MARKET PULSE - 29 NOV 2011

Currency market

USD/INR is in consolidation mode at 51.50-52.50. This is the range I discussed in my previous report that would provide good comfort to RBI to the extent that RBI would shift into dollar buy mode at 51.65-51.50 to focus on release of pressure on rupee liquidity squeeze. Now, 52.15/52.35/52.50 will attract dollar supplies while 51.85/51.70/51.50 attracts bids. The factors that drove rupee in to strong bear grip continue to stay valid; hence there is no conviction to look for rupee bull rally at this stage. Given the positive cues emerging from the US and no signs of recovery in the Euro zone; USD will continue to have a firm hold on the Euro to drive the USD Index above 80 in due course. Hence, we cannot rule out test/break of all time low at 52.73 for extended run into 53.50-54.00 to complete end-to-end move of set near term range of 51-54. Let us keep this at back of our mind. Strategy for importers is to hedge 1-3M payables on spot gains into 51.65-51.50 and 12M dollars above 54 is not a bad one for exporters.

EUR/USD is boxed between strong support zone of 1.3250-1.3200 and resistance zone of 1.3350-1.3400. It is traders market with price action driven by news and data. The trend is clearly down into 1.3150/1.3000/1.2850 while 1.3400/1.3550/1.3650 to hold any correction driven by positive news out of the Euro zone. The strategy therefore is to wait for move into the said levels; initiate appropriate actions with tight stop on firm break out into the next level. However, strategy for exporters is to cover Euro receivables in parts at 1.3400-1.3650 while importers to stay aside for 1.3100-1.2850. It is possible that EUR/USD gets into short term consolidation at 1.30-1.40 with overshoot limited to 1.2850-1.4150. For now, let us watch 1.30-1.35 to stay valid.

USD/JPY has nicely moved from the set buy zone of 77.25-76.75 to t/p zone of 78.25-78.50. The set objective of extended dollar gains into 79.50-80.00 is valid. Let us now shift our focus at 77.50-79.50 with strategy to buy at 77.75-77.25 with stop below 77 for 79.25-79.75.

Let us stick to 3X12 play in FX premium; the set strategy to stay paid at 2.5-2.25% has proved well. During this time, we have already seen strong spike in 3M from below 4.5% (to above 5%) and in 12M from below 3% (to above 3.25%). It is safe to assume that we get into consolidation play at 4.5-5.5% in 3M and 3.0-3.5% in 12M. The signals are mixed and balanced on interest and exchange rate play to gain momentum for test/break either way.

Commodity market

Gold is trading in familiar range of 1680-1710 with overshoot limited to 1660-1730. Let us continue to watch sideways trading mode. It is traders market to play end-to-end move with tight stop on test/break thereof.

NYMEX crude is also in consolidation mode at 95-100. The Iran and Syria related issues is providing good support while growth pressures in the global economy attracts supplies over 100. Let us continue to watch 95-100 with overshoot limited to 93-103.

Bond/OIS market

10Y bond is in consolidation mode at 8.80-8.85%. No change in view of looking for sideways trading mode at 8.75-8.90%. The break-out direction bias is clearly towards extended weakness into 9% which should hold. Strategic investors can buy into weakness at 8.90-9%.

OIS rates rock steady with 1Y supported well at 8.10% and weakness in 5Y holding at 7.40%. Let us continue to watch tight range of 8.10-8.20% in 1Y and 7.30-7.40% in 5Y and test/break either-way not expected to sustain. RBI will be happy to see this kind of price stability in the bond and OIS market.

NIFTY

The start of the week rally is getting difficult to get through resistance at 4850-4875. The market is traders’ delight now, giving 200-300 points exit in quick time; thus we are seeing sharp corrective rally on shorts squeeze. The mantra is to trade from “short side” and stay fleet footed to make quick bucks. We may need to review the near term range play into 4650-5150. US market is looking to get better and any positive news from Euro zone will trigger shorts squeeze. However, the trend is clearly bearish and it is matter of time before we take out 4650 for extended run into 4450-4350. Now, selling levels are at 4850-4875; 4975-5000 and 5100-5150 while short squeeze to come in at 4700-4650.

Moses Harding  

MARKET PULSE - 28 NOV 2011

Markets in consoldation mode:

Some feel-good developments in the Euro zone has pushed the markets into consolidation mode. However, bail out financial support extended by IMF/ECB may not be good enough to remove the strong bearish set up in the market. What next?

USD/INR SPOT: The set short term range play within 51.50-52.50 is valid. We have already seen a sharp reversal from close to 52.50 and is in prepartion of extension into lower end. Till fresh news come in, it is good to sell at 52.35-52.50 (to cover 1-3M receivables) and to buy at 51.65-51.50 (to cover 3-6M payables). I would not be surprised to see RBI on the bid at 51.50 to release rupees into the system.

EUR/USD: We have already seen a nice bounce from the 1.3250-1.3200 support zone (and our t/p level for shorts entered above 1.34). The bounce from 1.3210 is now facing resistance at sell window of 1.3325-1.3375.
In the near term, weakness into 1.3150 is very much on cards not ruling out extended weakness into 1.3000/1.2850. For now, let us look to sell at 1.3325-1.3400 (stop above 1.3425) for 1.3150.

USD/JPY: Got a boune from buy zone of 77.25-76.75 but finding it difficult to take out resistance zone of 77.75-78.00. Let us watch 77.50-78.50 with test/break either-way to attract. The expected move into 79.50-80.00 is valid; hence need to be long for this move.

NIFTY: Good news from Euro zone provided shorts squeeze to drive the NIFTY to higher end of the set range play at 4350-4850. The move from 4650-4850 is at best considered as correction and market should get back to take out 4650 for extension to 4450-4350.

Gold: The reversal from 1710 held well at 1680 and bounce from there was good enough to take out 1710 but expected to stay below 1735. Let us sell at 1725-1740 with stop above 1750 for 1680

NYMEX Crude: It has now traded end-to-end of 95-100. Let us continue to watch 100-103 to hold for push back to 97-95. Play end-to-end.

Moses Harding

EUR/USD UPDATE (23/11)

EUR/USD: Got a decent bounce from 1.3250-1.3200 (low of 1.3210) after giving an exit for short entered at 1.3400. Now 1.3300-1.3350 to hold for gaining momentum for extended weakness to 1.3150  ahead of 1.3000. Look to sell at 1.3325-1.3400 with stop at 1.3425 for 1.3175-1.3125. Correction from here should fail at 1.3225-1.3275 for 1.3000 to complete the move from 1.42-1.30. We may also allow further extension to 1.28 before reversal.

USD/JPY: Found support at 77.25-76.75 zone (low of 77.07) for move into 77.75. Hold long for 78.25-78.50. Over all, move into 79-80 is on cards

Rupee - flash update (25/11)

Rupee held well at 52.10-52.00 buy zone (low of 52.08) has taken out 52.35 for extended run into 52.50. Now, 52.25-52.15 is expected to hold for 52.65-52.75.

Watch EUR/USD support at 1.3250-1.3200. you can exit short entered above 1.3400 at this zone for re-entry at 1.3300-1.3350. No change in expectation of extended weakness into 1.3150-1.3000

NIFTY could not hold above 4750. Allow consolidation at 4650-4750 before down to the set objective of 4450-4350

Intraday market update - 25 November 2011

USD/INR: Second generation reforms (opening up of retail FDI) is good news but it has come in when market is in firm bearish mode. But would consider that anything to help arrest excessive weakness is good at this stage. Intraday, 52.10-52.00 is a strong support zone while 52.25-52.35 will attract supplies. We will watch consolidation at 52.10-52.25 with overshoot limited to 52.00-52.35. Play end-to-end.

EUR/USD: Held well at the sell zone of 1.3400-1.3475 (high 1.3410). Having sliced through strong support at 1.3350; looks set for extension to 1.3150. Exit shorts here and allow bounce back to 1.3250 before down to 1.30.

