MARKET PULSE – 02 February 2012
Currency market
The trading pattern so far has been in order with spot USD/INR move into 49.20-49.30 (low of 49.24) giving opportunity for importers to buy February 2012 dollars below 49.60 and spot move into 49.65-49.75 (high of 49.67) giving opportunity for exporters to sell April 2012 dollars above 50.65. It is not bad deal even for companies having matching imports and exports; needless to say, matching flows without matched maturity obligation dates is not natural hedge. As mentioned in earlier reports, rupee fundamentals have quickly turned from negative to bullish. There are no signals for reversal of FII flows (into debt and equity) and no signs of shift of forward market from excessive supply driven mode to demand driven mode. These two factors are good enough at this stage to give firm control of the market to rupee bulls. There is good possibility of strong support at 49.20 (close at 49.27) to give way for extended gains into 48.85 (see weekly report of 30th January) ahead of 48.60 (from where rupee had bitter experience of 12% fall into 54.30 in 45 days). The expectation at this stage is for short term consolidation at 48.50-50.50; hence the simultaneous call for importers to cover February 2012 dollars around the midpoint and exporters to cover April 2012 dollars above higher end. For now, let us revise the near term range into 49.00-49.50 with overshoot limited to 48.85-49.65. We would not recommend staying “short dollars” at 48.85-48.60; extended rupee gains below 48.60 will hurt exporters, thus inviting the attention of Commerce Ministry. Even die-hard rupee bulls need to cover February 2012 dollars at 49.15-48.90 (and March 2012 dollars below 49.50) on spot move into 48.85-48.60 having seen spot rupee above 54 and sending RBI into rescue act to prevent extended weakness into 56-58!
The reversal from 1.3213 found strong support at the buy zone of 1.3075-1.3025 (low of 1.3023); followed by rally back into the earlier sell zone of 1.3225-1.3250 (high of 1.3218). The sharp reversal from below strong support of 1.3050 provides comfort to Euro; getting the focus back into 1.30-1.33 range. The set near term range of 1.2750-1.3250 stays valid and extended gains into 1.3200-1.3250 will set up selling opportunities for 1.2925-1.2900 followed by 1.2750-1.2725. We will give up the chase beyond 1.3250 and allow extension into 1.3350-1.3500 before down. The strategy now is to play end-to-end of 1.3025-1.3275 with tight stop on break thereof.
USD/JPY is holding strong above 76.00 (low of 76.00) but pressure remains for extended weakness into 75.50. EUR/JPY weakness below 100 is providing support to USD/JPY at this stage. No change in view of looking to buy dips into 76.00-75.50 with stop/reverse at 75.25 (which then extend weakness to 74.75 and below. Having said this, we need to stay cautious of BOJ entry to push USD/JPY into 77.75-78.25 and EUR/JPY into 102.50. The risk-reward is in favour of staying long in USD/JPY at 76.00-75.50 and EUR/JPY at 99.80-99.30.
Interest rate market
10Y bond yield crashed post Rs.10K OMO auction news for “gap” out opening at 8.10% against previous close of 8.27% (low of 8.10%) before close at 8.14%; thus meeting the set near term objective of 8.10% ahead of time. This move gave exit for our “longs” (first lot at 8.40% and second one at 8.33%) at 8.12-8.10%. It is time to relax now. It is difficult to figure out logic for such strong rally post OMO news. It may not be due to “shorts squeeze” as staying “short” bonds in current market dynamics is not prudent. OMO option was there on cards anyway given RBI’s reluctance to pump rupees through FX market. The expectation on the way forward (into end March 2012) was for one OMO against two auctions for rest of FY12 and delivery of 50 bps CRR cut and 25 bps rate cut in the March midterm review. Given these expectations, it was considered good to stay invested on extended weakness (into 8.35-8.45%) for near term objective at 8.10-8.0% (expected by mid March 2012). Now that both events have happened in hurry, let us evaluate the next steps. In the current macroeconomic and market dynamics, it is not prudent to chase gains below 8.10%; given the upside gain of 10bps and downside risk of 25 bps. The risk-reward is clearly not in favour of staying “long” bonds below 8.10% and prudent to shift long tenor bonds to shorter tenor (1Y yield around 8.40%) and await spike in 10Y bond yield into 8.25-8.35% for re-entry. Over all, 10Y bond is expected to trade within 8.10-8.25% with overshoot limited to 8.0-8.35%. The strategy therefore is to unwind “longs” at 8.10-8.0% (for shift into 1Y bond around 8.40%) and invest on weakness into 8.25-8.35%. For now, let us watch sideways trading mode at 8.10-8.20% while allowing extension into 8.05-8.25%.
