sharply; fuel and core inflation is likely to stay at elevated levels and going forward, impact will be felt on food inflation as well. The higher subsidy element will cause further slippage in fiscal deficit. The impact of sharp depreciation in rupee will lead to downtrend in growth momentum below 7% and elevated headline inflation at above 8% by March 2012. It is obvious to conclude that “pause stance” of RBI may be an extended one into March 2012 and it would need sharp reversal in rupee into 49-51 to remove rupee impact on headline inflation. This combined within reversal in commodity prices will release the pressure on RBI. Till then, RBI is expected to stay with pause mode with the risk of back into hawkish stance if rupee extends its weakness beyond 56. Therefore, expectation of CRR cut now (and rate cut thereafter) has shifted to risk of rate hike if rupee continues its free fall. RBI is expected to keep CRR and policy rates unchanged and may not sound dovish on the way forward. RBI is expected to stay cautious on inflation (and rupee woes) and look for improvement in the external sector to address growth issues.

Currency market

Rupee fell into the last line of defence at 53.75-53.90 (low of 53.88) before close at 53.71. RBI did its best to prevent extended weakness over 54. The sharp fall from 48.61 to 53.88 since 1^st November is cause for serious concern while RBI is working to bring down the headline inflation into 7% by March 2012. In the meanwhile USD Index held well above 78.20 into over 80.50 and looking good for further extension over 81. The outlook for rupee continues to stay bearish given the strong downtrend in EUR/USD (below 1.2850 into 1.20) and NIFTY (below 4650 into 4250). There are no signs as yet for importers to hold back dollar demand and exporters to accelerate dollar supplies. The market is aggressively in demand driven mode; it should shift to neutral to complement RBI’s dollar supplies into the market. Till then, RBI’s intervention may not be effective and at best could delay the inevitable move into 56-58. Now, we revise the short term range from 51-56 into 53-56. The next support levels for rupee above 54 are at 54.50/54.90/55.25 ahead of 55.55/56.00. It is difficult to set a reversal point for rupee at this stage. RBI would need to think of measures other than intervention to halt run-away rupee weakness. RBI did well through its monetary actions to establish downtrend in inflation. But, rupee weakness may undo all the good work of RBI in its fight against inflation. This is the big worry for the economy; shift into low growth and high inflation will be an economic disaster. For now, let us watch 53.50-54.50; it would need EUR/USD holding its weakness above 1.2850 and NIFTY finding support at 4650 to avoid extended weakness into 54.90-55.25. Given the strong bearish set up both in domestic and external sectors; expecting a strong reversal is wishful at this stage. Now, all attention is on RBI on its measures (and actions) to defend rupee above 54 and provide reversal into 53-51 to guide near term stability at 51-54. Till then, reversal into 53.50-53.15 will attract importers’ interest (with stop below 53) while exporters are expected to hold back for 54.90-55.25 (with stop below 53).

EUR/USD is in firm downtrend and has moved into the lower end of set short term range of 1.2850-1.4150 (low of 1.2944 so far from high of 1.4247). The test/break of lower end will open up a swift move into 1.2600-1.2550 ahead of 1.1900-1.1875. At this stage, we cannot rule out reversal into 1.3250 before getting into downtrend. So, it would be good to “short” EUR/USD at 1.3050/1.3150/1.3250 for the next 1000 points move into 1.20-1.1850.  For now, we look for consolidation at 1.2850-1.3050. In the meanwhile, USD/JPY looks bid for extension into 78.75 while 77.75 is expected to stay firm.

The shift of interest rate play post weak inflation data pushed 3M premium into 6.25% and 12M into 4.6%. The strong bearish undertone on spot rupee and base effect (of higher spot) has caused test/break of strong resistance at 6% in 3M and 4.5% in 12M. This move is good for RBI as higher premium could get the forward market into supply driven mode or at the worst, cut the demand for forward dollars. The risk of test/break of over 6% in 3M and over 4.5% was flagged in the previous report as premium lost traction with exchange rate play (losing the downtrend despite higher spot rupee). For now, let us watch 6.0-7.0% in 3M and 4.5-5.0% in 12M with bias for move into higher end. The delay in rate reversal cycle will keep the upward momentum intact.