USD/JPY: Got the exit for long USD/JPY entered at 76.75-76.50 at 77.50. Now, watch consolidation at 77-78. The base is slowing shifting up from 75 to 77 now. Near term target is at 79.50-80. Look to buy at 77.25-76.75 with stop at 76.50 for 78.25-78.50

NIFTY: Held well at sell zone of 4750-4800 and looking weak to test/break 4650 enroute to 4450/4350. Hold short and add at 4775-4825 with stop above 4850 for 4650

10Y bond (8.79% 2021): Watch two-way consolidation at 8.75-8.85%; good to short at 8.76-8.74 with stop at 8.73% and buy 8.84-8.86% with stop at 8.87%

IY OIS: Watch 8.05-8.15% and play end-to-end; test/break either-way should not sustain. Better to pay stay paid for mid December call money move above 9.5%

5Y OIS: Watch 7.25-7.35%. Play from paid side on dips into 7.25 and keep adding on dips into 7.10% (with stop below 7%). Good carry and spike into 7.35-7.40% is on cards.

USD/INR Premium: Pay Jan/Oct below 2.5% (99) and keep adding on dips into 2.25-2.0%. 12M strong support at 3.0-2.90% (S/Oct at 144-139).

Have a great day and good week end ahead.......Moses Harding

MARKET PULSE - SHORT TERM UPDATE

Currency market

Rupee continues to stay in bearish undertone despite RBI’s efforts to “lead” dollar supplies and “lag” dollar demand. The efforts have not gone futile; else rupee would have already moved into 53.50-54.00. RBI has managed to remove rupee’s traction with fall in EUR/USD and NIFTY. Now, the dollar demand (from uncovered payables) is held back and “long” dollars (uncovered receivables) are being closed out. RBI rolled out measures to attract off-shore flows (from FIIs/NRIs) into sovereign/corporate bonds; but given the liquidity squeeze and fear of hard landing of global economy, foreign investor appetite is low. The upward revision in FCNR/NRE interest rates is not enough; despite the revision, it is not attractive. The way is to deregulate and allow the market to find its own mutually acceptable level. Let us await more such measures from RBI to arrest extended weakness into 54-56.

Let us now try to figure out how “low” rupee can go before reversal. The post Lehman crisis pushed rupee down by 33% (from 39.20 to 52.17) in 15 months time. Now, rupee is already down by 20% (from 43.85 to 52.73) in 4 months time, triggered by the Euro zone crisis. The present crisis is much severe compared to the financial crisis of 2008. What is different from then and now (in the Indian context) is the inflation and growth story. Indian economy then was in high growth-low inflation engine and now the reverse; hence RBI’s serious concern to limit rupee weakness and to shield its impact on inflation. So, we can safely assume that RBI will go all-out to control excessive rupee depreciation; thus diluting the risk of fall beyond 33% this time. In the given market dynamics of strong dollar (against major currencies) and weak stock market, Rupee should find its “floor” somewhere at 54-56 before reversal. The hedging strategies need to be based on this belief. The worry factor is the time to reversal. The 2008 crisis saw rupee reversal lasting for 14 months (January 2008 to March 2009). The current crisis being mix of economic; monetary and financial, the time to reversal may be long. Given the rupee liquidity squeeze, RBI will choose to turn dollar buyer to avoid infusion of liquidity through CRR cuts; thus providing kind of price stability at 51-53 till commodity prices start turning towards south.

What is short term outlook? Rupee is expected to start building its traction with (strong) USD Index and (weak) Equity market when RBI exhausts its ammunition to defend rupee. Intervention is not a solution as this will lead to spreading currency woes to money market. Given the strong downward momentum in EUR/USD and NIFTY; it is safe to assume that a strong base is set up around 51. The greenback is expected to face stiff resistance from RBI at 52.70-52.85 to stop posting a new all time low. There is high probability of this rupee support window to give way for extended rupee weakness into 53.50-53.65 ahead of shift into 54-56. It is very difficult to set a reversal point from this zone. One thing is certain; not to stay “long dollars” at 54-56 as reversal from there shall be swift. This would mean importers should cover on extended gains below 52 (into 51) while exporters stay away for 53.50-54.50. It is also clear that USD/INR has moved into a new base at 49-50 into the medium/long term. This is sharply higher from 39 (January 2008) into 44 (July 2011) and now expected to be at not lower than 49. This fits well into the set short term range of 49-54, we discussed in late October and we have already seen a sharp fall from 48.61 (31/10) to 52.73 (22/11); we would have seen end-to-end move but for RBI’s aggressive and stubborn presence. For now, while 52.70-52.85 holds; it is possible to see correction into 51.65-51.00. USD Index will face bit of resistance below 80 for pull back before getting back into the bull trend. It is advised not to chase rupee gains beyond 51.65 (into 51.00) given the complex market dynamics. There will be shorts squeeze (on run into 51.00) and may not be a bad strategy for importers to hedge part with intention to exit at 52.70/53.50/54.50. On the other hand, exporters can hedge part of receivables at 52.70/53.50 with intention to exit at 51.65/51.00. Over all, short term play is expected to stay within 51.65-52.75 with overshoot limited to 51-53.50. It is also possible that RBI provides price stability at 51.50-52.50; having sold huge quantity around 52.50, it would make sense to buy them back around 51.50 to release pressure on rupee liquidity in the system before run into tight second fortnight of December.

EUR/USD is already down from 1.42 to 1.3350 and looks set for extended weakness into 1.3150-1.3000. Over all, the play has been within the set tolerance range of 1.30-1.40 and test/break either-way was rejected straight-away. There is more bad news to come out of Euro zone to maintain firm bearish momentum on EUR/USD. Now, correction into 1.34-1.35 should hold for 1.3150-1.30 to guide consolidation within 1.30-1.35 and await fresh cues to set up directional break-out. The short term bias is however for extended weakness into 1.20-1.1850. USD/JPY is boxed between buy zone at 76.75-76.25 and sell zone at 77.50-78.00. The break-out if any will be for rally into 79.50-80.00 while 76.50 stays protected. Let us continue to play end-to-end of this range and ensure to stay “long” dollars for 79.50-80.00.

Money Market

The squeeze in rupee liquidity is up from RBI’s tolerance level of Rs.25-50K Crores to Rs.1.25 Trillion triggered by shift of dollar credit to rupee credit and fiscal slippage leading to higher market borrowing. Now, currency woes have emerged to add to pressure. If these factors remain valid for some more time, the risk is of trigger of additional LAF counter at 9.5% to drive call money rate into 10%. There will be upward push on the shorter end of the money market rate curve pushing the 3-12M curve into 10.0-10.5% by mid December.

Bond market is weak driven by inflation worries; tight liquidity and excess of supplies over demand. Banks are already holding over 6% of NDTL as excess SLR which is now being funded through Repo/CBLO counter. 1Y bond yield is in stable mode at 8.75-8.85%. There is risk of extension into 9%+ on spike in call money rate from 8.75% to 9.75%. RBI will maintain price stability in 10Y bond yield at 8.75-8.90% through balancing act between OMO and auctions. The downtrend in US Treasury yields and rally in USD will be bond supportive; thus setting up bias for move below 8.75%. Over all, Bond market is in better shape with limited price volatility. The short term outlook is mixed; weak at shorter end and steady in the longer end of the curve. Let us watch 1Y at 8.75-9.0% with bias into higher end and 10Y at 8.75-8.90% with test/break either-way difficult to sustain. The risk factor of 10Y bond yield spike over 8.90-9.0% will be on confirmation of fiscal deficit moving into 5.5% (against target of 4.6%) and additional demand for funds from the system.

OIS rates are steady at 8.10-8.20% (1Y) and 7.25-7.40% (5Y) attracting good bids at lower end driven by tight liquidity; high short term interest rates and attractive bond spread while move into higher end is attracting receiving interest on expectation of CRR and/or rate cut in Q4 if not before. Let us continue to track this range and play end-to-end. Rate cut post trigger of additional LAF counter may delay the expected move into 7.90% (1Y) and 7.10% (5Y).

Commodity market

Gold has traded end-to-end of 1680-1710 and the bias is for extension into 1650-1635 which should hold. Let us maintain our strategy to sell 1710-1725 with stop above 1735 and buy at 1650-1635 with stop below 1625. Over all, consolidation within 1630-1730 would be in order. NYMEX crude is also in consolidation mode at 95-100. Let us continue to stay with the set strategy to sell 99-102 with stop above 103 for 93-90. Over all, sideways trading within 90-100 will be in order and prepare for shift into 80-90 in due course.     

