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