MARKET PULSE : 28-30 March 2012

MARKET PULSE: Report for 28-30 MARCH 2012

Currency market

USD/INR pair played perfect to the script trading end-to-end of set immediate term range of 50.60-51.10; posting sharp reversal from high of 51.15 to low of 50.63. In the process, dollar “shorts” entered at 51.40-51.50 was taken out at 50.70-50.60. What next? Rupee fundamentals continue to stay weak guided by significant pressure on fiscal and trade deficit. It is important that balance of payment should stay surplus to release the firm bearish grip on rupee. So, rupee continues to stay dependent on flows from FIIs with limited scope from FDIs. The signals from FIIs are also not positive attracted by bullish US stock market (outperforming EM stocks) with limited signs of optimism on the Indian economy (and equity market) in the first half of FY13. The only attractive destination is the debt market where sovereign and corporate debt assets continue to provide attractive LIBOR yields even on fully hedged basis. On the other hand, the worst case scenario for spot rupee in 2012 is not beyond 53-54 with a broad 47-54 range for FY13. Given the conflict of play between domestic and external cues, there is no clarity on the trend/direction; it could go anywhere towards 47 or 54 during this time. With this belief, value of forward dollar above 54 for end December 2012 and above 54.50 for delivery in March 2013 is overvalued and considered good (and prudent) to cover export realisations. We have already seen sharp reversal in December 2012 dollars from high of 54.15 to 53.25 and now in consolidation mode below 53.50. This expectation sets up strong resistance for USD/INR pair at 51.50 in the short term and expected to hold good at least for the next couple of months till time decay sets in. It is also considered prudent at this stage for importers to cover 1M dollar payables at value below 50.85 which sets up strong support for USD/INR at 50.40-50.30. Beyond there, the best case scenario (for rupee) at this stage is not beyond 49.80. Taking all these together, short term trading range for USD/INR is at 50.30-51.00 with overshoot limited to 49.80-51.50. The strategy is rather straight forward; to sell January – March 2013 dollars at value 54.00-54.50 and cover 1-3M imports at value 50.50-50.00. For now, let us watch consolidation at 50.65-51.15 and have a close watch on the USD Index which is expected to be in consolidation mode at 78.20-79.20; break-out direction will trigger extension into 50.30 or 51.50. Let us prefer weak dollar at this stage given the shift into “risk-on” mode and look for extended gains for rupee into 50.30 in due course not ruling out further extension into 49.80. Strategic traders can look to sell in two lots at 51.10-51.15 and 51.45-51.50 (with stop at 51.60) for 50.35-50.30 and 49.85-49.80. The risk-reward is good with 30 paisa on the table for 120 paisa reward.

EUR/USD posted strong gains from the set buy zone of 1.3200-1.3175 (low of 1.3193) to hit the first hurdle at 1.3400 (high of 1.3385) for 200 pip rally and now in consolidation mode at 1.33-1.34. The undertone continues to be bullish and this run would extend to 1.3475-1.3550 to complete the end-to-end move of the set short term range of 1.30-1.35 (reversal from 15^th March low of 1.3002). The strong support now is at 1.3300-1.3250 which should hold for completion of this round. For now, let us watch 1.3300-1.3500 with extension limited to 1.3250-1.3550. The strategy now is to buy at 1.3300-1.3250 (with stop below 1.3225) for 1.3475-1.3525. Let us also sell at 1.3500-1.3550 (with stop above 1.3575) for sharp reversal into 1.3250-1.3200.

USD/JPY is finding tough to pass through the set sell zone of 83.00-83.50 (high of 83.38) but reversal from there is finding support above 82.50 (low of 82.68). The underlying trend is bullish for 84.00-84.25 and into the final pit stop at 85.00-85.50; but would be in order to get a correction into 82.50-81.75 before take-off into the said objectives. The strategy now is to watch consolidation at 82.50-83.50 with bias for test/break of lower end; hence would look to buy at 82.25-81.75 (with stop below 81.50) for 84.00-84.25 and 85.25-85.50. This rally should be followed by sharp reversal into 80 to keep alive the expected short term consolidation at 80-85.   

