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