short note on GDP data............29 FEB 2012

It is time to shift focus to growth............

The release of GDP data for Q3 at 6.1% is sending strong negative signals into the ecoomy. This number is sharply down on sequential basis with Q2 print at 6.9%. It is across-the-board under performance with growth in manufacturing sector dismal at 0.4%. It will now be very difficult to meet the FY12 growth target of 6.9%. Over all, FY12 will end with lower than budgeted growth target and higher than budgeted fiscal deficit target.

It is time for the Government and RBI to come together to execute the rescue act soon. RBI is prepared for shift into growth supportive monetary stance subject to stability in rupee and crude oil price. Now, risk of rupee weakness is not in the radar while extended rally in crude oil is not ruled out.

Now, growth-inflation dynamics is mixed. The risk of downtrend in growth momentum into 6.5% in FY13 is much higher than uptrend in headline inflation over 7%. Therefore, the monetary policy stance has to shift from anti-inflation to pro-growth aggressively; not through baby-steps approach.

It is possible that we might see 25-50 bps rate cut along with 50 bps CRR cut on 15th March subject to NYMEX crude trading below 110.

What is the expectation in bond yields in the short term? The first pit stop will be for 1 and 10Y yield to meet around 8%; thus squeezing the negative spread to par. The next pit stop will be downtrend in 1Y yield into 7.75% while 10Y bond yield stays steady around 8%; to build tenor spread of 25 bps. The final pit stop for FY13 will be for stability in 1Y yield around 7.5% and 10Y bond yield around 8%; to build 50 bps tenor spread.

The strategy therefore is to stay invested in 10Y bond on weakness into 8.25-8.35% and not to chase extended gains into 8.05-7.95%. It is also good to stay received in 1Y OIS at 8.20-8.30% and play end-to-end in 5Y at 7.10-7.45% (allowing extension into 7.0-7.55%).

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

Moses Harding

Liquidity squeeze....Is it a crisis?

Liquidity squeeze not to be seen as crisis

There is serious discussion in the market demanding immediate CRR cut from RBI on LAF drawdown hitting a peak of Rs.1.8 Trillion at start of the current fortnightly reporting cycle. Is this a serious problem to expect an immediate policy action ahead of midterm review on 15^th March? It is definitely not. Let us get into details. Initially, it was RBI’s agenda to maintain system shortfall at 1% of NDTL to maintain operative policy rate at higher end of LAF corridor to arrest demand-push impact on inflation. This worked well till October 2011.

The economy faced serious issues from Euro zone crisis since July 2011. The resultant downtrend in growth momentum (from over 8.5% to below 7%) impacted revenue collection; rupee reversed sharply from a position of strength into weakness and shift of credit demand from foreign currency to rupees. The slippage in fiscal deficit from budgeted 4.6% to projected FY12 actual of above 5.6% has caused additional demand of over Rs.1 Trillion rupees on the system. RBI has absorbed Rs.50-100K Crores from the system to defend rupee. There has been sharp increase in the liquidity spread on foreign currency funding; higher spread over LIBOR and higher cost of conversion (of dollars to rupees) has made dollar funding unattractive to borrowers. The 3-4% arbitrage available till October 2011 on dollar funding has now reversed into 1-2% arbitrage on rupee funding. At current 3M FX premium of 9%, it makes sense for exporters to fund in rupees (at base rate of 10.0-10.5%) at all-in dollar rate of 1.0-1.5%. On the other side, importers have also lost the interest cost advantage of shifting sight imports to dollar denominated Buyers/Suppliers’ credit. There has been sharp run-down in the Foreign Currency Loan portfolio of Banks which are repaid through rupee loans.

RBI has no control over the pressure on the market from fiscal deficit. At this stage, there is no case for RBI to defend rupee by selling dollars. The immediate need therefore is to address the structural issue of releasing the demand on rupee credit by shift to foreign currency. There is availability of dollar liquidity given the extended financial support in the western markets and these funds need to be used to address rupee liquidity owes. RBI has more or less exhausted its OMO option; now over Rs.1 Trillion and has also delivered the first round of CRR cut. It may need to use the FX options with the twin objective of releasing rupee funds into the system and bring the cost advantage on dollar funding. It may need to absorb excess dollar supplies in the spot market and also resort to Buy/Sell swaps in the forward market. The risk factor is on possible trend reversal for rupee which is looking very bullish now for test/break of 48.50. But allowing a correction into 49.50 may not hurt the market stake holders; stability at 48.50-49.50 (at worst within 49-51) post the risk of extended rupee weakness beyond 54 (into 56-58) is considered good.

The system is short (of rupees) by an average Rs.1.25 Trillion (higher drawdown from LAF counter at over Rs.1.5 Trillion at start of reporting cycle and down below Rs.1 Trillion by end of cycle); i.e., by 2% of NDTL. It is expected that CRR will be at 3-4% during the course of FY13 to adjust this shortfall. RBI is now seen in a position to absorb escalated demand from the Government through OMO. The current liquidity strain is seen as temporary. It will go worse by second fortnight of March on advance tax outflows but end-of-the year Government spending and shift into FY13 will release pressure significantly. The expectation therefore is for RBI to infuse liquidity through FX market; continue with 50 bps CRR cut and conduct OMO purchases as and when necessary. The rate action will be delayed till April 2012 Annual monetary policy review with close track on commodity prices and ability to execute fiscal consolidation. The growth factor has become pivot to remove worries on fiscal deficit and its impact on liquidity and rates. RBI may not be keen to support growth at the cost of inflation but there has to be a balanced approach to get into a win-win situation. We stay focussed on liquidity and OIL to get better clarity on the way forward.

Happy reading..............Moses Harding 

MARKET PULSE - 29 FEB 2012

MARKET PULSE – 29 February 2012

Currency market

The worry on higher crude oil price and resultant weakness in domestic stock market pushed rupee down (from 48.94) into the set sell zone of 49.15-49.25 (high of 49.30) but could not sustain there for close at 49.07. In the process, exporters got good opportunity to sell April 2012 dollars above 50 (high of 50.08) before close at 49.84. What next? The near term bullish undertone for rupee is marginally diluted on fear of extended rally in NYMEX crude above 110. USD Index too getting good support around 78.20. Both these factors could set up weakness in rupee into 49.35-49.50 considered good to sell July 2012 dollars around 51. There is no risk at this stage to look for extended rupee weakness beyond 49.50 as we stay tuned to near term consolidation at 48.50-49.50. USD Index is expected to crash through strong support at 78.20 into 76.50-76.75 before setting up strong rally; thus expected move into 48.65-48.50 buy window for importers is very much on cards. For now, let us watch 48.85-49.15 with overshoot limited to 48.75-49.25 and the bias into the near term is for one more look at 48.60-48.50 before strong bounce. The strategy is to sell April 2012 dollars around 50 (spot move into 49.20-49.25); sell July 2012 dollars around 51 (spot at 49.40-49.50) and buy March 2012 dollars below 49 (spot at 48.65-48.50). Over all, rupee will continue to remain bullish into the near term tracking high domestic interest rates; liquidity over-hang in western markets and dollar supply driven mode in the forward market attracted by 9.0-6.5% premium across 3-12M tenor.  

USD/JPY nicely traded end-to-end between set sell zone of 81.50-82.00 (high of 81.61) before sharp reversal into the buy zone of 80.25-79.75 (low of 79.99) and got into consolidation mode around 80.50. We highlighted topping out signals above 81.50 for deeper correction into 79.50 before getting into bullish uptrend again. For now, we watch two-way sideways trading mode at 79.50-81.50 with strategy to sell at 81.25-81.75 and buy at 79.75-79.25 with tight affordable stop. EUR/JPY was down sharply from below 110 to 107 but maintains bullish undertone into the near term. The broad trading range now is at 106-111 with test/break either-way not to sustain. Let us be cautious buyer on dips into 107.25-106.25 (with stop below 106) for immediate objective at 110.50-111.50.

EUR/USD is struggling to hold on to its gains into earlier sell window of 1.3450-1.3525 (high of 1.3479) but reversal from there is supported above the buy window of 1.3350-1.3275. Positive developments in the Euro zone lead by aggressive financial support and clear intent to bail out Greece is keeping the underlying bullish mode into the near term for extended gains into 1.3550-1.3625. Beyond there, let us stay neutral and await fresh cues. Let us now watch two-way sideways trading mode at 1.3325-1.3550 with overshoot limited to 1.3250-1.3625. The strategy is to buy at 1.3325-1.3250 and sell at 1.3550-1.3625 with tight affordable stop.

FX premium lost momentum dot at the set resistance of 9% in 3M and 6.5% in 12M before mild reversal which got supported above 8.5% and 6.25% respectively. In the process, March/January failed at the door step of set receive zone of 6.25-6.40% (high of 260) to set up a quick 10 paisa trade for reversal below 250. What next? The interest rate play is in favour of the bulls while exchange rate play has turned neutral. Let us watch consolidation in 3M at 8.5-9.0% and 12M at 6.25-6.5%; test/break either-way to attract. The strategy is to absorb 3M above 9% for ALM play (to fund PCFC from rupee sources) and receive March/Feb at 6.25-6.40% (284-291) with tight stop above 6.5% (296). Fleet footed traders can receive 12M at 6.50-6.65% (with stop above 6.75%) for push back to 6.15-6.0%.