EUR/JPY upside momentum failed ahead of 111.50 (high of 111.25) and now in consolidation mode around 110.50. With USD/JPY in consolidation mode, the traction is more with moves in EUR/USD. Given the near term bullish set up in the EUR/USD and sharp reversal in USD/JPY; we may need to allow for extended gains above recent high of 111.43 into 112.75-113.00 before reversal. The focus therefore has now shifted to 110-113 with bias into higher end. The strategy is to buy at 110.25-109.75 (with stop below 109.50) for 112.50-113.00. Let us also look to sell at 112.75-113.25 (with stop above 113.50) for reversal into 108.50-107.50

Interest rate market

Bond market is weak post announcement of Bond Issuance calendar for H1/FY13. Market was prepared for 60% (Rs.3.4 Trillion) but RBI chose to front-load 65% at Rs.3.7 Trillion. RBI has also chosen to avoid two weeks (June 11-15 and September 10-14) to cover advance tax outflows scheduled during these weeks. Over all, weekly auction of minimum Rs.15K Crores is bit on the higher side; beyond the appetite of the investors. It is obvious that in these tough market conditions, it would be tough job for RBI to push through the borrowing schedule and the Government may need to bear higher cost of borrowing (against their comfort 10Y rate of around 8.20%). 10Y bond yield is already at higher end of the short term range of 8.35-8.65% and the risk is of extended weakness into 8.75-9.0% in the absence of any supportive statements (or actions) from RBI. RBI has to use all options such as CRR cut; rate cut and OMO to get the 10Y yield back into the Governments’ comfort/tolerance zone of 8.15-8.25%. Having said these, it may not be prudent to chase weakness in 10Y bond yield above 8.65% at fag end of FY12. For now, let us watch 10Y bond yield at 8.50-8.65% and believe spike over 8.65% may not sustain. Strategic investors who have exited on recent run into 8.20-8.10% can look to re-enter; funding these bonds at LAF/CBLO provides positive carry. I am not sure at this stage whether the weakness could extend to 9.0% or so but it is definitely good to buy into HTM at 8.65-9.0% to replenish sales made to RBI through OMO counter. It is not good time for traders; would need deep pockets to trade this market, hence advise to stay out in the last couple of days of FY12. The current levels are very attractive for Bond swap trades; to buy 10Y Bond at yield above 8.65% against 5Y OIS hedge at below 7.60% (spread of over 1% is too good to ignore).

OIS rates are firmly in uptrend; 1Y in consolidation mode at 8.05-8.20% and 5Y rate at 7.50-7.70% with upward bias. There is no change in strategy of staying received in 1Y at 8.20-8.25% and paying in 5Y at 7.50-7.45%. The strategy is to hold on to 1Y received book entered at 8.25% (add at 8.20-8.25%) and hold 5Y paid book entered at average 7.51% (add at 7.50-7.45%) for immediate objectives at 8.0-7.90% (1Y) and 7.65-7.70% (5Y).

FX premium is in consolidation mode at 8.25-8.75% (3M) and 6.0-6.5% (12M) and as expected the bias in 3M is into upper end tracking high money market rates and bias in 12M is into lower end tracking over valuation of 12M forward dollar; extension in 3M into 8.75-8.85% and extension in 12M into 6.05-6.0% attracted good interest. Let us continue to watch consolidation in these ranges as test/break either-way is not expected to sustain given the current market dynamics. Over all, it is good to receive 3M above 8.75% (to fund PCFC/FCL loan book through rupee sources) and good to pay 12M below 6% (for attractive rupee yield against FC sources).

Equity market

NIFTY held well at the immediate resistance at 5265-5280 (high of 5278) but reversal from there lost steam ahead of immediate support at 5175 (low of 5185) and now in consolidation mode above 5200. While it would be in order to look for consolidation within 5175-5275 at this stage, the bias is for extended weakness into 5075-4950 before reversal. The strategy is to hold on to shorts entered at 5265-5280 (with stop at cost) for 5100-5050. Any gains in NIFTY on the back of support from DJIA (which looks good for extended gains into 13350-13400) will stay limited to 5350-5400. Over all, we look for near/short term consolidation at 5050-5350 with overshoot limited to 5000-5400. Strategic investors can stay away for 5025-4950 to open the investment book for FY13.

Commodity market

Gold as expected extended its gains into 1700 (high of 1696) and now in consolidation mode at 1670-1680 boxed between immediate support of 1665 and resistance of 1685. The traction now is more with the movement in the USD Index and given the bearish set up in USD Index for extended weakness into 78.20-78.00; it is prudent to absorb dips into 1665-1655 for one more look at 1690-1700. It would need extended weakness in USD Index below 78 to get the focus above 1700-1715. Let us now watch consolidation at 1665-1700 with overshoot limited to 1650-1715 and no clarity on break-out direction at this stage. The strategy therefore is to buy at 1665-1650 and sell at 1700-1715 with tight affordable stop.