NIFTY

We are in the fourth cycle since entry into 21^st Century. The first cycle was the economic prosperity rally driving the NIFTY from 849 (low of September 2001) to high of 6357 (January 2008). The second cycle was the collapse triggered by post Lehman financial crisis to drive the market down to 2252 (by October 2008) in short span of 10 months. This was followed by a third cycle to provide relief rally to 6338 (November 2010). We are now in the fourth cycle down to 4650 in a year’s time; thus seeing 2 cycles of bull rally and now in the second cycle of bear run. The need now is to study this fourth cycle to find out the reversal point for the fifth cycle which will be third round of bull rally.

The financial crisis of 2008 resulted in fall of 65% when it was not difficult for Central Banks and Governments to bail out the financial system to protect the global economy from gloom. Now, we are in a crisis covering sovereign; economic; monetary and financial issues. The sovereign rating downgrade of the developed world has begun; none seem to fit into AAA category. The Euro zone woes have already hit the western markets exerting severe growth pressures; thus diluting the efficiency of their monetary/fiscal dynamics. The lower/mid layer of so-called group of developed countries are facing sovereign crisis. The spill-over of these woes to emerging economies cannot be wished away. China is already preparing for hard landing. India’s growth momentum is slipping from over 9% to below 7%. While other emerging economies do not have worries on inflation and currency; India is struggling to guide soft landing on headline inflation and to arrest excessive currency weakness. All these factors have lead to fall in NIFTY by 26% or so since November 2010. If a financial crisis can result in 65% fall before reversal, the present crisis can lead to much more; which is a big concern at this stage. As said many times, we have long way to prepare for reversal. The reversal cycle of 2008 lasted for just 10 months; now we are already over a year with no signs of “floor” in sight with risk of turning from bad to worse. Given this expectation, investor appetite will be low; most strategic investors have not only lost time value, there has been deep erosion in the asset value. Over all, it will be very safe to assume that we are not in good times; hence the need to allow much deeper correction from current. The next objectives for this may be around 3900 ahead of 3200. The hard landing of Indian economy is inevitable and ideally growth momentum should not go below 6.5% given the strong domestic push. Inflation should settle down around 7% or so; thus Indian economy will continue to stay with low growth-high inflation scenario for extended period of time. Let us now believe that despite the severity of the current crisis (relative to 2008), the fall should not extend beyond 50%. It would be prudent for strategic investors to stay away for extended fall into 3900-3200. Cash is king now and good to stay invested in short term; high yield fixed income assets (7-30 day Bank deposits are priced at 8.5% with upward bias and liquid funds are yielding over 9%; considered good to park monies there).

For now, it is possible that we have moved into a new range of 4350-4850 and the bias is clearly for move into the lower end. The strategy is continue to play from “short” side; buy only to book profit with intention to re-enter. Any reversal above strong 4675-4725 support zone triggered by “shorts squeeze” will be good selling opportunity with stop above 4850. Strategic players can sell in two lots at 4750-4775 and 4825-4850 with stop above 4875. It is a 100 point sacrifice trade for a reward of 400-500 points. Having run the shorts from above 5350 to 4650; it is worth it to try again.  

Will be away next week.  Next update in the second week of December.

Moses Harding

MARKET PULSE - INTRADAY UPDATE 23NOV11

EUR/USD: The first t/p objective met at 1.3350 (low of 1.3318) on shorts initiated at 1.3575-1.3625. Now, correction process should fail at 1.3400-1.3475. Reinstate shorts at this window with stop above 1.35 for next pit stop at 1.3150 (ahead of 1.30).

USD/JPY: The bounce from above 76.50 (our buy entry was at 76.75-76.25) fell short of t/p zone at 77.50-78.00 (high of 77.40). Let us continue to watch the set buy and sell zone

USD/INR: RBI strongly defending 52.40 to prevent posting a new all time low. RBI measures have arrested an extended run into 53.50-54.00 but could not reverse the trend into 51.50. Let us continue to watch buy zone of 51.50-51.00 and sell zone of 52.50-53.00. The market has so far traded between 51.70 and 52.58 (falling short of either side).Watch consolidation between 52.00-52.50. The risk of extension into 54-56 remains valid

NIFTY: NIFTY has bounced from 4640 (after slicing through the 4725-4675 support zone). It is shorts squeeze.  now, while 4725 holds, next objective is 4450-4350. New range to play 4350-4850. Sell correction into 4725-4825 with stop above 4850.

Moses Harding 

Financial Tsunami in the making

It is tough to navigate against strong headwinds......tough times ahead!

RBI is looking at all options to “lead” foreign currency supplies and “lag” foreign currency demand (into the FX market) to arrest run-away rupee weakness which will lead to hard landing of the Indian economy. In its effort to limit excessive one-way move; repeated rounds of interventions have not yielded desired results as rupee is already down from 48.61 (31^st October) to 52.73 (22^nd November) at an alarming rate of 8.5% in short span of time (annualised rate of over 140%). It is unfortunate that RBI is left to fight against strong headwinds both from domestic and external sectors. While the fundamentals are very weak triggered by low growth; high inflation; tight liquidity and high interest rates, the structural woes are severe. The market stake holders are already in dollar oversold mode driven by leading of export receivables; lagging of import payables; uncovered short term carry trade flows and un-hedged interest cost reduction structures shifting rupee liability to dollar liability. RBI rolled out measures to pull in dollar flows from foreign investors through relaxation in investment norms such as higher limit; new products and no restriction on residual maturity. Given the very low investor appetite with foreign investors; there is no tangible benefit from these measures.

There will be more such measures in pipe-line having already lifted the cap of USD 100 mio net supply position to enable companies to increase their “short dollar” positions. The merit of this move will not be known now; as further rupee depreciation will add to financial woes of these companies. The pipe-line measures should target addressing dollar liquidity squeeze and supply side issues. More important ones are deregulation of FCNR/NRE rates and lifting of “cap” on off-shore borrowing limits for Banks. These can provide instant results with low lag time. What can be the impact of these measures on the rupee? It can definitely result in reducing the momentum to the fall. But for some of the measures already rolled out, rupee would have posted another historic low above 53.50; thus has prevented things moving from bad to worse. The reversal from bad to good is not going to be easy given the weak fundamental and structural dynamics of the domestic and global economy.

The strong headwinds are there to stay for more time, may be 6-12 months. The immediate concern for RBI would be to arrest spread of currency woes into money market. There is already risk of overnight MIBOR shooting past 9% ahead of trigger of additional LAF counter (at 1% above Repo Rate). This would mean that call money rate can move into double digit by second fortnight of December when advance tax outflows hit the system. It would be extremely difficult for RBI and the Government to arrest simultaneous downward pressures from equity; currency and money markets while struggling to address low growth; high inflation issues. The rough ride so far since July 2011 is becoming tough and difficult to navigate. It may not be a financial Tsunami in the making but need to tighten the belts to avoid damages from hard landing!

Moses Harding

Rupee update

RBI's aggressive presence has prevented rupee posting another all time low above 53 and was not good enough to guide a reversal into 51.50-51.00. It is not going to be easy to drive rupee up against weak EUR/USD and NIFTY. There is huge demand from NDF arbitrage as well.

Another issue is that FX woes are spreading to MM. Call money above 9% is matter of time. The risk is of trigger of additional LAF counter at 9.5% to push overnight MIBOR into double digit.

Strong bearish set up across currency; money and equity market.................cash is king.

Moses

NIFTY update - 23 NOV 2011

NIFTY sliced through strong support zone of 4725-4675 (low so far 4640). Trail shorts entered above 5350 to 4750. The next near term pit stop at 4450-4350. Range to play now is 4450-4750. Take care. Good luck.