Bond/OIS market

The strategy to unwind “long bonds” on extended gains below 8.45% (10Y) and “received book” in OIS at 7.70-7.75% (1Y) and 6.95-7.0% (5Y) on run into monetary policy proved good. The weak inflation number and risk of rupee impact on inflation pushed 10Y bond yield up from 8.41% to 8.52% and OIS rates sharply up from 7.70% to 7.80% in 1Y and 6.96% to 7.07% in 5Y. What next? Now, the way forward is clear. There is no case for RBI to shift into dovish monetary stance. The risk is of now Indian economy shifting into low growth; high inflation scenario. While there is clarity on downtrend in growth momentum below 7%; rupee depreciation by 25% in 4 months (and worst not yet in sight) will keep the headline inflation above 8%. There will be further pressure on trade gap and fiscal deficit. Rupee has now become pivot for RBI’s monetary stance. Given the inability of RBI to defend rupee; its impact on inflation is a serious worry. Having said these, RBI would need to pump in rupee liquidity to create room for aggressive dollar sales. RBI also cannot allow the rupee to find its own “floor”. It is indeed complex and caught between the devil and deep sea. In the event of rupee having a free fall beyond 56; the risk is of RBI shift into rate hike mode to arrest rupee fall. For now, let us watch 10Y bond yield at 8.45-8.60%; 1Y OIS rate at 7.75-7.90% and 5Y OIS rate at 7.05-7.20%. While the bias is into the higher end; RBI’s preference for OMO to pump rupee liquidity will limit extended weakness beyond higher end. However rupee weakness beyond 56 will get the focus back into 8.75% (10Y bond) and 7.40% (5Y OIS); not ruled out at this stage.

Commodity market

Gold moved sharply down to meet the set objective at 1600-1580 for extended weakness into 1564. In the meanwhile NYMEX crude lost steam around 100 for reversal below 95 (low of 94.21). Given the strong US Dollar and recessionary fears in the global economy; commodity assets will continue to be in downtrend. The next pit stop for Gold is at 1535-1485 and NYMEX crude into 93-90. For now, let us watch 1500-1600 in Gold and 90-97 in NYMEX Gold with immediate bias for move into lower end. Staying short with stop above 1610 and 98 would be good at this stage.

NIFTY

NIFTY traded end-to-end of 4750-4850 (high of 4839 and low of 4750) before close at 4763. The rally from 4639 to 5100 on expectation of shift into dovish monetary stance by RBI is not relevant now. The risk is of extended pause mode or trigger of next round of rate hike come into play to set up firm bearish play in the equity market. We await test/break of 4639 in preparation for extended weakness into 4350-4250 in the near term. For now, let us watch 4600-4800 with bias into the lower end.

Moses Harding  

   

Premium trades for 14 December 2011

Premium trade recommendations for 14 December 2011

Open trades:

1. Received 5Y OIS at 7.05% (current 6.97). Stop at cost and t/p at 6.95%
2. Sold NIFTY at average 4800 (current 4796). Add at 1.4860 with stop at 1.4880 and t/p at 4735
3. Short March 2012 dollars at 54.65 (first lot). Add second lot at 54.95 with stop at 55.30
4. Short NYMEX crude at 100. Add at 102.50. Stop at 103.50 and t/p at 97.50

Fresh initiations:

1. Sell Gold at 1655-1675 with stop at 1685 and t/p at 1595
2. Buy 10Y 8.79% at 8.50-8.55% with stop at 8.58% and t/p at 8.35%
3. Sell EUR/USD in two lots at 1.3075/1.3125 with stop at 1.3155 and t/p at 1.2925 (missed earlier entry at 1.3250 by 14 pips)
4. Buy USD/JPY in two lots at 77.75/77.50 with stop at 77.25 and t/p at 78.50