Fixed Income (Bond/OIS market)

System liquidity continues to stay tight with LAF drawdown at record Rs.1.80 Trillion. However, Bond market stayed steady with 10Y bond yield up from 8.18% to 8.23% before close at 8.21%. 1Y OIS rate eased from the set receive zone of 8.23-8.28% (high of 8.24%) but reversal from there found support above 8.15%. 5Y OIS rate was tightly boxed at 7.40-7.45% range. RBI’s preference is to continue with OMO operations instead of delivering CRR cut ahead of midterm policy review to ease current tight liquidity situation; thus announcement of Rs.12K OMO for the week was not a surprise. The OMO expectation has indeed arrested extended weakness beyond 8.23-8.25% at this stage. This should provide temporary relief to bond market to drive the 10Y bond yield into 8.15%.  No change in view as we look for consolidation in 10Y bond yield at 8.10-8.35% (within 8.0-8.5%) into the short term; thus extended gains below 8.15% (into 8.10%) will set up good opportunity to sell 10Y bonds (by replacement of 1Y above 8.5%) as risk of weakness into 8.30-8.35% is very much valid at this stage. For now, let us watch 10Y bond yield at 8.15-8.25%; 1Y OIS rate at 8.10-8.20% and 5Y OIS rate at 7.30-7.45%. The strategy is to sell 10Y bond at 8.14-8.11% (with stop below 8.09%); pay 5Y OIS at 7.35-7.30% and receive 1Y OIS at 8.20-8.25% for near term objectives at 8.28-8.30%; 7.50-7.55% and 8.05-8.0% respectively.

Commodity market

Gold got supported at the lower end of 1760-1835 range (low of 1762) and prepared its move into strong resistance at 1802 (high so far is at 1789). The turnaround from 1760 is positive but lack of momentum for bullish extension beyond 1780 (into 1802) turns the immediate term outlook neutral to look for two-way consolidation at 1760-1800. Let us play end-to-end of this move with tight stop on break thereof. The bias thereafter is for extended move into 1835 followed by bullish extension into 1920. Let us hold “long” entered at 1765-1762 with trail stop at 1775 and watch price action at 1795-1805. 

NYMEX crude did not have the momentum to move past strong resistance at 110 (high of 109.77) but reversal from there was held at strong support above 106 (low of 106.20). As said, extended rally in NYMEX Crude above 110 will not be good for the global economy. There has been serious resistance to this move from the IMF with rumours of release of strategic petroleum reserves from the US to arrest this speculative demand with huge supplies. Let us continue to look for consolidation at 103-110 and prefer test/break of lower end into 97-95 in due course. Strategic investors who rode the move from 95 to 110 can afford to stay “short” at 109-111 (with tight stop above 112) for 97-95.

Equity market

We saw a quick run into the lower end of set near term range of 5225-5575 (low of 5268) and bounce from there attracts good selling interest at 5385-5400 (high of 5391) before close at 5375. The immediate term outlook is mixed despite good buying interest from FII community. The concerns on OIL factor and domestic economic and monetary woes continue to keep domestic investors in risk-off mode. The alternate option in Fixed Income (low risk; high reward) is attractive at this stage. There are uncertainties ahead from midterm monetary policy review (15^th March) and Union Budget FY13 (16^th March). Till then, external factors will provide directional momentum to domestic stock market with FIIs absorbing extended correction while DIIs selling into rallies. For now, let us watch consolidation at 5250-5550 with bias into lower end. The strategy is to trade end-to-end by selling at 5550-5625 and buying at 5250-5175 with tight affordable stop on break thereof. Strategic investors can await correction into 5225-4985 to buy in three lots at 5225/5105/4985 (with stop below 4950) for 5630-5740.

Have a good day ahead..............Moses Harding 

some thoughts into Union Budget FY13

Union Budget FY13....a tight rope walk

It is a tough task to make both ends meet when things around are negative and complex. There has been a sharp slippage in fiscal deficit; estimated to end FY12 at 5.5-6.0% against budgeted 4.6% of GDP. It will be sharply higher on sequential basis against FY11 actual of 4.7% of GDP. The Government may not be blamed for this as the slippage was driven by external sector since July 2011 Euro zone crisis; exerting severe downward pressure on growth momentum from above 8.5% into 7% causing pressure on revenues. On the other hand, there has been cost escalation through increase in subsidies driven by high crude oil and fertiliser prices (and weak rupee). Over all, it is fair to assume that current poor fiscal position of India is triggered by imported factors from external sector on which the Government has little control.

Finance Ministry is in preparation of the FY13 Budget in the midst of woes across political, economic and monetary environments. The UPA (and the Congress) Government is unable to roll-out next generation economic reforms in the absence of support both from inside and outside of coalition. Economic woes are in plenty both from domestic and external sectors. The monetary situation is tough and anti-growth. The overshoot in fiscal deficit and resultant funding of the gap from the market is major cause for the liquidity squeeze and high cost of liquidity. The environment is definitely not in favour of delivery of “feel-good” Budget with no compulsion to deliver populist budget when the next General election is distant away.

The focus (and priority) for this year will be on critical factors to increase revenue to arrest further slippage in fiscal deficit and to maintain it around 5%; effect pass-through of subsidy to consumers to control cost; pull domestic and foreign investments to core sectors to spur growth momentum and boost exports (outside Services sectors) to address Trade deficit and its resultant impact on exchange rate. The need would also be to roll-out catalyst measures to Agriculture; infrastructure and Manufacturing sectors which have huge upside potential.  It is important to maintain stock and exchange rate market in bullish undertone to shift domestic and foreign investors into “risk-on” mode. Therefore, it will be a two point agenda this time; to revive growth momentum and bring in fiscal consolidation.

The stake-holders may need to be prepared for higher excise duties and service tax (with higher coverage) to ramp up revenues. It is expected that pass-through of subsidies in the fuel sector will be aggressive while implementation of Food Security Bill will keep food subsidies at elevated levels. It has to be trade-off between fuel and food subsidies to arrest escalation on the cost side of the budget. Ideally, estimate for FY13 fiscal deficit will be maintained at mid-point of FY11 actual and FY12 estimates; which could be around 5.2% of GDP. There may not be additional pressure on the market with gross borrowing estimated at Rs.5.0-5.25 Trillion (and net borrowing of around Rs.4.5 Trillion). The down-side risk to this estimate will be on strong headwinds from external sector to push GDP growth below 7% (into 6.5%) and inability to attract long-term investments into core sectors.

What is the impact on Money and Bond market? RBI would need to support the government by maintaining system liquidity at adequate mode at affordable cost of liquidity. Having said this, it would be very tough for RBI to guide the operative policy rate from Repo rate to Reverse Repo rate till Government cuts its dependence on the market. RBI needs to maintain system liquidity within the tolerance level of 1% of NDTL to support growth. It is possible that CRR is brought down to 3% by Q3 of FY13 while keeping SLR unchanged. The supply side concerns in the Bond market will build-in tenor spread to the yield curve with gradual downtrend in 1Y yield into 7.5-7.0% and 10Y yield not below 8% during FY13. Over all, shift into FY13 will set up downtrend in short term money market rates for sharp reversal in 3-12M rate curve into 8.5-9.0% from current 10.25-10.75%.

The impact on stock market will be neutral to positive. There will be good investor appetite from external sector and follow-through buying by domestic investors will be needed to provide the desired upward momentum. The current pessimistic expectation on growth and inflation is keeping the domestic investors in “risk-off” mode with investments locked in low risk; high yield Fixed Income assets; aggressive shift into rate cut cycle will bring the funds back into equity market.

The belief (and expectation) is that of limited downside risks and significant upside gains into FY13 after disastrous H2FY12. The headwinds from external sector on domestic growth momentum will ease given the extent of financial support in the Western markets in the form of QEs with commitment to maintain near zero interest rate regime till 2014. On the domestic front, there will be improvement in fiscal deficit on sequential basis; expected to be down from above 5.5% of FY12 into below 5.5% in FY13. Given these limited expectations on the Budget FY13, FM is not expected to send “unpleasant surprises” into the market. Let us stay neutral to mildly bullish on run into Budget FY13.

Moses Harding

Executive Vice President

Head – ALCO and Economic & Market Research

IndusInd Bank, Mumbai  

  

MARKET PULSE - 28 FEB 2012

Short udpate for 28th Feb 2012

USD/INR SPOT: Reversed sharply from 48.94 to 49.30 driven by OIL woes and now in consolidation mode at the set sell zone of 49.15-49.25. There is no change in rupee bullish outlook into the near term with objective at 48.85-48.60. Having sold April 2012 dollars above 50 (high of 50.08), let us watch July 2012 dollars above 51 to sell (spot at 49.35-49.50). No change in looking for near term consolidation at 48.50-49.50.