Moses Harding

Intraday market update - 23 November 2011

Rupee: It is a two way move between 51.50 and 52.75. There is tremendous interest both sides. RBI is seen aggressive to arrest built up rupee weakness in traction with weak EUR/USD and NIFTY. EUR/USD is just above support zone of 1.3425-1.3350 and NIFTY holding above support at 4725-4675. There is build up of  momentum for move into this range and prepare for test/break of lower end into next pit stop at 1.3150 and 4450. Rupee bulls are strongly shielded by RBI. Because of that arbitrage in 3M NDF has widened to 35 paise; thus RBI dollar sales may not be very effective. However, fear of RBI's intervention has helped in two counts (a) there has been good profit booking on long unwinding and (b) dilution in shorts squeeze in anticipation of RBI's triggered move into 51.50-51.00 or below. The demand side is now from NDF bids; weak EUR/USD into 1.3425-1.3350 and weak NIFTY into 4725-4675.

Moses Harding

MARKET PULSE - 23 NOVEMBER 2011

Currency market

Rupee has now moved into uncharted territory above 52.18 to post all time intraday low of 52.73 and all time daily close low of 52.30. The reversal from intraday low into 52.30 was triggered by late evening news of RBI meeting oil PSUs dollar demand from its books while the traction with correction in EUR/USD (from 1.3470 to 1.3550) and in NIFTY (from 4780 to 4850) was low. What next? We have already shifted into a new near term range of 51-54 with next objectives at 53.50-54.00. The USD Index is in bullish mode despite weak US fundamentals. This is mainly on build up of economic; monetary and fiscal pressures on the Euro zone with no signs of roll out of concrete rescue packages. It is also believed that it is matter of time before France and Germany get sucked into Euro zone woes. It would need strong outperformance of Euro zone over US zone to get rupee back into its bull phase; which is not on cards right now. Therefore, it is important for RBI to think different to dilute rupee bearish undercurrent; as rupee weakness beyond 52 (and into 54-56) will hit the economy very hard. It is essential to get the focus back into 49-52. Having said these, we need to see how effective RBI’s measures would be to counter strong USD Index (weak EUR/USD) and weak equity market. While RBI’s actions will provide bit of comfort to rupee bulls; it is important for EUR/USD to hold its weakness above 1.3350-1.3425 support zone and NIFTY above strong support zone of 4675-4725. There will also be issue from widening arbitrage between offshore NDF and onshore OTC; creating demand for dollars. 3M NDF dollars is already trading at premium of over 30 paisa which is attractive and easy money. While we watch impact of RBI’s action on rupee; the market is expected to stay volatile in the immediate term within 51-53. Strategy for importers is to cover 6-12M payables on spot gains into 51.50-51.00 while exporters stay away for 52.75-53.25 to cover 1-3M receivables. The risk factor to RBI’s measures will be from NIFTY weakness below 4700 and EUR/USD fall below 1.3350; which are high probable occurrence. We will also await measures from RBI such as deregulation of FCNR/NRE interest rates; lifting the “cap” on off-shore borrowing limit for Banks; issuance of rupee denominated corporate bonds to overseas investors; open up USD counter to Banks to fund PCFC etc. These measures will be more effective than RBI’s physical intervention or direct selling of dollars to oil PSUs. Opening up of access to FII/NRI investor community into long term corporate/infra bonds could do little to help rupee at this stage; no investor will wish to take cross-border exposure without currency hedge. Other than being dependent on EUR/USD and NIFTY factors (for reversal in bearish set up on rupee), it is important for RBI to infuse dollar liquidity to push forward premium higher to make value of forward dollar attractive to exporters. It is also not correct to send panic signals into market through restrictions in forex operations (by Banks and/or other stake holders) that could trigger short dollar squeeze. Rupee bulls should wish and pray for EUR/USD holding above 1.3425-1.3350 support for taking out 1.3550-1.3625 resistance window for 1.3850-1.3900 and NIFTY to hold at 4725-4675 for reversal into 5150-5200 to get the focus on rupee back into 49-52; else weak fundamental and structural dynamics would keep rupee bear trend in play into short term. As of now, we keep our fingers crossed and allow couple of days to get a clear view on the trend.

EUR/USD is boxed at 1.3425-1.3550 with no momentum to guide test/break either-way while USD/JPY found support above 76.50 for 77.30. The set sell zone of 1.3550-1.3650 and buy zone of 76.75-76.25 has held well so far and it is expected to hold for extension into 1.3350 and 77.75-78.00 where it is considered good to exit and await fresh cues. Having said this, the near/short term bias is for extended dollar strength into 1.3150-1.3000 and 79-80 to push USD Index into 80.

The strong exchange rate play pushed premium down below the strong support of 4% in 3M and 3.00% in 12M (low of 3.5% and 2.5% respectively) but bounced back strongly for close at 4.5% and 3.1% respectively. There is not enough dollar liquidity in the system for cost effective conversion of FC sources into Rupee uses. RBI’s support to infuse rupee liquidity through OMOs has cut the interest rate play on premium in the longer end; thus squeezing the 3X12M premium around 2.5%. “Operation RR” (Rupee Rescue) and resultant demand for forward dollars (from shorts squeeze and NDF arbitrage) will now push 3M premium back into 5.5-6.0% and 12M into 3.75-4.0%. Having said this, if rupee’s fall extends into new territory  (driven by weak EUR/USD and NIFTY); then we get the focus back into 4% in 3M and 2.5% in 12M. For now, let us watch 3M at 4-5% and 12M at 2.90-3.40%. While the immediate bias is for move into the higher end tracking initial spot rupee gains, cannot rule out sharp reversal if rupee gets back into bear trend tracking weak EUR/USD and NIFTY. Hence, the need is to keep a close watch on EUR/USD and NIFTY. Given the lack of clarity and mixed signals, staying paid on 3X12M between 2.50-2.0% is too good to ignore both for importers and for ALM play.

Commodity market 

Gold lost its steam to slice through strong support at 1710-1680 (low at 1665) but could not sustain there for back into 1680-1710. It is now important to hold above strong support at 1645-1635 to retain its bullish undertone for visit back to 1790-1810. Given the weak global cues; Gold is expected to retain its safe-haven status. Let us stay away for a while and watch consolidation at 1645-1730 and await more cues to get firm grip on directional break-out. Fleet footed traders can look to buy at 1650-1635 with stop below 1625 and look to sell at 1710-1725 with stop above 1735.

NYMEX crude failed at the set resistance/sell zone of 100-103 for push back into support/buy zone of 97-95. While two-way sideways trading mode within 95-100 will be in order at this stage; bias is for getting back into consolidation mode at 80-90 when Iran related fears (and worries) are out of the way. The strategy is to sell rally into 99-102 with tight stop for push back into 95-90.

Bond/OIS market

The market fundamentals are mixed; bearish set up triggered by tight liquidity; high interest rates and inflationary pressures (driven by weak rupee and high commodity prices) are countered by sluggish growth momentum and rate cut hopes. This brings the structural issues into play; demand-supply mismatch. The market is already in excess SLR investment mode of around 6% of NDTL with limited investment appetite for pipe-line RBI’s supplies. The demand has shifted into the shorter end of curve given the global economic woes. RBI is working its way through issuance of OMOs to bridge demand-supply mismatch. The quantum has to be huge (over Rs.1 Trillion into end of H2) to arrest spike in 1Y bond yield above 8.85% and 10Y above 9%. There would be good investor appetite (both from domestic investors and FIIs) in the shorter end on hopes of RBI getting into rate cut mode before March 2012. 1Y yield at 8.85% is not bad against 1Y OIS hedge around 8.10%. The lower 1Y forward premium below 3% provides good return on LIBOR on fully-hedged basis for foreign investors. The extension of dollar strength against major currencies will also set in to provide support to bond market. The liquidity squeeze has now shifted from dollar to rupees and will remain valid into end December 2011 and further into March 2012. Taking all these together, it would be in order to look for consolidation in 1Y bond at 8.75-8.85% and 10Y at 7.75-7.90%. Given the weak rupee and high commodity prices; headline inflation is not expected to come down in a hurry and would stay at elevated levels for extended period of time. It would be tough for RBI to address growth pressures and inflation worries at the same time. But, it is possible that priority will shift to growth on import of economic woes from the West into India. For now, let us watch two-way sideways trading mode in 1Y at 8.75-8.85% and 10Y at 7.75-7.90% with test/break either-way to attract. The strategy is to stay invested in 1Y at/above 8.85%; buy 10Y bond at 7.87-7.90% (for OMO) and sell 10Y at 7.80-7.75% (for auction).