Closed out trades:

1. Long USD/INR entered at 51.35 exited at 52.35
2. Long USD/INR entered at 51.70 exited at 52.28
3. Paid 5Y OIS at 7.0% out at 7.05%
4. Short EUR/USD at 1.3400 out at 1.3295
5. Short NIFTY at 4900 out at 4755
6. Received Feb/Nov at 152 out at cost after seeing low of 137

Good luck....................Moses Harding

MARKET PULSE - 14 DEC 2011

Market Pulse – 14 December 2011

Currency market

Rupee weakness got good support at 53.50 (low of 53.52) before reversal into 53.11 for close at 53.22. Now, move into next support at 53.65-53.75 (ahead of 53.90-54.00) is on cards to complete end-to-end move within the set short term range of 51-54. In the meanwhile, USD Index has sliced through resistance at 79.65-79.80 for move over 80 (at striking distance to the set near term target at 80.80-81.00). Rupee continues to be under pressure despite sharp weakness from 44 to 54 with more negative factors in play and stake holders looking up to RBI to save rupee from further disaster. There are no genuine dollar supplies to complement RBI’s dollar sales to cushion rupee weakness. RBI’s ability to intervene is limited in a strong demand driven market. RBI is heavily short of dollars (in its Reserves) and short of rupees in the system (with risk of shortfall overshooting over 2% of NDTL post advance tax outflows). Given the strong downtrend in EUR/USD and NIFTY, extended weakness in rupee beyond 54 into 56 is not ruled out; thus we had set up a 51-56 range (on 22/11) when rupee hit all time low of 52.72. The reversal from there found strong support at 51.35-51.20 buy zone (low of 51.19) and now set to move into 54-56.  What is the strategy for exporters from now on? Exporters, who have run open positions from 44 to 54, can afford to cover 25-50% at 53.65-54.00 and retain the balance for run into 56 with stop loss below 53. It is important to stay prudent overcoming the element of greed at this stage. It is also good for companies to shift long term rupee liabilities into dollars at 54-56. The forward value of 3/5/7/10 years dollars looks good with attractive interest carry. Given the scenario of peaking rupee interest rate and stability in dollar interest rate till end 2013; shift of rupee liability into dollars at 54-56 will be most interest cost effective with good upside gains on rupee into the long term. We asked importers to stay fully hedged on 1-3M payables and there was good opportunity to do so on sharp reversal into 48.61 (from 50.32) on 31/10 and from 52.72 to 51.19 (on 2/12). Importers who continue to remain uncovered despite the strong bearish set up on rupee; can continue to stay away for move back to 51.00 with stop above 56.00. It is time to allow the market into supply driven mode to make RBI’s intervention effective. For now, let us watch consolidation at 53.15-53.65 with overshoot limited to 53-54. RBI needs to protect 54 with firm hand to arrest rupee impact on inflation to prepare ground for quick reversal into monetary easing cycle to address growth issues.

EUR/USD held below the sell zone of 1.3250-1.3300 (high of 1.3236) to meet the set objective at 1.30 (low of 1.3016). The momentum continues to be strong for extension into 1.2850. This would complete the end-to-end move of set short term range at 1.2850-1.4150. Let us unwind EUR/USD shorts at 1.30-1.2850 and stay aside for fresh cues. For now, let us watch 1.2850-1.3150 with test/break either-way to attract. In the meanwhile USD/JPY has moved from lower end to higher end of set near term range of 77.25-78.25. Now, we look for consolidation at 77.50-78.50 with test/break either-way not expected to sustain.