USD/JPY: has traded end-to-end of set sell zone of 81.50-82.00 (high of 81.61) and buy zone of 80.25-79.75 (low of 79.99) and now at 80.20. The market is now expected to stay in consolidation mode at 79.50-81.50. Let us trade end-to-end buy buying at 79.75-79.25 and selling at 81.25-81.75 with tight affordable stop.

EUR/JPY: fell sharply from high of 109.89 to 107.27 dragged by lower EUR/USD and USD/JPY. Let us stay aside on this pair and focus on EUR/USD and USD/JPY. However, EUR/JPY is expected to hold above 107 for back to 110.

EUR/USD: is in consoliation mode at 1.3375-1.3475. The undertone continues to be Euro bullish for 1.3625-1.3700 while 1.3325-1.3250 holds. Let us play this range end-to-end with tight stop on break thereof.

NIFTY: fell sharply in line with expectation into 5225 (low of 5268). Let us now watch consolidation at 5200-5400 while reversal into immediate resistance at 5385-5400 will look heavy. The bias is into lower end at this stage.

Gold: is in consolidation mode at the lower end of set near term range of 1760-1835 (low at 1762). However, the bounce from here is not convincing at this stage; hence may need to review the immediate term range into 1730-1800 not ruling out gradual move into lower end before getting into bull trend. The short term outlook is for extended gains beyond 1835 into 1920 while 1690-1710 supports.

NYMEX Crude: is holding well below strong resistance at 110 (high of 109.77) with fear of intervention through release of strategic reserves to arrest supply side concerns arising out of tensions in the Middle East. As said, crude above 110-115 is disaster for the global economy; hence would be prudent to allow for correction into 103-100 for near term consolidation at 100-110. Let us play end-to-end of this range.

Have a great day ahead............Moses Harding

Midterm reveiw of monetary policy - some thoughts

The dilemma ahead of midterm review of monetary policy

RBI has done well so far to achieve the immediate objective of bridging the negative gap between growth and inflation. It had to resort to series of rate hikes since March 2010 by pushing operative policy rate from 3.25% to 8.5% to guide headline inflation from above 9.5% to 7.0% with resultant impact of downtrend in growth momentum from over 8% to 7.0%. The expectation now is that both GDP growth and WPI inflation numbers will meet around 7% by end of FY12.

The next agenda for RBI (into FY13) is to arrest downtrend in growth momentum below 7% while driving the headline inflation below 6% which could build investor confidence to support and provide momentum to maintain GDP growth above 7% till emergence of support from external sector. RBI was seen prepared for rate reversal action post delivery of 50 bps CRR cut (on 24^th January) taking comfort from strong rupee and steady commodity prices despite concerns on elevated core inflation. There is already strong headwind to downtrend in inflation from supply side pressures with robust domestic demand despite tight liquidity and high cost of liquidity while the ability of the Government to address fiscal issues is in doubt. Now, higher crude oil price is emerging as major hurdle to put RBI in dilemma on whether or not to shift its stance from neutral to growth supportive monetary policy. RBI cannot afford to shift to growth supportive stance at the cost of inflation that would once again open up negative gap between growth and inflation. Crude oil price is already up by 15% since start of February and underlying bullish tone is strong for extended gains beyond 115 and RBI will take this impact on inflation before shift into growth supportive monetary stance.

RBI would continue to stay concerned both on inflation and growth going into FY13 and as of now bias seems to be on inflation. The external factors are not expected to turn growth supportive in the near future. While RBI’s priority would be to guide inflation into its tolerance level of 4.0-6.0%, it is also important to support the Government in its efforts to address fiscal issues through growth supportive monetary policy. The ability of the Government to address fiscal deficit from the cost side is limited and it is important to quickly ramp up revenues to bridge gap. Given these complexities, it is expected that RBI would continue to focus on liquidity and cost of liquidity. The domestic system is short of rupee funds to the tune of Rs.1.5 Trillion (approx 2.5% of NDTL) against RBI’s comfort of 1% of NDTL. The liquidity situation has not improved despite 50 bps CRR cut and series of OMO bond purchases to the tune of Rs.1 Trillion. The liquidity shortage has become structural issue; hence it is safe to assume that RBI would deliver the next round of 50 bps CRR cut on 15^th March. The cost of liquidity which is very high at 10.25-10.75% across 1-12M tenor is a concern and infusion of Rs.32K Crores through 50 bps CRR cut may not make significant impact on short term money market rates. Nevertheless, the current liquidity pressure being considered temporary till last week of March 2012, RBI may not opt for providing relief at this stage through rate cut. It would be prudent to wait till positive outcome from Union Budget FY13 and possible reversal in NYMEX Crude from $115 (into $95) before trigger of rate cut action. Over all, with lack of clarity on two critical factors of fiscal deficit and crude oil price, RBI will like to keep things simple by delivery of 50 bps CRR cut while keeping policy rates unchanged.

The impact on medium/long tenor bond market may be significant; CRR cut without rate cut is considered negative for the Bond market at this stage with the fear of reduction in OMO purchases. 10Y bond yield eased from 9% to 8.10% on aggressive OMO purchases by RBI despite supply side issues which would extend into FY13. The current negative spread between 1Y and 10Y bond yields (1Y at 8.50% and 10Y at 8.20%) is expected to reverse with downtrend in 1Y yield into 8% and uptrend in 10Y yield into 8.5%; reversal from there will depend on shift of operative policy rate from Repo rate to Reverse Repo rate or start of rate reversal cycle. Over all, shift into FY13 is expected to be good for Money and Bond market as RBI is expected to maintain adequate system liquidity at affordable cost to support growth momentum to set up bullish undertone in stock market and ensure higher revenue collections to arrest slippage in fiscal deficit beyond 5% of GDP.

Moses Harding

MARKET PULSE - intraday review of Weekly update

NIFTY:

Sliced thruough immeidate support of 5400-5385 and brings the next support at 5240-5225 into focus (low so far is 5300 at big figure support). Any correction from now on will stay below 5350 for move into 5240-5225 to trigger the first lot buy at 5225 for strategic investors.

USD/INR Spot:

The greenback bounced from intraday low of 48.95 and set to move into our sell window of 49.15-49.25 to trigger our sale of April 2012 dollars at 49.90-50.00. The bullish undertone for rupee is strong despite risk from OIL factor.

USD/JPY:

Came off swiftly from the set sell zone of 81.50-82.00 (high of 81.61) and now at 80.95 after posting a low of 80.79. It is a counter trend trade; hence play with trail stop at 81.25. The buy entry at 80.25-79.75 is valid.

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

MARKET PULSE - Report for the Week 27 Feb - 02 Mar 2012

MARKET PULSE – Weekly report for 27 February to 02 March 2012

Currency market

Rupee traded end-to-end of “inner ring” of 48.85-49.35 (high of 49.32 and low of 48.93) within the set near term range of 48.50-49.50 for close of week at 48.93. We had already shifted our focus at 48.85-48.60 and asked importers to stay away for this move. On the other side, exporters were asked to sell 1-3M receivables on dollar strength into 49.35-49.50. What next? The dollar supplies both in cash and forward market is huge and there is not enough cash demand to absorb these supplies; thus pushing the market into supply-driven mode and RBI is not yet seen on the “buy side” to pump rupees into the system by absorbing excess dollar supplies. The reversal in domestic stock market is not yet triggered by FIIs while USD Index is struggling to hold on to its gains into 79.50 and looks set for move below 78.00 in the immediate term. Over all, weak dollar; good cash supplies from FII/NRI investors and high FX premium are the major factors providing bullish momentum to rupee. The weak domestic fundamentals driven by high fiscal deficit; high trade deficit and high commodity prices have not yet provided significant headwinds to rupee rally. The immediate focus therefore is for move below 48.85 into 48.65-48.50. Importers can afford to stay away for this move. In the meanwhile, rupee weakness into 49.15-49.25 is considered good to sell April 2012 dollars around 50. For the week, let us watch 48.50-49.25 with bias for move into the lower end and do not prefer conclusive break of 48.50 at this stage given the weak domestic/external fundamentals. The trade strategy is to sell April 2012 dollars at 49.90-50.00 (spot at 49.15-49.25) and buy March 2012 dollars at 48.90-49.00 (spot at 48.60-48.50). It would be good for RBI to absorb excess dollar supplies below 48.50 to bring down the LAF drawdown from over Rs.1.5 Trillion to below Rs.1 Trillion to meet higher demand for rupee funds ahead of financial year end. Having said this, higher crude oil price (NYMEX at $110) may need to be adjusted with stronger rupee to dilute its impact on inflation. Let us stay neutral around 48.50 and await fresh cues to set our focus on the next objective; which could be either extended rupee rally into 47.80 or gradual correction into 49.20.