OIS rate moves is boxed between attractive bond spread and rate cut expectations; thus providing strong support in 1Y at 8.10% (bond spread of 75 bps) and 5Y at 7.25% (bond spread of 160 bps). The resultant upward pressure is facing resistance at 8.15% and 7.35% respectively. Now, RBI’s support to rupee will push the overnight MIBOR and short term rates up; thus providing extended run into 8.20-8.25% (1Y) and 7.40-7.45% (5Y) which should hold. However, it is matter of time for shift of operative Repo rate from current 8.5% to 7.5% to push OIS rates into the short term objective at 7.90% and 7.10% respectively. For now, let us watch 1Y at 8.10-8.20% and 5Y at 7.25-7.40% with recommendation to play end-to-end with tight stop on break thereof. Strategic players can build 5Y received book at 7.40-7.45% (with stop above 7.5%) for 7.15-7.10%. It is good to get into bond swap trade in the 1Y tenor; buying bond at/above 8.85% with OIS hedge at 8.10% (as protection to possible spike in call money rate triggered by RBI’s intervention in FX market and further squeeze in liquidity on shift into second fortnight of December).

NIFTY

Having taken out strong support at 4850, NIFTY is holding above 4750 (low of 4764) for close at 4812. It would be in order to allow bit of consolidation after posting a sharp reversal from above 5350. It is difficult to get a single positive factor to look for bullish reversal in NIFTY. The domestic factors are dominated by low growth; high inflation; tight liquidity; high interest rates and weak rupee. Now, import of economic woes from the West to Emerging markets has come into play to add momentum to bearish undertone. We have miles to go for shift into stability ahead of bullish reversal. The investor appetite will be very limited for equity assets and the preference will be for short term; high yield fixed income. The exit target for first lot (on our shorts above 5350) is met at 4800 while retaining the balance with trail stop above 4950 (watch this space for t/p target). It is matter of time before we move into strong support zone of 4725-4675 but not convinced to expect strong reversal from there. Let us now watch consolidation at 4700-4900. Beyond there, an extension into 4450-4350 is on cards. The strategy is to sell correction into 4850-4925 with stop above 4950.

Moses Harding

MARKET PULSE - Intraday update 22 NOV 2011

Rupee: Having entered new territory; rupee is now in consolidation mode at 52.50-52.75 with next pit stop at 53.45/54.10.

EUR/USD: Struck in 1.3425-1.3550 consolidation mode. Play end-to-end; good to sell at 1.3550-1.3600 with stop at 1.3625 for 1.3425/1.3350. The near term bias is for extension into 1.3150-1.3000

USD/JPY: Good support at 76.50 and strong resistance at 77.75. Play end-to-end

NIFTY: Watch consolidation at 4725-4850 with immediate term bias for extension into 4675. The next major pit stop at 4450-4350

NYMEX crude: Came off nicely from sell zone at 100-103 into buy zone at 97-95. Watch consolidation at 95-100 before getting into 90-80.

Gold: Pierced through strong support at 1680 but manged to recover. Watch 1640-1710; both ends staying safe.

Special update on rupee

Rupee out of control....no quick fix solutions on hand

Rupee missed the all time low of 52.18 by a whisker but posted daily close above 52 for the first time; down by 19% since August 2011. The one-way run from 43.85 to above 52 is excessive. RBI’s efforts to cut the excessive one-way move have been futile. The unfortunate part is that there is not a single factor to bring the rupee bulls into street who was in total control till July 2011. There has been sudden reversal in rupee fundamentals driven by widening trade gap and reduced capital flows. The structural factors too turned against rupee through uncovered imports; un-hedged foreign currency carry-trade liabilities and shift of forward market into demand driven mode. RBI’s ability to intervene is also hampered by squeeze in system liquidity and limited dollar reserves in its balance sheet. The big blow came in the form of shift of economic woes from the West to the Emerging markets exerting downward pressure on growth momentum. The resultant run on equity market added to rupee woes. The hit on rupee is severe as most other peer group economies run trade surplus and stay less dependent on capital flows.

Currency depreciation is not a worry for economies running on low inflation engine and trade surplus. It is demonstrated that arresting currency appreciation is much easier compared to preventing run-away depreciation. We are now burdened with issues of high inflation and widening trade gap. Capital flows come in attracted by high growth and prudent fiscal management. The pressure on growth and slippage in fiscal deficit has cut the capital account flows. Moreover, the investor community from the Western economies is struggling for breath. All these issues cannot be addressed overnight; it takes a long time. While India is burdened with these fundamental issues, the structural issues are no better. The forward market has shifted from supply driven to demand driven mode; low premium is not good enough to sell dollars forward when rupee is down at alarming rate. Given the dollar liquidity squeeze in the system, FX forward premium will remain low to cover liquidity premium and higher credit spread. The shift of credit from foreign currency to rupee has added to squeeze of rupee liquidity. Both these factors would limit RBI’s ability to intervene both in the spot and forward market. Taking all these together, it is obvious that it is not going to be easy to defend rupee depreciation. It is a situation of getting caught between the devil and deep sea. There are lot of lessons to learn. It is important to maintain low inflation; high growth engine and run manageable trade deficit to avoid excessive dependence on off-shore liquidity. It is also important for companies to stop looking up to RBI intervention for their misdeeds.

What next? Rupee is now dependent on reversal in dollar strength against major currencies and release of bearish set up in the equity market. The sharp down move in EUR/USD from above 1.42 to below 1.35 and NIFTY move below 4850 are danger signals. It is important for EUR/USD to recover its strength above 1.40 and NIFTY above 5350 to provide reasonable correction in USD/INR into 51-50. The probability of this expectation becoming true is not high as downward pressure on EUR/USD and NIFTY is huge driven by Euro zone crisis with no signs of viable solutions to bring it back on its feet. It is possible that rupee has shifted to a higher base of 51 with next objective at 54-56. Definitely, this is not going to be liked by many (except those exporters who run uncovered receivables) but it is fact that rupee weakness would have been arrested at below 50 if there were options on hand to defend. So, we may need to be prepared for short term range play at 51-56. Aggressive intervention by RBI in the spot market will lead to higher call money rate and widening of arbitrage between off-shore NDF and on-shore OTC while selling in the forward market will push the forward premium down to widen the demand-supply gap in the forward market; thus exerting additional pressure on the cash market. The low FX premium will increase the cost of export credit as well. The only option is to open up the NRI gate by deregulation of FCNR/NRE interest rates. The release of dollar liquidity from NRIs will be positive for rupee. It may not be prudent for RBI to bring in restrictions on Forex operations to cut the dollar demand. Over all, there are no clear cut solutions to save rupee from distress and let us tighten our belts for hard landing!

Moses Harding

   

MARKET PULSE - 21 NOVEMBER 2011

Shift of economic woes from the West to the East......Cash is king

It has been a roller coaster ride since 2001. First, there was economic prosperity for the East from the West; then shift of economic power to the Emerging markets and now spill over of economic woes of the West to rest of the World. The global economic capacity expanded multi-times during this period for overall financial prosperity. The reversal of good times since 2008 triggered by financial crisis in the US extended into financial and sovereign crisis in the Euro zone; and now threatening the economic viability of the emerging nations. Given the magnitude of the crisis, it is obvious that there are no quick-fix solutions; revival process will be a long-drawn struggle, thus causing severe damage to the investor and consumer confidence. The resultant impact on the global economies and market will be very negative. The built-up capacity will go idle with global economy shifting into below par capacity. There is no case for capacity expansion; hurting job and wealth creation. The fiscal capability of the Governments will come under pressure; squeezing government expenditure and exerting downward pressure on growth momentum. The capacity to invest and consume will be down significantly; thus impacting the top-line and causing margin squeeze. Over all, the market dynamics are complex and roll-out of viable supportive measures seems difficult at this stage. The only positive factor is the hope of joint actions by the West and Emerging economies to save the globe from economic disaster!

