short update for 01st March 2012

MARKET PULSE – Short update for 01^st March 2012

Currency Market

Rupee gains halted at the lower end of set intraday range of 48.85-49.15 for an 18 paisa reversal from low of 48.85 to 49.03 before close at 49.01. The reversal momentum into 49.15 lacked strength despite weak Q3 GDP number and resultant negative impact on stock market. The higher than expected demand from ECB’s LTRO counter has sent bearish signals into the Euro zone. For today, we watch consolidation 49.00-49.25. The chance of extended gain into 48.65-48.50 may be delayed but not yet out of the radar. Importers can cover up to 15 days payables at spot 48.85-48.75 and 15-30 days payables on extension into 48.65-48.55; it is considered prudent to acquire up to 1M forward dollars below 49.00 as the reversal from 48.60-48.50 can be sharp for push back into 49.35-49.50 to complete end-to-end of set near term range of 48.50-49.50. Exporters can look to sell April 2012 dollars above 50 on spot weakness into 49.25-49.35.

FX premium is in consolidation mode at 8.50-9.0% in 3M and 6.25-6.5% in 12M; near term bias is for test/break of lower end while rally into higher end will set up good receiving opportunity. We will watch 1X12M (March/Feb) at 5.90-6.15% with strategy to receive at 6.15-6.25% (278-283) for near term objective at 5.5% (250).

USD/JPY bounced sharply from 80.00 big figure support (midpoint of set buy window of 80.25-79.75) into set sell window of 81.25-81.75 (high of 81.36) and now in consolidation mode around 81. The immediate term outlook is for consolidation at 80.75-81.75 followed by extended JPY weakness into 83.75. For today, let us watch consolidation at 80.75-81.75 with strategy to buy dips into 80.75-80.25 (with stop below 80.00) for 81.75-82.00. Let us stay away in EUR/JPY allowing reversal back into 107.25-107.00; a good risk-reward trade is to buy at 107.25-106.75 (with stop below 106.50) for 109.50-110.00 ahead of 111.0-111.50; good chance of another 300 pip trade.

EUR/USD fell sharply post aggressive LTRO (buy the rumour; sell the fact syndrome again); reversal from below 1.35 to above 1.33 is sharp. Nevertheless, there is no build up of bearish set up at this stage and we watch two-way sideways trading mode at 1.33-1.3450 with overshoot limited to 1.3250-1.3500. The strategy is to play end-to-end by buying at 1.3300-1.3250 and selling at 1.3450-1.3500 with tight affordable stop.

Bond/OIS market

10Y bond yield was in consolidation mode around 8.20% (intraday play within 8.18-8.21% before close at 8.20%) despite unexpected OMO auction and weak Q3 GDP data. The inability to extend gains into 8.15% despite these favourable signals is bearish into the immediate term. We continue to watch sideways trading in 10Y bond at 8.15-8.25%. Strategic investors can now stay invested on weakness into 8.23-8.28% for 8.10%. The set short term range into FY13 at 8.0-8.35% is valid.

1Y OIS rate has eased nicely from the receive zone of 8.23-8.26% (weekly high of 8.24%) and now into the lower end of set intraday range of 8.10-8.20% (low of 8.12% before close at 8.14%). The bias is for test/break of lower end for extension into 8% which should hold. Suggest unwinding received book at 8.05-8.0%.

We are neutral in 5Y OIS looking for correction into 7.35-7.30% or test/break of 7.55% to initiate “pay book”. 5Y OIS rate traded tight range of 7.39-7.42% before close at 7.39%. Now, we may need to allow for extension into 7.25% not ruling out overshoot into 7.10% into the near term. Bond swap strategy (7Y yield of over 8.30% against 5Y OIS hedge of below 7.40%) looks good at this stage; it is also a good risk-reward trade to stay received at 7.40-7.50% with stop at 7.55% for 7.25-7.10%.

Commodity market

Gold reversed sharply from close to t/p zone of 1795-1805 (high of 1790) for 100 point drop into 1688 and now around 1720. We have sent caution signals to watch price action at very crucial resistance zone of 1790-1805 and bearish momentum was sharp for quick push into strong support zone at 1680-1695. We continue to look for two-way consolidation within the familiar range of 1690-1790 with overshoot limited to 1675-1805. For today, let us watch consolidation at 1690-1740 and stay neutral on break-out of this range. Strategic players can continue to play end-to-end buying at 1690-1675 and selling at 1790-1805 with tight affordable stop.

NYMEX Crude is losing its upward momentum and now is held above strong support at 106.20. The immediate term expectation is for two-way sideways trading mode at 100-110 with bias into lower end and if all is well thereafter, we can look for 100% retracement of the rally from 95 to 110. For today, let us watch 103-108 with bias into lower end.

Equity market

The initial rally into 5458 was erased post weak GDP data for close at 5385; inability to sustain above 5385-5400 support zone is bearish. Nevertheless, the domestic investor sentiment is expected to turn in favour of equity market soon while FII interest continues to remain valid into short term; hence let us continue with “buy dips” mode for strategic investors. For today, let us watch 5250-5450 with test/break either-way to attract.

Have a good day ahead................Moses Harding