EUR/USD has nicely traded end-to-end of set buy zone of 1.3050-1.2950 (low of 1.2973) and sell zone of 1.3450-1.3550 (high of 1.3486). In the meanwhile, JPY is extending its weakness both against USD and EUR for move above strong resistance at 80.50 (high of 81.03) and 108.00 (high of 109.23) respectively. The bounce from above 76.00 (USD/JPY) and 99.00 (EUR/JPY) has been really sharp. The strategy to convert rupee liabilities into JPY on rupee weakness into 53.50-54.25 and JPY strength into 76.25-75.50 has been good to yield good results in quick time. What next? EUR is strong and looks good for extension into 1.3600-1.3650 (against USD) and into 111.25-111.75 (against JPY) while USD/JPY expected to lose momentum at 81.50-81.75. There has been bit of temporary relief in the Euro zone with commitment from the Governments to address fiscal issues while Central Banks have done their best to keep system liquidity at adequate mode. However, this situation is not good enough to provide extended gains in EUR/USD above 1.3650 and EUR/JPY above 111.50. Let us watch topping out signals ahead of these critical levels. For the week, let us watch EUR/USD at 1.3250-1.3650; EUR/JPY at 108-112 and USD/JPY at 80-82 with test/break either-way not expected to sustain. The trading strategy is to buy EUR/USD at 1.3325-1.3250 and sell at 1.3600-1.3650; buy EUR/JPY at 108.25-107.75 and sell at 111.25-111.75; buy USD/JPY at 80.25-79.75 and sell at 81.50-82.00 with tight affordable stop. It is possible that we see end-to-end moves within the set buy and sell zones during the week. Let us stay neutral on break-out direction at this stage and would not prefer break-out on the higher side.

FX premium eased from the high of 8.5% in 3M and 6.5% in 12M but found good support above the lower end of the set near term range of 8.0-8.5% (3M) and 6.0-6.5% (12M). In the meanwhile 2X12M (March/January) fell from high of 6.15% to low of 5.75%; thus trading end-to-end of set receive zone of 6.05-6.15% and pay zone of 5.75-5.65%. What next? The combination of interest and exchange rate play should keep downside limited at this stage with risk of test/break of 8.5% (3M) and 6.5% (12M) into 9.0% and 6.75% respectively. For the week, let us watch 3M at 8.25-9.0% and 12M at 6.15-6.65% with test/break either-way to attract. Fleet footed traders can trade end-to-end of these ranges with tight stop on break thereof. Strategic players can stick to 2X12M play by paying dips into 5.75-5.65% (March/Jan at 240-235) and receiving spike into 6.25-6.40% (March/Jan at 260-265).

Fixed Income (Bond/OIS market)

The liquidity situation remains a serious concern for RBI. The LAF drawdown is around Rs.1 Trillion even at the end of reporting fortnight cycle despite injection of permanent liquidity through 50 bps CRR cut and continuation of OMO operations. The risk is now for further squeeze to push the draw down close to Rs.2 Trillion by second fortnight of March 2012 (on combination of tax outflows and higher demand at start of reporting fortnight cycle). Short term money market rates are already up at 10.25-10.50% across 3-12M tenor with risk of overshoot into 10.75-11.0% by then as Banks gear up for build-up of top-line deposits ahead of financial year end. The resultant higher call money rate at 8.75-9.5% and short term money market rates at 10.25-11.0% will add to pressure on 1Y T-bill yield and 1Y OIS rate. However, given the expectation of delivery of next round of 50 bps CRR cut and 25-50 bps rate cut on 15^th March, it is good time for cash surplus entities to lock-in to these high short term rates which will not sustain on shift into first week of April 2012. It is now considered good to stay invested in 1Y T-bill yield at 8.50-8.65% (for 8.25-8.10%). 1Y OIS rate has nicely bounced from the pay zone of 8.05-8.0% (low of 8.04%) but reversal from there was sharp to take out the set receive zone of 8.13-8.16% (high at 8.18%) before close of week at 8.18%. Now, we may need to allow for extended rally into 8.23-8.28% before reversal. Strategic players can look to initiate “received book” at 8.25-8.30% for reversal back into 8.05-8.0%. For the week, let us watch call money rate at 9.0-9.25%; 1Y T-bill yield at 8.50-8.65% and 1Y OIS rate at 8.15-8.30% with bias into higher end.

10Y bond yield is nicely trading end-to-end of 8.15-8.25% range (low of 8.16% and high of 8.24%); move into 8.15% driven by OMO and back into 8.25% to meet bond auction; weekly close at 8.23% despite an unexpected OMO is bearish. There is no strength at the moment to look for extended gains below 8.15%. NYMEX Crude is up by over 10% and its impact on downtrend in headline inflation will be significant. This would delay RBI’s shift into aggressive growth supportive monetary stance. The current liquidity squeeze has become a structural issue and there is need to bring the CRR down to 3-4% to push system liquidity into RBI’s tolerance level of 1% of NDTL (either-way). The support to the Bond market from OMO operations (already close to Rs.1 Trillion) may not be there into the near/short term; thus it would need RBI to deliver rate cut on 15^th March to limit weakness beyond 8.35% (into 8.5%). It would be in order to look for 8.15-8.35% range play into the midterm review of monetary policy.  5Y OIS rate is up from the set pay zone of 7.30-7.25% (low of 7.26%) into receive zone of 7.43-7.48% (high of 7.48%) before close of week at 7.44%. Now, the immediate resistance at 7.53-7.55% is under threat given the bearish set up in Money and Bond market; break of which will open up quick extension into 7.75% ahead of 8.05%. For the week, let us watch 10Y bond yield at 8.20-8.35% and 5Y OIS rate at 7.35-7.55%. The trade strategy is to sell 10Y bond at 8.19-8.16% and buy at 8.31-8.34% with tight affordable stop. In the meanwhile, let us stay neutral on 5Y OIS market and await correction back into 7.35-7.25% or test/break of 7.55% to initiate paid book. Strategic investors can now stay ready to absorb weakness in 10Y bond yield above 8.35% and 5Y OIS rate above 7.55%.

Commodity market

Gold has nicely traded end-to-end between set buy zone of 1710-1690 (low of 1705) and sell zone of 1780-1800 (high of 1787) and now looks good for extension above 1802. The inability of USD Index to take out strong resistance at 79.50 and sharp reversal from there to below 78.50 sets up the bullish momentum for Gold. The injection of liquidity support in the Euro zone and expectation of QE3 in the US keeps the investors on risk-on mode. Let us now shift our focus at 1920 (high of 11/9/2011) from where we saw a sharp reversal to 1522 (1/1/2012); first signal for this move will be break of immediate resistance at 1802 ahead of 1835. For the week, let us watch 1760-1835 with bias into higher end and not ruling out directional break-out for extension into 1920. Strategic investors can look to buy in two lots at 1770-1760 and 1720-1710 (with stop below 1700) for 1900-1920. Fleet footed traders can trade end-to-end of 1760-1835 with tight affordable stop on test/break thereof.

NYMEX crude has comfortably taken out the strong resistance at 105.00 (high of 109.95) to meet the set objective at 110 and looks good for further extension into 115. The suggestion to stay “long” (and avoid staying “short”) given the limited downside potential has proved good as the recent rally from set buy zone of 97-95 (low of 95.44) has been sharp; rally of over 15% since 2^nd February. This sharp reversal within a month has put RBI on back foot on its shift in monetary policy stance (from neutral to growth supportive shift). The main concern at this stage is the escalation of tensions in the Middle East and resultant supply side pressures to trigger extended rally beyond 115. US authorities are already expressing their concerns on higher consumption from Chindia; getting the focus into 147 (high seen post Lehman Brothers Crisis in July 2008) on conclusive break of 115 will be very bad for the global economy. So, it is important to get the Iran fears (and worries) out of the way quickly to guide a quick reversal into 95 while not allowing extended gains above 115. Till Iran fears are out of the way, any correction may get supported at 103-100. For the week, let us watch 103-115 with bias into upper end. Let us stay neutral at this stage on test/break of higher end and prefer gains beyond 115 not to sustain. The trade strategy is to play end-to-end of this range by buying in two lots at 103.50/101.50 (with stop below 99.50) and selling in two lots at 113.50/115.50 (with stop above 117.50). Strategic investors who have traded the move from 95 to 110 can look to sell at 114-119 (with stop above 120) for 97-95. It would be prudent to expect concerted action to prevent extended rally in crude oil.

Equity market

NIFTY lost momentum ahead of the set near term objective of 5650-5700 (high of 5630) to complete end-to-end move of set near term range of 5200-5700 for 400 pip trade from recent low of 5225. The recommendation was not to chase this extended gains having seen sharp 1000 point rally from above 4550 to below 4650 in span of two months since 20^th December 2011. There seems to be very little participation from domestic investors and major beneficiaries being FIIs who chose to divert liquidity injection in the Euro zone into emerging markets. The off-shore support to domestic equity market is there to stay valid in the short term as appetite for equity will increase on roll-out of fiscal and monetary support to spur growth in the Indian economy. The signal of monetary stance from anti-inflation to pro-growth accelerated FII flows and any disappointment (or dilution) in this expectation will cause severe damage. The domestic investors will stay in short term debt till clarity emerges from Budget and midterm monetary policy review; both to be released in Mid March. It would also need reversal in the current bullish momentum in commodity assets. Till emergence of clarity in all these factors, the upside momentum will be shallow to drive the market into consolidation mode with mild bearish undertone. In these circumstances, it would need entry of domestic investors to set up a higher base for recovery; in the absence of which profit-booking triggers from FIIs can cause extended reversal. The immediate supports ahead are at 5400-5385; 5240-5225 and 5115-5100 with strong impulse pushing the NIFTY down to 5000-4985. On the other side, there may not be momentum to take out recent high at 5630 and if at all should fail below 5740 (high of 10/7/2011), the reversal point on Euro zone crisis. Given that the worst in Euro zone is not yet sighted, chasing gains into 5630-5740 may not be prudent at this stage. Let us now set our focus at 5115-5630 with overshoot limited to 4985-5740 and the bias is expected to be for gradual move into the lower end. For the week, let us watch 5225-5575 with bias into lower end. Strategic investors who have exited on recent gains into 5550-5625 can look to reinstate on extended correction into 5225-4985 in three lots; one each at 5225/5105/4985 (with stop below 4950) for 5630-5740. Let us not rule out the possibility of revisit of 2012 low of 4588 (2/1/2012) ahead of 4531 (20/12/2011) at this stage on disappointments from the Budget; midterm monetary policy review and extended rally in commodity assets.