What do these mean to global markets? All assets classes will be under pressure. The credit spread; liquidity premium and tenor spread is already high in the Western markets. EMs are in better shape right now; but there are strong signals that impact will be felt soon here in the absence of flow of liquidity and consumer demand from the West. The worst hit will be equity assets with pressure on top-line business; profitability and growth momentum. The shift into sustenance mode in the global economies, real estate assets will come under severe pressure. Economies maintaining deficit in Trade and Current Account will face severe pressure on domestic currency. The resultant impact on the inflation and the need to maintain affordable interest rates to support growth will push up liquidity premium and tenor spread; thus setting up extended bearish run on medium/long tenor fixed income. The market dynamics are mixed in commodity assets. Gold is likely to retain its safe haven status in the absence of confidence on the West; US Dollar has lost its default safe-haven status and investors have very little option to choose. Taking all these together, it will be prudent to stay away from equity; real estate and medium/long term fixed income. There is risk of losing time value and erosion in asset value. The most sensible investment strategy seems to be stay in cash and park them in high yielding short term fixed income assets. There is guarantee of positive returns; the strategy is to stay conservative (low credit risk/low return) when the road ahead is complex and unclear. Investors’ preference will be for sovereign bonds, Bank Fixed Deposits and Gold.

What is the near term impact on markets?

Currency market

Rupee almost met the first target of 51.50 (low of 51.40) and shifted quickly from the lower end to higher end of set short term range play at 49-52. The fundamentals and market dynamics continue to remain bearish. There is severe pressure on trade/current account; flows into debt capital market is down and not expected to revive soon; FII flows into equity capital market will be down not ruling out reverse flow ahead of their financial year end; forward segment is in one-way demand driven mode with exporters not attracted by lower FX premium and absence of comfort on rupee stability/appreciation; risk of slippage of growth momentum below 7%; inflation continue to stay at elevated levels on higher commodity prices and weak rupee and more importantly fear of downgrade by global rating agencies on shift of economic woes from the West to Emerging markets. Having said these; current depreciation of rupee from 43.85 to 51.40 since August 2011 is excessive.  It would be prudent to allow for consolidation till we get clarity on pipe-line supportive measures by IMF/ECB for revival of the Euro zone. The preference is for consolidation at 50-52 in the near term. Given that it would take a very long time for rupee getting back into appreciation mode; strategy for exporters would be to sell 1-3M dollars on spot weakness into 51.75-52.25 while importers stay away for correction back into 50.25-49.75 to cover 3-6M dollar payables. While it is essential for RBI to supply dollar liquidity into the system to drive the forward segment into supply-driven mode; it is unfortunate that there is not enough rupee liquidity in the system for this action. A quick-fix solution to arrest rupee weakness beyond 52 is by pushing the 3M premium into 7% and 12M into 5%. There seems to be no solution at this stage to address both rupee and dollar liquidity squeeze without one impacting the other in the absence of RBI’s ability to effect aggressive CRR cuts or conduct large OMOs. So, there is no conviction at this stage to look for sharp reversal below 50 and may not be a good risk-reward to chase extended weakness beyond 52. While it is considered good for near term consolidation play at 50-52, the risk of extended weakness beyond all time low of 52.18 is very much in play if not now, definitely into the short term. For the week, let us watch consolidation at 51.00-51.80 with overshoot limited to 50.65-52.15.  It is not wishful to expect all-time low of 52.18 to remain safe in the near term.

EUR/USD moved into the sell zone of 1.3550-1.3650 (high around 1.3615) and USD/JPY down into the buy zone of 76.75-76.25 (low around 76.55) before close of week at 1.3525 and 76.90. Market is in wait-and-watch mode to get clarity on roll-out of stimulus and supportive fiscal/monetary/financial packages. It is also obvious that these measures could at best squeeze the credit spread and liquidity premium but not confirm a quick revival. These expectations into the near/short term will keep the market in consolidation mode for now before setting up directional break-out. Let us stay with the set near term range of 1.30-1.40 in EUR/USD and need to be prepared for two-way volatility driven by news and data. It is prudent for strategic investors to stay aside to get more clarity on directional break-out leaving the floor to fleet-footed traders who can afford to play end-to-end with tight stop on test/break thereof. For now, let us watch EUR/USD at 1.3350-1.3650; while the bias is for extension of Euro weakness into 1.3150-1.3000, cannot rule out gains into 1.3800 before down. USD/JPY will stay in consolidation mode at 76.25-77.50. The downside risks for USD is low (not beyond 75.50) with higher probability of gains into 79.50-80.00. Strategic players can look to sell into Euro weakness at 1.3650-1.3800 (for 1.3150-1.3000) and buy USD/JPY at 76.50-75.75 (for 79.50-80.00).

It was not a surprise to see sharp reversal in FX premium from the set strong resistance/receive zone at 6% in 3M and 4% in 12M but extension below 5% (into 4.5%) in 3M and below 3.5% (into 3.25%) in 12M was unexpected and thus excessive. It was mainly on strong exchange rate play while interest rate play turning neutral on being even on rupee and dollar liquidity squeeze. What next? The exchange rate play on extended rupee weakness into 51.90-52.15 would exert downward pressure on premium but extension below 4.5% (3M) and 3.15% (12M) is not expected to sustain. It is time to unwind 3M receive book entered at 5.75-6.0% at 4.5-4% to shift PCFC funding back into dollar sources (and release rupee liquidity) while 12M premium move into 3.15-2.90% is too good to ignore for raising cost effective rupee sources from dollar uses. For now, let us watch 3M at 4.0-5.0% and 12M at 3.0-3.5% and not advised to chase extended weakness below the set lower end. This sets up strong support in 3X12M at 2.5% (98) which is a good interest cost effective strategy for dollar import funding on fully hedged basis. 3X12M has slipped into 2.75% from 3.25% which is difficult to sustain; hence importers can use this as hedge while waiting for spot reversal into 50-49 (to buy 3M dollars).

Commodity market    

Gold reversal from 1790-1810 is holding well above strong support at 1710 (ahead of 1680). Till clarity emerges on rescue packages in the US and Euro zone; sideways consolidation mode is expected to prevail within 1680-1760. Over all, given the strong downward pressure on most asset classes; Gold will retain its safe-haven preference. Strategic traders can look to buy at 1710-1680 with tight stop for 1790-1810. The reversal in NYMEX crude from 103 has extended below 98. The break-out from comfort zone of 80-90 into 95-105 is triggered by tensions out of Iran. Any resolution there would drive the market back into 80-90 while G20 will work to arrest bull rally beyond 103-105. Taking all these together, it would be a low risk; high reward trade to sell in two lots at 99-101 and 103-105 (with stop at 106) for 90-85. For now, let us look for consolidation at 95-100 with bias for test/break of lower end into 93-90.

Bond/OIS market

The signals in the Money Market are mixed. The focus has shifted from interest rate to liquidity (and fiscal deficit).  The upward pressure on rates/yields is in play triggered by liquidity squeeze driven by huge pipe line demand for funds from RBI (week-on-week bond supplies) and shift of FC credit to rupee credit. On the other hand, the need for RBI to keep H2 Government borrowing at affordable cost and to counter growth pressures; we can safely assume that market has seen the end of rate hike cycle. But, high inflation; weak rupee and high commodity prices continue to remain as risk factors to trigger rate (and/or CRR) cut. However, bias is in favour of rate cut and liquidity infusion sooner than later. The system liquidity squeeze of dollar and rupee has struck at the same time, making things difficult for RBI to address bearish trend both in currency and bond market. A one-shot solution to address both together is tough. Given these factors in play, Bond market is boxed between rate cut expectations (to arrest run-away weakness) and huge supplies from RBI (to limit excessive gains); thus had set up consolidation play in 10Y bond at 8.75-9.0%. We have seen end-to-end moves of this range and now trading at 8.83%. The strategy of buying into weakness at 8.90-9.0% (for OMO) and sell into 8.80-8.75% (for RBI auctions) stays valid. FII’s interest in the shorter end of the curve will limit weakness in 1Y bond yield above 8.85%. For the week, let us watch consolidation in 1Y at 8.75-8.85% and 10Y at 8.75-8.90%.

