MARKET PULSE – Weekly report for 13-17 February 2012 (Next update after 20th 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 15th 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 15th 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
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