12M FX premium fell nicely from 4.5% into strong support window of 4.0-3.90% before spike again for close at 4.4%. In the meanwhile reversal in 3M held above 5.5% for close at 5.9%. Over all, we have seen end-to-end moves within the set near term range play at 5.5-6.0% in 3M and 4.0-4.5% in 12M. Now, there is clarity on interest rate play (strong downward set up tracking CRR cut now and rate cut later) but exchange rate play is neutral. It would also need RBI to release rupee liquidity into the system (through CRR cuts) to spend USD 5-10 billion dollars to prevent extended weakness in spot rupee beyond 54. The risk is of test/break of higher end on sharp reversal in USD/INR spot from 54 to 51. 3X12M has also traded end-to-end of 3.5-4.0%. For now, let us continue to watch consolidation at 5.5-6.0% (3M); 4.0-4.5% (12M) and 3.5-4.0% (3X12M) with test/break either-way not expected to sustain. Let us stay with 3X12M play by receiving over 4.0% and paying 3.5%.

Bond/OIS market

Bull-run in Bond market continues with 10Y yield down from 8.46% to 8.40% while initial reversal in OIS rates into 7.70% (1Y) and 6.95% (5Y) found support for close at 7.75% and 7.0% respectively. No change in view as we watch consolidation at 8.35-8.45% (10Y bond); 7.70-7.80% (1Y) and 6.95-7.05% (5Y). The bias will be for move into lower end on run up to monetary policy. It is prudent to unwind long bond and received OIS books on test of lower end and stay square into the policy. There is 51% probability of 50 bps CRR cut with signals for 50 bps rate cut in January 2012.

Commodity market

Gold held below the set resistance of 1680 (high of 1674) before reversal into set objective at 1620-1605 (low of 1622). While the immediate target is at 1600-1580; it is prudent to exit shorts and await fresh cues. For now, let us watch 1580-1680 not ruling out strong reversal from the lower end. In the meanwhile NYMEX crude held well below 98 (and above 97) for spike into 100. We continue to watch consolidation at 97-102 and prepare to gain stronger momentum for test/break of lower end into 95-90. Over all, prefer consolidation at 93-103 into the short term.

NIFTY

NIFTY held above strong support zone of 4725-4675 (low of 4728) but bounce from there held below strong resistance at 4850 (high of 4824) before close at 4800. There is no change in view of looking for consolidation at 4725-4875 before look at recent low of 4639. Beyond there, we need to watch RBI’s action on 16^th December to provide directional guidance within 4300-5300. So, suggest staying square into the policy but need to keep in mind that the short term bias is in favour of move into 4350-4250 considered good for strategic entry.

Moses Harding

Premium trade update for 13 December 2011

Open trades:

1. Received Feb/Nov average at 152 (current 140). Stop at cost and t/p at 132
2. Received 5Y OIS at 7.05% (current 6.97). Stop at cost and t/p at 6.90%
3. Sold NIFTY at 4775 (current 4752). Add at 1.4825 with stop at 1.4855 and t/p at 4655

Fresh initiations:

1. Sell Gold at 1680-1685 with stop at 1690 and t/p at 1620
2. Sell NYMEX crude at 99-101 with stop at 103 and t/p at 95
3. Buy 10Y 8.79% at 8.50-8.55% with stop at 8.58% and t/p at 8.35%
4. Sell EUR/USD in two lots at 1.3250/1.3300 with stop at 1.3325 and t/p at 1.3005
5. Sell March 2012 USD/INR at 54.75-55.00 with stop at 55.25

Closed out trades:

1. Long USD/INR entered at 51.35 exited at 52.35
2. Long USD/INR entered at 51.70 exited at 52.28
3. Paid 5Y OIS at 7.0% out at 7.05%
4. Short EUR/USD at 1.3400 out at 1.3295
5. Short NIFTY at 4900 out at 4755

Good luck....................Moses Harding

Premium trades for 13 December 2011

Premium trade recommendations for 13 December 2011

Open trades:

1. Received Feb/Nov average at 152 (current 146). Stop at 160 and t/p at 130
2. Received 5Y OIS at 7.05% (current 7.04). Add at 7.08-7.13 with stop at 7.15% and t/p at 6.90%

Fresh initiations:

1. Buy USD/INR in two lots at 52.65 and 52.50. Stop at 52.35 and t/p at 53.65
2. Sell Gold at 1680-1685 with stop at 1690 and t/p at 1620
3. Sell NYMEX crude at 100-102 with stop at 103 and t/p at 95
4. Buy 10Y 8.79% at 8.50-8.55% with stop at 8.58% and t/p at 8.35%
5. Sell EUR/USD in two lots at 1.3250/1.3300 with stop at 1.3325 and t/p at 1.3005
6. Sell NIFTY in two lots at 4775/4825 with stop at 4855 and t/p at 4675

Closed out trades:

1. Long USD/INR entered at 51.35 exited at 52.35
2. Long USD/INR entered at 51.70 exited at 52.28
3. Paid 5Y OIS at 7.0% out at 7.05%
4. Short EUR/USD at 1.3400 out at 1.3295
5. Short NIFTY at 4900 out at 4755

Good luck....................Moses Harding

MARKET PULSE - 13 DEC 2011

Currency market

The reversal from 51.18 to 52.85 was swift and it took just 5 trading days. The speed of reversal despite sporadic dollar supplies from RBI would be the biggest worry for RBI and the Government. This is not good for the economy when the system is struggling with high inflation and slippage in fiscal deficit. The fundamentals for rupee are very weak. The domestic cues are bearish and external sector is yet to see the worst. The immediate support for rupee is at 53.35-53.50; further ahead is 53.90-54.00. Given the downward pressure on EUR/USD and NIFTY, test of these support levels is certain. Need to watch the momentum on the reversal from these historic lows. For now, let us watch 52.75-53.75 with overshoot limited to 52.50-54.00.

EUR/USD having traded multiple times within 1.3250-1.3450 and as expected has shifted into lower range play at 1.31-1.33 with risk of extended weakness into 1.30-1.2850. USD/JPY is now boxed at 77.50-78.00 and there are no factors to indicate test/break of 77.00-78.25; however bias is for extended dollar gains into 79.25-79.50 into the near term.

FX premium was driven lower by mix of both interest and exchange rate play. The reversal from peak of 6% (3M); 4.5% (12M) and 4% (3X12M) is sharp for close at 5.6%; 4.15% and 3.6% respectively. The immediate term bias is for gradual move into 5.0% (3M); 3.75% (12M) and 3.25% (3X12M) which is expected to hold. For now, let us watch 5.25-5.75% (3M) and 3.90-4.35% (12M); while the bias is for move into lower end, test/break thereof is expected to attract.

Bond/OIS market

The strategy to buy into weakness proved good as initial weakness in 10Y Bond was supported at the door step of the set buy zone at 8.55-8.60% for rally into 8.43% before close at 8.45%. In the meanwhile OIS rates too eased from days’ highs for close at 7.79% (1Y) and 7.04% (5Y). Now, weak IIP data has set the road clear for extended bond rally irrespective of RBI actions on 16^th December; pipe-line bond supplies and slippage in fiscal deficit. The shift into monetary easing cycle is just round the corner. While all asset classes will be under pressure; investor interest will shift into bond market. For now, let us watch 8.35-8.50% (10Y bond); 7.70-7.85% (1Y OIS) and 6.95-7.10% (5Y OIS). The bias will be for move into lower end while weakness into upper end will attract. The high growth/high inflation market dynamics pushed operative policy rate from 3.25% to 8.5% since March 2010. Now, shift into moderate growth/moderate inflation dynamics (both meeting around 7% on or before March 2012) should establish downtrend in operative policy rate to 7.0% by March 2012. The shift into this scenario would need 1-2% of CRR cut and 0.5-1.0% rate cut. So, need to stay invested for this move with 1Y target at 8.0-7.75% and 10Y at 8.0-8.25%. This will drive 1Y OIS rate into 7.60-7.50% and 5Y OIS into 6.90-6.85%. Beyond there, it would need shift into low growth (below 6.5%) and low inflation (below 6%) scenario to drive the operative policy rate below 7%. Let us review this when RBI reverses into monetary policy easing stance.