OIS rates having come off from the resistance/receive level above 8.35% (1Y) and 7.50% (5Y) has now settled into support/pay zone at 8.10-8.05% (1Y) and 7.30-7.25% (5Y). For reasons discussed above, we look for consolidation play at 8.0-8.20% in 1Y and 7.15-7.40% in 5Y. The bias into the near/short term is for squeeze in the 1X5 spread and we need to be prepared for this; thus the strategy is not to chase 1Y above 8.15% and 5Y below 7.10%. The trade for now is to receive 1Y at 8.15-8.20% (for 7.90%) and 5Y at 7.35-7.40% (for 7.15%). Thereafter, we will fix the 1X5 strategy.

NIFTY

The set first objective of 4850 is met (low of 4837); thus completing end-to-end of set near term range of 4850-5350. Now, we would allow bit of consolidation before meeting the next target at 4700 as we now watch near term play at 4700-5000 with overshoot limited to 4650-5150. The outlook for equity asset class is very negative triggered by weak domestic cues driven by low growth; high inflation; tight liquidity and high interest rates. The risk is also from pass through of economic woes from the West into Emerging markets. There is build up of strong bearish play driven by both domestic and external sectors. Having said these, weakness into 4700-4650 will be good to open the investment account for strategic investors. For now, let us watch consolidation at 4850-5000 in preparation of gaining momentum for 4750-4725. The near term trading strategy is to sell in two lots at 4950-4975 and 5025-5050 (with stop at 5075) for 4750-4700.

Moses Harding

MARKET PULSE - 18 NOVEMBER 2011

18^th November 2011

Currency market

Rupee was in consolidation mode at 50.50-51.00; generating good supplies at 50.90-51.00 (in anticipation of RBI’s support) and attracting good demand at 50.65-50.50 (shorts squeeze from uncovered importers). RBI was also seen selling forward dollars in the shorter tenor (January-February) to prevent extended weakness beyond 51.00. In the meanwhile, USD Index was in two-way sideways trading mode at 77.50-78.50 (but it is matter of time to see retest of recent high at 79.84). The short term fundamentals for rupee are weak with risk of NYMEX crude settling above 100 and NIFTY below 4700. There is no clarity from the Euro zone and even on roll-out of aggressive support measures; it may not result in release of dollar liquidity squeeze in the domestic system. As said, there is not a single positive factor in favour of rupee at this stage (except RBI’s token presence to cushion excessive one-way move) and there is clear formation of medium term base around 49 (sharply up from 39 since January 2008 and 44 since July 2011). For now, we stay put with expectation of short term consolidation at 49-52; not ruling out the possibility of shift into higher base (of 50 or 51) into the medium term. The strategy now is for importers to hedge 3-6M payables in two lots on spot gains into 50.65-50.50 and 50.15-50.00 while exporters stay aside for spot weakness into 51.75-52.25 to cover 6-12M receivables. There are no cues to expect strong reversal in rupee below 50 at this stage and chance of visit into historic high of 52.17 is on cards. It may not be to RBI’s dislike if rupee could settle into consolidation mode at 50-52 till positive cues emerge from external sector. For today, let us continue to look for two-way sideways trading mode at 50.65-51.10 with overshoot limited to 50.50-51.25.

EUR/USD failed at resistance zone of 1.3550-1.3650 but holding well at immediate support zone of 1.3400-1.3425 while USD/JPY is in consolidation mode at 76.75-77.25. No change in strategy as we await EUR/USD move into 1.3150-1.3000 and USD/JPY reversal into 79-80. The strategy for now is to sell EUR/USD at 1.3550-1.3650 for 1.3150-1.3000 and buy USD/JPY at 76.75-76.25 for 79-80. While short squeeze in EUR/USD is expected to provide support above 1.3350; it would be matter of time for extension into 1.3150 while bounce from there will find 1.3450-1.3500 difficult to crack. It is possible that we move into near term consolidation at 1.30-1.35 till more cues come in to set up the directional break-out.

FX premium has nicely traded end-to-end of 5.5-6.0% in 3M and 3.5-4.0% in 12M before close at 5.6% and 3.8% respectively. While the interest rate play continues to exert upward pressure; exchange rate play has turned neutral. There is no risk of test/break of higher end till dollar liquidity is back into the system which is seen as low probability occurrence at this stage. So, let us continue to stay with the set range with strategy to fund PCFC book through rupee resources absorbing 3M premium at 5.85-6.0% and pay 12M at 3.65-3.50% for interest cost advantage through conversion FC sources into rupee uses. The relaxation of FII limits in Government and Corporate Bonds without restriction on residual maturity will keep the bullish undertone intact in the longer end. The risk of break higher will be on rupee test/break of historic high at 52.17 which could trigger 3M into 7.0-7.5% and 12M into 5.0-5.5%; hence need to be cautious there. Strategic players can now revert to 3X12M play by paying Jan-Oct at 3.25-3.10% (125-119) for near term target at 4% (155).

Commodity market

NYMEX/WTI crude moved into the sell zone of 99-102 but did not have the momentum to take out the stop at 103 for reversal back into 98. In the absence of strong cues to set up momentum either-way, it would be prudent to look for consolidation at 95-105. Let us stay fleet footed to trade this range by buying at 96-93 and selling at 102-105 with tight stop on test/break thereof. Gold has now traded end-to-end between set resistance/sell zone at 1780-1810 and support/buy zone at 1710-1680. The downward momentum is high tracking higher sovereign yields across the Euro zone. There has been selling across all asset classes to stay in cash. This is the risk factor to trigger test/break below 1680. Let us now shift our attention for consolidation at 1680-1760 and await more cues for setting up directional break-out.

Bond/OIS market

Most targets met; 1Y bond yield sailed into 8.85% and 10Y bond has now traded end-to-end of set 8.75-9.0%; giving good entry around 9% and exit at below 8.80%. The announcement of OMO to prevent extended weakness in 10Y bond above 9% was not a surprise. But, it would not be prudent to expect the bond market getting into bull phase given the negative factors in play; at this stage there is not a single positive factor to get into aggressive buy mode and would rather wait for higher yield pick-up in RBI’s week-on-week auctions. The purpose of OMO is said to bring down the draw down from Repo counter which is sustaining around Rs.1 Trillion despite moving into reporting Friday. The shift into new reporting fortnight; pipe-line bond auctions; advance tax outflows; shift of foreign currency credit to rupee credit and demand for funds from Banks are some of the factors that will keep the pressure on liquidity for extended period. Let us continue to watch 1Y around 8.75-8.90% and 10Y at 8.75-9.0% with immediate term bias for move into upper end. The strategy is to play end-to-end as test/break either-way is not expected to sustain. OIS market moved perfect to the script; to complete end-to-end move of the set near term range of 8.10-8.35% (1Y) and 7.25-7.50% (5Y). Here again, there is no conviction to look for test/break either-way; hence continue to watch sideways trading mode within these set ranges. The bond swap spread of 75 bps in 1Y and 160 bps in 5Y will provide support and possibility of RBI shifting into rate cut mode soon will limit extended weakness. Let us continue to stay fleet footed playing end-to-end moves of the set ranges with tight stop on break thereof. Having said this, the risk is for extended run into 8% and 7.10% respectively which will form a very strong base for shift into consolidation at 8.0-8.25% and 7.10-7.35% into the short term.

Equity market

NIFTY extended its weakness below 5000 for close at 4934; thus setting up a firm bear run into play. Now, there seems to be confirmation of slippage in growth momentum below 7.5% into 7.0-6.5% in the medium term. Moreover, tight liquidity (and higher short term interest rates) into end December will add to downward pressure. Over all, test/break of 4850 into 4700 is just matter of time. We now watch 4700-4950 and set exit levels of 4800 and 4700 for shorts initiated above 5350 with trail stop at 5000. Strategic investors to stay away for the test of lower end of set medium term range of 4700-5700 to initiate one-third of investment appetite. There is no clarity (and conviction) to expect strong reversal from 4700 at this stage; hence do not rule out extended weakness below 4700 when we would set our next entry levels for strategic investors. Fleet footed traders can sell at 4950-5000 with stop above 5050 for 4750-4700.