Have a great week ahead...................Moses Harding     

MARKET PULSE: 22-24 FEB 2012

MARKET PULSE – Report for 22-24 February 2012

Currency market

USD/INR is now into consolidation mode trading end-to-end between sell zone of 49.50-49.65 (high of 49.54) and buy zone of 49.00-49.15 (low of 49.05) before close at 49.31. The strategy to sell up to 3M dollar receivables at the sell zone and to buy up to 1M dollar payables at the buy zone has proved good. However, near term outlook is for extended gains into 48.60 ahead of 47.80; hence the recommendation for exporters to absorb higher USD/INR spot to cover 6-12M receivables while importers to stay uncovered beyond 1-2M. What next? The near term outlook for rupee continues to stay good driven by dollar supplies both in cash and forward market. The chance of rupee bulls pushing USD/INR spot into 48.85-48.60 is bright. This zone was earlier considered as high risk zone to stay “short dollars” (where we asked importers to cover 1-2M payables) and accordingly we saw strong reversal from 48.60 (6/2/2012) to 49.76 (10/2/12); this move was considered good for exporters to sell 6-12M receivables. The current rupee bull run since mid December 2011 are driven by RBI’s strictures on FX operations, good FII flows into debt & equity market and high FX premium cutting demand for forward dollars. However, macroeconomic dynamics continue to be negative, dominated by low growth; widening trade gap; high fiscal deficit and moderate inflation. It would need shift into high growth; low inflation scenario to extend rupee bull-run in the short/medium term into 44-47. For now, into the near term let us focus our sight at 48.50 while rupee weakness into 49.50-49.65 not expected to sustain. For the rest of the week, let us watch 49.00-49.50 with bias for extended rupee gains into 48.85 which should hold. It is considered good for importers to stay away for 48.85-48.60 (to cover 1-2M payables) while exporters can sell 1-3M receivables at 49.35-49.50; 3-6M receivables at 49.50-49.65 and 6-12M receivables on further extension into 49.65-49.80. It would be in order to look for near term stability in USD/INR at 48.85-49.80 for possible directional break out into 48.65-48.50.  

Since the last update of 13^th February, EUR/USD held well at the buy zone of 1.3050-1.2950 (low of 1.2973) and fell short of earlier sell zone of 1.3300-1.3350 (high of 1.3292) to set up a 250 pip trade. Our “bet” on EUR/JPY was perfect as the pair rallied from the buy zone of 102.25-101.50 (low of 101.79) to meet the immediate objective above 105 (high of 106.00). USD/JPY too rallied from just above the buy zone of 77.25-76.75 (low of 77.35) into psychological big figure resistance of 80 (high of 79.88). What next? We watch near term consolidation in EUR/USD at 1.3150-1.3350 with overshoot limited to 1.3050-1.3450. The strategy therefore is to accumulate EUR at 1.3150-1.3050 and to sell at 1.3350-1.3450 with tight affordable stop. It is possible that we see end-to-end moves within the set buy and sell zones. It would now be in order to allow bit of consolidation in USD/JPY and EUR/JPY. The trend continues to be bullish at this stage for next objective at 82.50 and 108.00 while correction shall stay limited to 79.25-78.50 and 104.25-103.50 respectively. The strategy is to buy USD/JPY at 79.25-78.75 (with stop below 78.50) and EUR/JPY at 104.25-103.75 (with stop below 103.50) for 81.25/82.50 and 106.50/108.00 respectively.

FX premium continues to stay in bid mode driven by both interest and exchange rate play with 3M at 8.0-8.5% and 12M at 6.25-6.5%. We asked to receive 2X12M (March/January) at 6.0-6.15% (high of 6.10%). The strategy was also to receive 3M at 8.50-9.0% and pay 12M at 5.85-5.60% for ALM play and these two levels have held well. We continue to look for short term range play at 7.5-8.5% in 3M and 5.5-6.5% in 12M with break either-way not expected to sustain. For now, let us watch two-way sideways trading mode at 8.0-8.5% in 3M and 6.0-6.5% in 12M. Let us continue to receive 2X12M at 6.0-6.15% with tight and affordable stop for near term objective at 5.75-5.60%.

Commodity market

Gold found support at the set buy zone of 1710-1690 (low of 1705) for gradual move into the set sell zone of 1760-1780 (high of 1755); thus trading end-to-end of set buy and sell zones. Let us now watch near term consolidation at 1730-1770 with overshoot limited to 1700-1800. The trading strategy is to play end-to-end of this range by holding on to “long” entered at 1710-1705 (with trail stop at 1730 and t/p at 1775) and selling at 1780-1800 (with stop above 1805). The risk of extended gains over 1800 is valid at this stage.

We have been highlighting the possibility of higher crude oil price into 103-105 (high of 105.04) based on emergence of bullish factors driven by easy liquidity; shift into risk-on mode and tensions out of Iran. We have already seen a sharp spike from above the set buy zone of 97-95 (low of 97.32) into identified sell zone of 103-105. We need to trade this pair having close watch on Iran. The risk-reward is now in favour of trading from “long side”. Till Iran related fears are out of the way, any dips will stay supported at 103 and escalation of tension will quickly drive it past 105 into 110-115. The trading strategy is to be a cautious buyer on dips in two lots at 103.00-102.50 and 101.50-101.00 (with stop below 100) for 113-115.

Bond/OIS market

10Y bond yield is in tight consolidation mode within 8.15-8.20% while 5Y OIS rate found good support at the pay zone of 7.30-7.25% (considered as t/p zone for received book entered at 7.43-7.48%). On the shorter end, 1Y T-bill yield was steady around 8.40% with 1Y OIS rate around 8.05%. The near term outlook is positive driven by rate cut expectation on 15^th March and RBI’s alternate week OMO operations (against week-on-week bond auctions). Rupee liquidity has become scarce despite abundant dollar liquidity in the system. The drawdown from LAF counter at over Rs.1.25 Trillion despite moving into end of reporting fortnight is a serious concern for RBI. There is good possibility of another round of 50 bps CRR cut on 15^th March to meet tax outflow from the system. The action of upward revision of Bank Rate into 9.5% gives the possibility of opening up of another counter to pump short term liquidity. Over all, there will be three counters; one at Repo rate to fund excess SLR; another at MSF to fund up to 1% of SLR and the last resort counter at Bank Rate to dip into SLR at Bank rate to tide over short term cash crunch. This has two implications: high short term money market rates at over 10.25% will start turning south into 9.5% and halt of OMO operations will drive the bond yields up. Thus, short term outlook for Bond market is bearish; hence it would be good opportunity to trim investments on rally in 10Y bond yield into 8.15-8.0%. For now, let us watch 10Y bond yield at 8.15-8.25% with test/break either-way not expected to sustain. The strategy is to play end-to-end moves by buying weakness into 8.23-8.26% and selling extended gains into 8.12-8.09% with tight affordable stop. It is possible that we see end-to-end moves within the set buy and sell zones.

There is no change in outlook for consolidation in 5Y OIS rate at 7.25-7.45%. Despite 50 bps rate cut, overnight MIBOR is expected to stay above 8.10% into short term. Given the risk of higher bond yields into FY13, it is prudent not to stay received at this stage. For now, let us watch 1Y at 8.0-8.15% and 5Y at 7.25-7.40%. The strategy is to receive 1Y at 8.13-8.16% and pay 5Y at 7.27-7.24% with tight affordable stop for immediate objectives at 7.95% and 7.45% respectively.

