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