Commodity market

The downtrend has picked up momentum as Gold eased from 1714 into the set objective of 1675-1665 (low of 1657). The downward momentum is now strong; thus setting up for extended weakness into 1620-1605 while 1680 holds firm. In the meanwhile, NYMEX crude failed ahead of 100 for reversal below 98 and in course for extended weakness into 95 while reversal into 100 is difficult to sustain.

NIFTY

The weak domestic fundamentals with combination of low growth and high fiscal deficit continue to keep the bears in play. The reversal from 5100 to 4750 was swift; underlying the strong bear grip on the market. Now, sharp decline in rupee is also a worry which could trigger FII pull out ahead of year end. The next strong support of 4650-4625 is just striking distance away and market is set to complete end-to-end move within the set near term range of 4650-5150. Now, quick shift into easing monetary cycle by RBI will help to limit weakness but may not be good enough to provide sustainable rally into near/short term. Now, we focus our attention for consolidation at 4650-4850 not ruling out test/break of recent low at 4639. Let us not get the focus away for extended weakness into 4350-4250; considered good for strategic investors to lock into one-third of investment appetite.

Moses Harding     

Breaking News: Rupee post all time low of 52.85

The all time low of 52.73 (posted on 22 November 2011) is taken out as rupee fell to new low of 52.85 before close at 52.84. The reversal since 22 November driven by RBI’s measures to “lead” foreign currency supplies helped rupee recovery into 51.19 (2^nd December 2011) but strong bearish set up on rupee from both domestic and external sectors brought rupee back into bearish trend to post a new historic low in quick time. The short recovery cycle before quick shift into rupee bearish mode is a serious concern for RBI (and the economy).

There is nothing positive for rupee at this stage. The uncertainties (and complexities) in the Euro zone is adding to dollar strength with USD Index holding  above 78.20 and in preparation to take out immediate resistance at 79.65-79.80 for 81.00. This will drive the EUR/USD down into 1.30-1.28. The other immediate concerns are from widening trade gap; political issues in attracting long term capital flows and growth issues leading to weak stock market. The downtrend in EUR/USD (into 1.28-1.25) and NIFTY (into 4350-4250) are serious threat to rupee. The comfort is from declining trend in commodities; shift into growth supportive monetary policy and aggressive supportive actions from RBI to prevent run-away rupee weakness. Having said these, rupee was expected to trade within 51-54 into the short term given the weak market dynamics. Therefore, reversal from close to 51 was not a surprise but the speed of reversal is a concern. The way forward is not looking good for rupee. The fundamental concerns on trade gap; capital flows and growth pressures will stay valid into short/medium term. The higher fiscal deficit and low growth might bring India into rating watch. Over all, rupee bear run is expected to continue into short term. The immediate target is for quick run into 53.50-54.00 to complete end-to-end move within the set short term range of 51-54. While it is difficult to take a view beyond there; greenback will look good to sell for 5-7 years tenors. RBI has already lifted the “cap” of USD 100 mio net supply position for Banks; extended weakness beyond 53.50-54.00 is good for large companies to shift long term rupee liabilities into dollars. At this stage, let us not rule out extended weakness beyond 54.00 on strong USD Index above 81.00 and weak NIFTY below 4250; however, prefer this as a low probability occurrence. Rupee is already down by over 20% from 43.85 (27^th July 2011) to 52.85 (12 December 2011); hence it is not prudent to chase weakness beyond 54.00. 

Moses Harding