Equity market

It is one-way track since the last update (of 13^th February) as NIFTY has rallied from above support at 5350 (low of 5351) to hit a high of 5621 before close at 5607. It is just a week back that we shifted the near term range into 5200-5700 and now it is almost at the upper end. It is pity that most market participants missed this 1000 point rally from 4550. The rally was driven by FII liquidity that captured (ahead of the crowd) the shift of RBI’s monetary stance from anti-inflation to pro-growth. On the other hand, domestic investors chose to play safe tracking tight liquidity; high money market rates and depressed macroeconomic fundamentals. The rally from 4531 (20/12/2011) to 5621 (21/2/2012) is sharp and swift; 24% in 2 months’ time. It would now be in order to allow (profit booking) unwinding as next monetary action is distant away (by three weeks) and we also cannot rule out disappointment from RBI by holding rates unchanged. In the given market dynamics, let us not chase gains beyond 5700-5750. Beyond there, risk-reward may not be favourable to stay invested; with upside gains of 200 points into 5900-5950 and downside risk of 500 points for reversal back into 5200. For now, let us watch 5250-5750 with strategy to sell in two lots at 5650-5675 and 5725-5750 (with stop at 5775) and to buy in two lots at 5350-5325 and 5275-5250 (with stop at 5225). It is possible that we see end-to-end moves within the set sell and buy zones. The current rally not backed by domestic investors is difficult to sustain beyond here; hence it is important for late entrants to stay in short term money market investments and await decent correction for shift back into equity. 

Moses Harding

MARKET PULSE for the week 13-17 FEB 2012

MARKET PULSE – Weekly report for 13-17 February 2012 (Next update after 20^th Feb)

Currency market

The reversal in USD/INR from 48.60 to 49.76 is sharp; hence asked not to stay “short dollars” at 48.85-48.60. Nevertheless, this two-way volatility in rupee gave good opportunity for importers to cover February and March 2012 imports around 48.90 (current 49.59) and 49.20 (current 49.94) respectively. The reversal from there into 49.65-49.80 (high of 49.76) was considered good to cover April and July 2012 exports around 50.40 (current 50.29) and 51.35 (current 51.06) respectively. These actions should provide good comfort to both importers and exporters till rupee stays in consolidation mode within 49-50 and weekly close at 49.40 will provide good comfort to rupee bulls. There are no factors at this stage to expect test/break either-way (of 49-50) in the near term while not ruling out extension within 48.50-50.50 into the short term. The bullish factors for rupee are from good supplies from FIIs (both into debt and equity markets); accelerated flows from NRIs (to absorb double-digit rupee deposit rates for 1 year translating to USD yield of around 4% on fully hedged basis) and high forward premium keeping the forward market in supply driven mode. The “carry trade” flows have moved in favour of rupee investments; shift from interest cost reduction to yield maximisation strategy. The negative factors are largely driven by weak macroeconomic fundamentals of low growth; high inflation; high fiscal deficit and high trade deficit. The supply driven mode both in cash and forward market is good enough in the near term to off-set the fundamental issues. Into the short term, it is important to quickly shift into moderate growth; low inflation dynamics to remove the fear factor of rupee weakness into 51-54. The outlook however is positive as RBI shifts into aggressive pro-growth monetary stance through cuts in policy rates. There are two options now on short term outlook: either into 51-54 on weak fundamentals or into 44-47 on shift into high growth; low inflation dynamics. The bias is marginally in favour of move into 44-47 into the medium/long term. For the week, let us watch sideways trading mode at 49.15-49.65 with overshoot limited to 49.00-49.80. Importers having covered Feb-March 2012 payables can stay away for rupee reversal into 49.15-49.00. On the other hand, exporters having covered 3-6M (up to July 2012) receivables can absorb rupee weakness into 49.65-49.80 to sell October 2012 dollars at 51.95-52.10 and await extension in spot into 50 to sell January 2013 dollars at 52.80-52.95. The bias into the short term is for extended rupee gains into 48.60 ahead of 47.80; hence the strategy for importers to stay un-hedged beyond March 2012 and exporters to stay fully hedged up to January 2013.

EUR/USD is not having steam to take out strong resistance at 1.3300-1.3325 (high of 1.3321) and reversal from there is supported well at strong support zone of 1.3200-1.3150 (low of 1.3153); thus has nicely moved end-to-end of set sell zone and buy zone to set up 150 pip trade. Given the focus on QE in the Euro zone, non-delivery of rate cut by ECB was not a surprise; hence not much of price action post ECB keeping rates on hold. In the meanwhile USD/JPY has rallied from the set buy zone of 76.00-75.50 (low of 76.00) into t/p zone of 77.75-78.25 (high of 77.81) while EUR/JPY posted swift move from set buy zone of 99.80-99.30 (low of 99.59) into t/p zone of 102.50-103.00 (high of 103.23) on simultaneous up move both in EUR/USD and USD/JPY; hence was the call to stay “long” in both currency pairs of USD/JPY and EUR/JPY. What next? Euro seems to have shed its weakness and out of bearish set up in the near term. The market stake holders have shifted to “risk-on” mode on low USD interest rates (relative to Euro zone); aggressive QE in Euro zone and good chance of financial/fiscal resolutions out of Greece dead-lock. Taking all these together, it is possible that USD unwinds part of its strength from the high of 1.4939 triggered by Euro zone crisis. It is important for EUR/USD to take out strong resistance at 1.3325-1.3375 to get the immediate focus into 1.3550-1.3625. For this rally, any weakness in EUR/USD is expected to hold above 1.3150-1.3050. For the week, let us watch 1.3050-1.3450 with overshoot limited to 1.2950-1.3550; bias however is for extended EUR/USD gain into 1.3450-1.3550. The strategy is to accumulate EUR at 1.3050-1.2950 and sell at 1.3450-1.3550 with tight and affordable stop. It is possible that we see end-to-end moves within the set range not ruling out extended strength into 1.3625. USD/JPY is now expected to form a strong base above 77.25 to test/break strong resistance around 78.25 for extension into 79-80 before reversal. The upward momentum both in EUR/USD and USD/JPY will keep EUR/JPY in strong bullish mode; correction will stay supported at 102.25-101.50 for accelerated run above 103.75 into 105.25. For the week, let us watch USD/JPY at 77.25-79.00 and EUR/JPY at 101.50-105.00. The strategy is to buy USD/JPY at 77.25-76.75 (with stop below 76.50) for 79.00 and buy EUR/JPY at 102.25-101.50 (with stop below 101.25) for 105.00.

FX premium eased post weak IIP data for soft close at 8.35% (3M) and 6.05% (12M). Nevertheless, shift into new reporting fortnight and resultant strong interest rate play (with support from exchange rate play) should limit sharp reversal from current levels. For the week, let us watch two-way sideways trading mode in 3M at 8.0-8.75% and in 12M at 5.65-6.35%. Any extension above 8.75% (into 9%) in 3M will get the ALM play into the radar to convert PCFC book into rupee funding for 3M rupee yield of over 12.5% while reversal below 5.75% in 12M will be good to convert FC sources into rupee uses for 12M USD yield of over 4%. The strategy for the week is to receive 3M at 8.75-9.0%; pay 12M at 5.75-5.60% and receive March/January (2X12M) at 6.0-6.15% with tight affordable stop.   

Commodity market

During the week, Gold has nicely traded end-to-end of “inner ring” of 1710-1760 (high of 1762 and low of 1704) within near term range of 1680-1790. The weekly close above 1710 (at 1722) is positive for the yellow metal. There are no strong factors at this stage to look for directional break-out; hence trading end-to-end of this range will be in order. The investor appetite shift into risk-on mode will provide strong support while any negative news from the Euro zone will provide strong sell-off chasing risk-free assets. Let us stay neutral for now. For the week, let us watch consolidation at 1680-1760 and there is no change in strategy to buy dips into 1710-1680 and sell gains into 1760-1790 with tight affordable stop. We have already seen end-to-end trades within the set buy and sell zones and there is no conviction at this stage to look for range break-out.

NYMEX crude is firmly boxed at 95-100 and we have seen end-to-end move multiple times. Here again, there are no strong factors to provide directional break-out but the mild bias is for extended gains into 103-105. The fear factor from the Middle East; improved economic data from the US; hope of amicable resolution in Greece dead-lock and USD losing its strength are some of the factors providing strong support at 95 at this stage. For the week, let us watch consolidation at 97-100 with overshoot limited to 95-102. The trade strategy remains unchanged to buy dips into 97-95 and sell spike into 101-103 with tight affordable stop. Here again, we have seen end-to-end moves within the set buy and sell zones multiple times and there is no conviction at this stage to look for range break-out.