Moses Harding

Art of managing market risks

Corporate greed in management of exchange and interest rate exposures

The sharp fall in rupee from 43.85 to 50.60 since end of July 2011 has caught most of corporate entities in the wrong foot; depreciation of over 15% in 3 months (at an alarming annualised rate of over 60%) has hurt many. It was normal and business as usual till July 2011 when domestic system felt the dollar liquidity squeeze driven by economic; monetary and financial woes from the Euro zone. Till then, there was good amount of capital flows to bridge the trade gap. The forward segment was also in supply driven mode with exporters leading cover of their dollar receivables and importers lagging their import payments for interest cost advantage. It was not seen sensible then to incur premium to buy the greenback when rupee was seen to be either stable or in appreciation mode. To make things worse, corporate entities were either keeping long term dollar borrowings un-hedged and/or converted their rupee liabilities into dollars. The reward is meagre 2-4% interest cost advantage; unmindful of the huge downside risk from adverse exchange rate movement. There was also strong (and baseless) opinion that market risk is hedged if pipe-line exports are matched against long term dollar liability while it is obvious that it would be relevant only when cash flows are in perfect sync. It is a penny wise; pound foolish strategy and we are already witnessing depressed corporate Q2 performance due to high forex loss provisions.

This is not bolt from the blue; it is repeat of what system faced in 2008-09 when rupee depreciated from 39.20 to 52.15 during January 2008 to March 2009; down by 33% in 14 months time. It is pity that lessons are not being learnt from past mistakes. It is high time for introspection to avoid business margin getting eroded by adverse market risk. The need is to stay prudent and sensible to avoid real losses unmindful of missing out on opportunity gains.

Now, it is possible that USD/INR spot is getting into new territory; base has already shifted from around 39.00 (since January 2008) to 44.00 (by July 2011). The risk of further upward shift into 49.00 is in preparation to set up new trading range of 49-52 in the near term. The market dynamics both from domestic and external sectors are not in favour of rupee getting into its bull phase in the short/medium term. This would mean that getting into uncovered short term carry-trade deals will be of high risk and may not result in interest cost effective solution. On the other hand, extended rupee weakness into 52 would attract long term carry-trade opportunities.

The bearish set up in rupee is triggered by widening current account deficit (escalation in import bill on higher commodity prices and decline in exports); reduced off-shore flows into debt and equity capital market; lower FX premium making forward dollars unattractive for exporters; growth and inflation woes and fiscal slippages leading to possible sovereign downgrade. We need to closely track these factors and look for improvements to get the rupee bulls back on street. The inability of the Euro zone to get out of its woes quickly and resultant dollar strength will trigger extended weakness beyond 52; this is the risk factor stake holders should take into account. The way forward is complex and uncertain; hence it is important for stake holders – importers; exporters and foreign currency borrowers – to run low risk/low reward hedging strategies. It is prudent to stay conservative; hedge exposures with marginal gains and run opportunity gains with pre-set exit levels to avoid downside risks. It is good not to lose monies when making money becomes tough and better to play with prudence rather than being greed!

J Moses Harding

MARKET PULSE - 16 NOVEMBER 2011

16^th November 2011

Currency market

Rupee got back into bear trend from the immediate support above 49.85 to take out 50.35-50.50 for move into the immediate resistance at 50.85 and looks set for extended weakness into the next pit stop at 51.50-52.00; outer end of the set short term range of 49-52. There is not a single factor in favour of rupee with widening trade gap and significant cut in flows into debt and equity capital market. There is also build-up of sovereign rate cut that could trigger reverse flow of hot money FII investments. Euro zone is not getting better and adds further pressure to extension of dollar liquidity squeeze in the system. There is risk of market getting into (dollar) demand driven mode for extended period of time triggered by short (dollar) squeeze by importers and carry-trade positions. While we stay tuned to near/short term range of 50-52; any correction into 50.35-50.00 will attract interest. USD index is also looking bullish in the absence of concrete rescue plans in the Euro zone and move into 80 from current 78.00 is high possibility to provide momentum for rupee fall into 51.75-52.25 (for retest of historic low at 52.17). The strategy for now is for exporters to stay away for 51.75-52.00 to cover 12M receivables (at 53.50-54.00) and importers to absorb correction into 50.35-50.10 to cover 3M payables (at 51.00-50.50). For the day, two-way consolidation within 50.50-51.00 may be in order with bias for test/break of higher end for extended weakness above 51.00 where RBI is expected to provide bit of relief.

EUR/USD failed at 1.3750-1.3850 sell window for one more knock at 1.3525-1.3475 support zone while USD/JPY is in consolidation mode at 76.75-77.25. No change in strategy as we await EUR/USD move into 1.3150-1.3000 and USD/JPY reversal into 79-80. The strategy for now is to sell EUR/USD at 1.3650-1.3750 for 1.3150-1.3000 and buy USD/JPY at 76.75-76.25 for 79-80. While short squeeze in EUR/USD is providing support above 1.35; recovery from there lacks momentum which is not a good signal for the Euro bulls. Over all, there is no change in view of dollar retaining its safe-haven claim till confidence is back on the Euro zone.

The one-way demand driven mode in the forward segment and rupee liquidity squeeze has pushed premium higher into resistance zone of 5.75-6.0% in 3M and 3.75-4.0% in 12M. The interest rate play is strongly in favour of upward pressure and it is unlikely that draw down from Repo counter will move into tolerance level of Rs.25-50K Crores soon. The resultant higher cash/tom premium will dilute the impact from exchange rate play. Over all, the risk of test/break higher beyond 6% in 3M and 4% in 12M is very low; hence would be prudent to unwind paid book there. While we look for two-way consolidation at 5.5-6.0% in 3M and 3.5-4.0% in 12M; the strategy is to fund PCFC book through rupee resources absorbing 3M premium at 5.75-6.0% and pay 12M at 3.5-3.25% for interest cost advantage through conversion FC sources into rupee uses.

Commodity market

NYMEX/WTI crude held well below 100.00 and reversed from the set sell zone of 99-102 (high of 99.40) and now expected to stay in consolidation mode at 95-100 till Iran fears fade away. The expectation of extended weakness into 90-88 is not ruled out; our strategy to sell at 99-102 and buy at 91-88 stays valid. Gold did not have the steam to take out strong resistance at 1790-1810 (high of 1795) and in preparation for extension to immediate support at 1730-1710. Let us watch two-way sideways trading mode at 1730-1790 with overshoot limited to 1710-1810. The bias thereafter is for test/break of higher end for swift move into recent high at 1920. Gold is expected to hold its safe-haven status and is considered a better bet than the dollar for investors.

Bond/OIS market

10Y bond has reversed sharply from over 9% to below 8.90% on fear of RBI intervention to arrest extended weakness in the market; hence the recommendation for strategic investors to buy into weakness over 9%. Having said this, it is not prudent to expect gains beyond 8.80-8.75% and prefer consolidation within 8.75-9.0%. Here again, there is not a single factor to provide strong bond rally. The domestic fundamentals are weak; there is risk of sovereign downgrade which could trigger collapse in the bond market. As a counter measure, it is possible that RBI get into aggressive rate cut and/or CRR cut mode. Therefore, extended weakness in 10Y bond above 9% is a low probability occurrence. The strategy for now is to trade end-to-end of 8.75-9.0% with test/break either-way not expected to sustain. No change in view of looking for consolidation in OIS market with 1Y at 8.05-8.20% and 5Y at 7.25-7.40%. It is prudent to exit received book entered around 8.35% (1Y) and above 7.5% (5Y) on move into the set lower end. Over all, the chance of downside break is higher for near term target at 7.95% and 7.10% respectively.

Equity market

NIFTY quickly sliced through the strong support of 5150 for close at 5068. As said, there is not a single factor to look for restoration of bull rally and any up move will be seen as correction. Now, the market looks set for extension into the lower end of set near term range of 4850-5350. Traders who sold into 5350 can look to exit at 4850-4700 while adding to shorts at 5150-5200. For now, let us shift our attention to 4850-5150. Strategic investors to stay away for the test of lower end of set medium term range of 4700-5700.

Moses Harding