OIS rates tracked rally in the Bond market with 1Y down at 8.10% (against previous close of 8.16%) and 5Y down at 7.24% (against previous close of 7.31%) but closed higher at 8.13% and 7.31% respectively. Here again, the strategy to stay “received” at 7.35-7.40% has been proved good to meet the profit objective at 7.25-7.20%. The current money market conditions are not in favour of sharp downturn as operative policy rate is likely to stay at upper end of LAF corridor through FY13. However given the shift into rate reversal cycle by mid March (or latest by end April), upside risks is also limited; thus market will get into tight consolidation mode in the near term. Let us watch 1Y at 8.05-8.20% and 5Y at 7.20-7.35% with test/break either-way not expected to sustain. The strategy is to play end-to-end of this range with tight stop on break thereof. Strategic players can reinstate received book in 5Y at 7.35-7.40% with affordable stop for near term target at 7.20-7.15%. We will stay aside in the 1Y tenor given the high cost of carry and limited upside gains in the near term.
FX premium has eased nicely from the highs of 9.25% (3M) and 6.15% (12M) to find support at 8.25% (3M) and 5.65% (12M) before close at 8.65% and 5.95% respectively; thus boxed within the set range of 8.25-8.75% in 3M and 5.65-6.0% in 12M. The signals are mixed now; upward pressures from interest rate play will be diluted by exchange rate play tracking possible reversal in USD/INR from 49.00-48.85 support zone. The short term outlook however is bearish for move into 7.0-8.0% in 3M and 4.5-5.5% in 12M. Till then, we watch strong support at 8.25-8.10% (3M) and 5.65-5.50% (12M) to hold while spike into 8.85-9.0% (3M) and 6.0-6.15% (12M) will set up the next round of end-to-end play within 8.25-9.0% in 3M and 5.65-6.15% in 12M. The earlier strategy to initiate “received” book in 3M above 9% and 12M at 6.0-6.15% will come into play for reversal target at 8.25% and 5.65% respectively. Let us also prepare for initiating paid book in 12M at 5.65-5.5% considered good for generating cost effective rupee funds. The need for RBI is to keep FX premium high to retain supply driven mode in the forward market; thus cannot rule out RBI releasing its grip on FCNR rates to arrest steep decline in FX premium which carries the risk of driving spot rupee into 50.00-50.50. For now, let us continue to watch sideways trading mode at 8.40-8.90% (3M) and 5.80-6.10% (12M) with test/break either-way to attract.
Commodity market
Gold struck in 1730-1750 range (low of 1732 and high of 1751) and immediate bias seems to be on the lower side for extension into 1710-1690 before getting into the uptrend for 1790-1800. Now, let us watch resistance at 1750-1760 to hold for this move. The strategy is to sell at 1755-1760 with tight stop at 1765 for 1710. We switch sides there by buying at 1710-1690 (with stop below 1680) for 1790-1800. Strategic investors can look to buy in three lots at 1730/1710/1690 with stop below 1680 for 1790-1800.
NYMEX crude traded tight range of 97-100 (low of 97.07 and high of 99.50). The pair is locked at 97-102 for long time but no regret as it has given good two-way opportunities for traders. The near term outlook is for consolidation at 95-103 with bias for extended gains into 103.50-105.00 before sharp reversal into 95.00 within short term range of 95-105.. Strategy is to stay “long” for this move with stop below 95 for 103.5-105. We switch sides there by selling at 104-105 with stop at 106 for 97.5-95.0
Equity market
The initial weakness in NIFTY found support above the buy zone of 5150-5125 (low of 5159) for gradual move into sell zone of 5225-5250 (high of 5244) before close at 5235. The close above 5200-5220 resistance is bullish into the near term. The immediate attention is on 5350-5400; break of this will get the sight at 5650-5750. We have been revising the trading range upwards (since entry into 2012) in line with set up of bullish momentum from as low as 4550-4850 and now at 5000-5500. There is good chance of further revision into 5200-5700 as we move into the midterm review of monetary policy in mid March 2012 with expectation of 50 bps CRR cut and 25 bps rate cut. The bulls are getting control of the street and it would not be wise to stay without equity exposure. NIFTY has already rallied from 4640 (open of 2/1/2012) to 5235 for a gain of 13% in a month’s time and it is not bad for late entrants as upside gains from here is also significant. For now, we watch 5200-5400 with immediate bias for gains into 5350-5400 and thereafter to get the next objective of 5650-5750 into the radar. Strategic investors can buy in three lots at 5200-5175; 5125-5100 and 5050-5025 with stop below 5000 for 5650-5750. There is good chance of another trade set up for 500-600 points profit after chasing the recent rally from 4550 to 5150.
Have a great day................Moses Harding
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