Bond/OIS market

10Y yield eased from the first buy zone of 8.25-8.28% (high of 8.27%) for close at 8.19% while 5Y OIS is down from high of 7.46% to 7.37% and 1Y OIS down from 8.24% to 8.14%. The trigger for this move is from weak IIP data getting most of the market stake holders into rate cut expectation mode. In the process, 10Y bond yield has completed yet another end-to-end move between 8.20-8.30% while 5Y OIS rate rallied from the set pay zone of 7.25-7.20% to pass through the first receive zone of 7.40-7.43% but failed at the second zone of 7.46-7.49%. We were not keen to trade on the 1Y OIS but looked for unsustainability over 8.15-8.20%. What next? The shift into new reporting fortnight will push draw down from LAF over Rs.1.25 Trillion and overnight rate into 9.0-9.25%. The tight money market conditions will keep the 1Y rate/yield curve at elevated levels. The tightness will continue to stay valid till end March 2012. 3-12M CD rate will gradually move into 10.25-10.5% in the weeks ahead and into 11% by second fortnight of March; thus providing strong support to 1Y T-bill yield around 8.5%. On the longer end, signals are mixed in bond market; bearish set up on auction supplies and high fiscal deficit while alternate week OMO and rate cut expectations on 15^th March should limit weakness. As said, it is important for RBI to deliver 50 bps rate cut along with 50 bps CRR cut to arrest overshoot in 10Y bond yield above 8.30% into 8.40-8.50%. On the other side, infusion of liquidity through CRR and FX and resultant stoppage of OMO operation will limit gains beyond 8.15-8.10%. These expectations will provide stability in 5Y OIS rate at 7.30-7.45% with overshoot limited to 7.25-7.50%. Strategic investors can continue to absorb weakness in 10Y bond yield into 8.25-8.30% and unwind at 8.15-8.10% and receive 5Y OIS rate at 7.45-7.50% for unwind at 7.30-7.25%. For the week, let us watch consolidation in 10Y bond yield at 8.15-8.25% and 5Y OIS rate at 7.30-7.45% with test/break either-way to attract. The strategy is to buy 10Y bond at 8.25-8.30%; sell 10Y bond at 8.15-8.10%; receive 5Y OIS at 7.45-7.50% and pay 5Y OIS at 7.30-7.25% with tight and affordable stop. It is possible that we would see end-to-end moves within the set two extreme ends.

Equity market

NIFTY lost steam ahead of set strong resistance at 5450 (high of 5428) but reversal from there found support below 5350 (low of 5341) before close of week at 5381. While the close above 5350 provides comfort to the bulls but the inability to close above 5400 will dilute the bullish confidence into the near/short term. The shift of overseas investor confidence into risk-on mode and resultant flow of funds into Indian equity market is there to stay for extended period of time. However, the confidence of domestic investors is low tracking weak macroeconomic fundamentals. The growth momentum is depressed; there is no great confidence in sustainable downtrend in inflation; ability of the Government to maintain fiscal deficit below 5% is in doubt and there is no sign of release of pressure on tight rupee liquidity. The only positive factor from domestic cues is the shift into rate reversal cycle. It is important that the reversal starts on 15^th March to keep bullish momentum valid for test/break of 5700-5750 into 5900-5950. It is also equally important for RBI to shift operative policy rate from Repo rate to Reverse Repo rate and to drive demand for credit from rupees into foreign currency. For the week, let us watch consolidation at 5200-5500 with bias into lower end. The recommendation for strategic investors is to unwind “longs” at 5500-5550 with trail stop at 5325 and await deeper correction into 5200 (not ruling out extension into 5000). It is also considered good to buy in three lots between 5200-5000 (with stop below 4975) for 5700-5900. Fleet footed traders can try shorts in two lots at 5475 and 5525 with stop above 5550 for 5225-5200.

Have a great week ahead................................Moses Harding

MARKET PULSE - 10 FEB 2012

MARKET PULSE – 10 February 2012

Currency market

USD/INR traded to the script holding well at the set support zone of 49.00-48.85 (low of 48.98) for smart recovery into set resistance zone of 49.50-49.65 (high of 49.52) before close at 49.49. We had asked exporters to stay away for 49.50-49.65 to sell April 2012 dollars at 50.35-50.50 (high of 50.43). Having covered imports (on rupee gains into 48.85-48.60) for February 2012 at 49.10-48.85 (low of 48.90) and March 2012 at 49.40-49.15 (low of 49.20), it was considered prudent to cover exports for April 2012 above 50.35 despite risk of extended rupee weakness into 49.90-50.00. What next? There is nothing to panic on sharp “correction” from 48.60 to 49.50; market conditions are still in favour of rupee, hence consolidation around 49.50 will be in order. There is no risk at this stage for extended rupee weakness beyond 50.00 and the bias is in favour of reversal back into 49.00-48.85. We continue to watch near term consolidation at 49-50 with test/break either-way not expected to sustain and to stay within 48.50-50.50 into the short term.  For now, let us watch spot rupee at 49.15-49.65 with overshoot limited to 49.00-49.80. Importers can stay away for spot move into 49.15-49.00 to buy February 2012 dollars and thereafter into 49.00-48.85 to buy March 2012 dollars. Exporters can now sell 3-6M receivables at spot 49.65-49.80 (July 2012 dollars at 51.35-51.50) and await extended weakness into 49.90-50.00 to cover 6-12M receivables (January 2013 dollars at 52.85-53.00).

EUR/USD lost steam at the second sell zone of 1.3300-1.3325 (1.3321) and reversal from there found strong support at 1.3215 (low of 1.3216) to set up 100 pip trade and now in consolidation mode at 1.3250-1.3325. EUR/JPY met the set objective at 102.50-103.00 (high of 102.91) while USD/JPY has met the first objective at 77.25 (high of 77.42) and short of second objective at 77.75-78.25. Our “bet” on EUR/JPY based on momentum play in favour of Euro (against USD) and expectation of rally in USD/JPY from 76.00 has yielded 300 pips in EUR/JPY from 99.80 to 102.90 and 125 pips in USD/JPY from 76.00 to 77.40. What next? EUR/USD seems to have shifted to neutral mode deriving comfort from strong efforts to prevent the “worst” in the Euro zone. USD Index is looking weak at this stage and lacks momentum to take out strong resistance around 79.50 with risk of extended weakness into 78.00-77.90 before reversal. This could push EUR/USD into 1.3350-1.3375 ahead of 1.3450-1.3475 before down. This move could trigger EUR/JPY into 103.75-104.00 (with no support from USD/JPY) and into 105.50-105.75 (on gains in USD/JPY into 78.00). For now, let us watch consolidation in EUR/USD at 1.32-1.34 not ruling out extension into 1.3450-1.3475. The strategy is to buy at 1.3225-1.3175 with stop below 1.3150 for 1.3375/1.3450. Let us also buy USD/JPY at 77.00-76.75 (with stop below 76.50) and EUR/JPY at 102.25-101.75 (with stop below 101.50) for immediate objectives at 78.00-78.25 and 103.75-104.00 respectively.

FX premium back into bullish mode for higher close around 8.35% (3M) and 6.25% (12M). There is strong upward momentum through interest rate play tracking higher short term money market rates and spike in bond yields and OIS rates. The LAF draw down over Rs.1.25 Trillion ahead of reporting Friday is also major concern. The surprise is the loss of traction with exchange rate play despite sharp reversal in USD/INR from 48.60 to 49.50. The lack of borrower appetite for USD and resultant dollar liquidity over-hang in the banking system has added momentum to bullish undertone. Based on these factors in play, we recommended staying paid in 12M at 5.65-5.50% to convert FC funds into rupees and the bounce from just below 5.5% to 6.25% is sharp. Now, possible reversal in USD/INR from above 49.50 to below 49.00 would add further pressure. The focus is now into the earlier ranges of 8.0-9.0% in 3M and 5.5-6.5% in 12M. For now, we watch 8.25-8.75% (3M) and 6.0-6.5% (12M) with bias into higher end. 3-12M term money rates above 10% and NRI arbitrage flows would continue to provide support. The release of pressure will be on RBI shift into rate cut mode to drive 3-12M term money rates below 9.5%. The trade strategy is to receive March/January (2X12M) at 6.10-6.25% (255-265) for reversal into 5.65-5.5% post 15^th March midterm policy review.

Commodity market

Gold is in consolidation mode within set range of 1710-1760 (low of 1724 and high of 1751). There is no change in view of looking for short term consolidation play at 1700-1800. The strategy is to buy dips into 1710-1690 with stop below 1680 for 1790-1800. Fleet footed traders can look to buy at 1720-1710 and sell at 1755-1765 with tight and affordable stop. The trend for immediate term is bullish into 1800.

NYMEX crude reversed strongly from above 95.00 (low of 95.85) into 100 (high of 100.09) and looks good for extension into 103-105. Weak dollar; adequate liquidity; good economic data and fear from the Middle East are some of the factors providing strong support at this stage. It is important that resistance zone of 103-105 should stay firm to prevent swift extension into 115. For now, let us watch consolidation at 98-103 with overshoot limited to 95-105. The strategy is to play end-to-end by buying at 96.5-95.0 (with stop at 94.5) and selling at 103.5-105.0 (with stop at 105.5).

Bond/OIS market

As expected, 10Y bond yield spiked into the first buy zone of 8.25-8.28% (high of 8.27%) and reversal from there could not extend below 8.23%. 5Y OIS rate sailed through first receive zone of 7.40-7.43% but failed at second hurdle at 7.46-7.49% (high of 7.47%) before close at 7.40%. Despite ease in overnight rate into 8.65-8.75%, higher LAF borrowing of over Rs.1.25 Trillion despite ahead of reporting Friday pushed 1Y OIS rate into 8.24% before close at 8.20%; also tracking spike in 1Y bond yield from below 8.40% to over 8.50%. The market dynamics are negative for the bond market at this stage. Liquidity is tight; cost of liquidity is high and RBI’s release of 1 OMO against 2 bond auctions. The market is already in over-bought mode and not much of selling seen on recent gains below 8.15%. The rate cut action is distant away (more than a month from now) and RBI has already undertaken around 1.5% of NDTL of OMOs. The shift into CRR cut mode (another 2 phases of 50 bps cut in mid March and end April) will reduce OMOs in the near/short term. It would need delivery of 50 bps rate cut (in mid March) to prevent extended weakness in 10Y bond yield above 8.35%; delivery of CRR cut without rate cut will drive the 10Y bond yield over 8.5%. For now, let us watch 10Y bond yield at 8.20-8.35% and 5Y OIS rate at 7.35-7.50%. Strategic investors can afford to stay away for extended weakness in 10Y bond yield into 8.35-8.50% while fleet footed traders can sell on correction into 8.25-8.20%. Let us also unwind received book in 5Y OIS at 7.40-7.35% and await extended weakness into/above 7.50%.

Equity market

NIFTY extended its bull run (high of 5423) and close above 5400 is positive. It was surprise to see good buying interest around minor support at 5350 (low of 5339) without allowing deeper correction into strong support zone of 5225-5200. There is no conviction at this stage to chase gains into 5450-5550 and would prefer a reversal back into 5200 to set up near term consolidation play at 5200-5500. The domestic money market conditions do not support strong rally in stock market from now on and would need shift of RBI into rate cut mode to get the momentum into higher gears. It is also possible that FIIs will get into wait-and-watch mode and prefer to book profit to unlock significant (USD) returns since start of 2012. There are other significant events ahead such as election results and FY13 budget. The market will keenly watch fiscal deficit numbers of FY12 and forecast for FY13. Given these uncertainties ahead, it is prudent to unwind “longs” at 5450-5500 or hold with trail stop below 5325. For now, let us watch consolidation at 5200-5500 with bias into lower end. The recommendation for strategic investors is to unwind “longs” at 5450-5500 with trail stop at 5325 and await deeper correction into 5200 (not ruling out extension into 5000). Fleet footed traders can try shorts in two lots at 5465 and 5515 with stop above 5540 for 5250-5225.

Moses Harding

MARKET PULSE - 08 FEB 2012

MARKET PULSE – 08 February 2012

Currency market

Rupee hit the set objective at 48.85-48.60 (low of 48.60); identified as danger zone for rupee bulls; hence asked not to stay “short dollars” (and to cover February 2012 imports at 49.10-48.85 and March 2012 imports at 49.40-49.15). The reversal from 48.60 has so far found support below 49.25 attracted by exporters’ interest to sell 3M receivables above 50 or so. The traction with USD Index is minimal at this stage and largely driven by huge dollar supplies both in cash and forward market. Rupee has now fully recovered its weakness since 31^st October 2011 (48.61) into low of 54.30 (15^th December 2011). During this period USD Index is up from 74.75 to 79.25 translating into fair value of rupee around 51.50. On the other hand, if we track rupee fall from end of July 2011 (from 43.85) against USD Index movement, fair value for rupee seems to be around 47.50 with mean value at 49.50. Clearly, there is no clarity on the way forward but if we view the current scenario based on overheated markets (sharp rally in stocks; bonds and rupee since start of 2012) and underlying bullish trend for USD against major currencies, forward value of 1-3M dollars will look cheap below 49.50; hence it is important for importers to stay hedged on extended rupee gains into 48.85-48.60. The near term expectation therefore is for rupee consolidation at 49-50 with overshoot limited to 48.50-50.50. Beyond there, it is possible that rupee gets into 44-47 range on shift of Indian economy into high growth and low inflation dynamics; hence not looking at hedging dollar payables beyond 3M tenor and instead suggested to cover long term dollar receivables (including shift of rupee liability into dollars) on spot rupee weakness over 53.50.  For now, let us watch spot rupee at 49.00-49.35 with overshoot limited to 48.85-49.50. Exporters can stay away for spot move into 49.50-49.65 to sell April 2012 dollars at 50.35-50.50. Let us not rule out extended spot weakness into 49.90-50.00 where it is good to cover 6-12M dollar receivables. It is also possible for RBI to shift into USD buy mode to prevent extended rupee gains beyond 48.85 given the limitations in pumping rupee liquidity through OMO and CRR.

EUR/USD is in two-way sideways trading mode within the set buy zone at 1.3050-1.3000 and sell zone at 1.3200-1.3250. In the meanwhile USD/JPY has rallied from 76.00 (higher end of set buy zone of 76.00-75.50) into resistance zone of 76.75-77.00 and EUR/JPY from higher end of set buy zone of 99.80-99.30 into first target at 101.50. What next? The market is now driven by news and data both from the US and Euro zone. While the economic data from the US is encouraging, signals from the Euro zone is mixed to negative. The momentum is good for USD Index to test/break recent high above 79.50 for extended gains into 81.75-82.00. Let us keep this in back of our mind which would set up near term target for EUR/USD at 1.2925-1.2875; USD/JPY at 77.75-78.25 and EUR/JPY at 102.50-103.00. The strategy is to stay short in EUR/USD in two lots at 1.3225-1.3250 and 1.3300-1.3325 with stop above 1.3350. Let us also hold to long USD/JPY entered at 76.00 (with trail stop at 76.40) and long EUR/JPY entered at 99.80 (with trail stop at 100.80) for the set objectives.

FX premium is in contradicting play with good receiving interest in 3M above 8% and paying interest in 12M below 5.65%. The expectation in the near term is for consolidation in 3M at 7-8% and 12M finding good support at 5.50-5.65%. For now, let us watch 3M at 7.50-8.25% and 12M at 5.50-5.75% with test/break either-way not expected to sustain. The short term target (by end March 2012) is for decent reversal in 3M into 7% and 12M into 4.5%.

Commodity market

Gold traded perfect to the scrip losing momentum at the set sell zone of 1760-1770 (high of 1763) for reversal into buy zone of 1710-1690 (low of 1709). Now it is important for Gold to stay supported at 1690-1680 to retain its underlying bullish trend into 1790-1800. The market dynamics is clearly in favour of Gold to retain current buying appetite. Let us continue to watch consolidation at 1710-1760 allowing reversal into 1690-1680 before getting into uptrend for 1790-1800. The strategy therefore is to buy in two lots at 1700/1680 (with stop below 1670) for profit at 1760/1795.

NYMEX crude lost steam ahead of set sell zone at 98.5-99.5 (high of 98.03) before reversal into 95.84 and now steady at 96-97. Now, let us shift our focus into 92.50-98.50 with immediate bias into the lower end. The strategy therefore is to stay short at 98.50-99.50 with stop 99.75 for 93.50-92.50.

Bond/OIS market

Call money rate eased into 8.75% on shift into second week of reporting fortnight with little impact on 3-12M money market rates. 1Y sovereign bond yield stayed steady around 8.40%. Bond/OIS market traded to the script trading end-to-end of set ranges of 8.10-8.20% (10Y bond); 8.0-8.15% (1Y OIS) and 7.20-7.35% (5Y OIS). The trade recommendation to sell 10Y bond at 8.10-8.05%; pay 1Y OIS at 8.05-8.0% and pay 5Y OIS at 7.25-7.20% was good considering the current levels of 10Y bond yield at 8.18%; 1Y OIS at 8.10% and 5Y OIS at 7.34%. What next? Bond market is in overheated mode and gain into 8.10% is dependent on week-on-week OMO operations; else extended weakness in 10Y bond yield into 8.30-8.35% is on cards. The signals in OIS market is mixed with limited upside rally in 1Y (max 8.15%) but good upside in 5Y rate into 8.40-8.45% which should hold. Money market will stay tight on run into mid March midterm review of monetary policy but resultant weakness will stay significantly diluted on expectation of 50 bps CRR cut and 50 bps rate cut. Let us now watch 10Y bond yield at 8.10-8.35%; 1Y OIS rate at 8.0-8.15% and 5Y OIS rate at 7.25-7.50% with immediate bias into higher end. Having unwound “long bonds” and “received OIS” book, it is time to stay ready to buy 10Y bond in two lots on weakness into 8.25-8.28% and 8.31-8.34% and receive 5Y OIS in two lots at 7.40-7.43% and 7.46-7.49%. The short term objective for 10Y bond is at 8.05-8.0% and 5Y OIS at 7.10-7.0% on delivery of expectations from RBI.

Equity market

NIFTY met the set immediate term target at 5400 (high of 5413) before close at 5335. It was in order to attract long unwinding above 5400; rally of over 17% from start of 2012. It is good for FIIs to unlock value with combined 8.5% gains in rupee; an overall return of 25% (against USD) in just over a month is too good to resist for FIIs. What next? We have already shifted our short term range into 5200-5700 not ruling out March 2012 target at 5700-5750. This move will bring in 100% reversal of NIFTY fall triggered by Euro zone crisis (from 5740 in the second week of July 2011 to 4531 seen in late December 2011). For now, we cannot rule out bit of correction into 5225-5200 driven by profit booking and tight money market conditions into mid March 2012; reversal from there is expected to be sharp (and swift) on RBI shift into rate cut cycle. Let us watch 5250-5450 with overshoot limited to 5150-5550. The strategy is to buy in two lots at 5250-5225 and 5175-5150 with stop below 5125 for 5550/5700. Fleet footed traders can try “shorts” at 5500-5550 with stop at 5575 for reversal into 5350/5250.

Moses Harding