NYMEX Crude is in narrow range trade at 106-108 with no strong momentum either-way. Let us continue to watch 105-108 with extension limited to 103-110. The trading strategy remains the same to buy at 105-103 and sell at 108-110 with tight affordable stop. It is good to note that strong bullish set up in commodity assets is not getting the desired impact on crude price; fear of intervention from G3 continue to bother the bulls while bears continue to see risk factors from geo political factors from Iran and North Korea.

Next update is on 3^rd April 2012. Wish you all a profitable close of FY12 and a great beginning for FY13. I presume you find MARKET PULSE useful and adds value to your judgement on the markets; will appreciate valuable feedback and happy to cover any specific requirement on any asset class.

Cheers and good luck.......................Moses Harding

    

MARKET PULSE - 27 MARCH 2012

MARKET PULSE: update for 27^th March 2012 & review of weekly report

Currency market

USD/INR lost steam at the set resistance/sell zone of 51.40-51.50 (high of 51.49) before close of day at 51.27. In the process, December 2012 dollars hit a high of 54.04 and 12M forward dollars at 54.65; considered too expensive and thus the strategy to cover January-March 2013 export receivables there. These are the levels which prompted RBI to use extreme measures to defend rupee; hence it is prudent to take note of the importance of forward value over 54. The risk of spot rupee trading above 54 in 2012/FY13 is very low. Let us continue to believe that extended spot rupee weakness into 51.50 is not sustainable and would prefer gradual reversal into 50.65-50.50 ahead of 50.15-50.00. The immediate objective is at 50.85-50.65 where traders can look to unwind “shorts” entered at 51.40-51.50 (with trail stop at 51.35). Over all, let us watch consolidation at 50.60-51.10 before getting the focus back into 49.50-50.50 in due course. USD Index is looking weak having taken out strong support at 79.10 and now set for further extension into 78.20-78.00; break of which is very bearish for the dollar.

EUR/USD lost steam at the set support/buy zone of 1.3200-1.3150 (low of 1.3193) and reversed sharply to take out strong resistance at 1.3290 and looks good for extension into 1.3450-1.3500. Hold on to long position entered at 1.3200 (with trail stop at 1.3275) for 1.3450-1.3500. Over all, we should see end-to-end of 1.32-1.35 in this run.

USD/JPY moved into set resistance/sell zone of 83.00-83.50 (high of 83.10) and looks good for reversal below 81.75 into 80.25-80.00 (trigger from reversal in EUR/JPY). Hold on to “shorts” with t/p at 81.00-80.50 and turn “long” at 80.75-80.25 (with stop below 80) for 85.00-85.50. Over all, we should see end-to-end move of 80-85 in this run.

EUR/JPY overshot the set resistance/sell zone of 110.00-110.50 but looks top heavy for reversal into 108.50 (ahead of 106.25-105.75) and any upside momentum will fail ahead of 111.50. Look to stay “short” for this move. The trigger will be from USD/JPY. Over all, we should see end-to-end move of 105.50-111.50 in this run.

FX premium is in strong traction with exchange rate play; 3M is steady at 8.50-8.75% tracking high call/short term money market rates while 12M traded 6.10-6.35% tracking spot rupee at 51.50-51.25. Continue to watch 3M at 8.25-8.75% and 12M at 6.0-6.5% with test/break either-way to attract. Play end-to-end of these ranges and stay “received” on 12M on shift into FY13. Over all, near term trend is down on shift into FY13 for consolidation in 3M at 7-8% and in 12M at 5.5-6.0%.

Bond/OIS market

Call money rate sailed over the MSF rate of 9.5% (overnight MIBOR at 9.62%) and draw down from LAF counter at record Rs.1.96 Trillion (excluding marginal drawdown from MSF counter). However this being considered temporary, there was not much impact on term money rates. Three factors of higher demand on start of reporting fortnight; unattractive dollar credit and higher overnight rates have contributed to this spike. Things should fall in place on shift into FY13 with draw down from LAF expected to stabilise around Rs.50-75K Crores on fortnightly average basis. We may need to live with this “pressure” (higher LAF drawdown and higher call money into double-digit) this week.

10Y bond yield held at previous resistance/sell zone of 8.38-8.35% (low of 8.38%) and reversal from there moved into higher end of set short term range of 8.25-8.50% for close at 8.47%. The risk of extended weakness in the Bond market into 8.50% (and possibly further into 8.65%) has come into the radar now. In the given bearish set up on the bond market driven by supply side concerns and inflation worries, rate cut from RBI could provide bit of relief and this would be essential to guide consolidation in 10Y Bond yield at 8.35-8.50%. Now, let us watch 8.40-8.55% with risk of extended weakness into 8.65% where strategic investors can choose to open the investment book for FY13. Strategic investors can buy one-third of appetite at 8.55-8.58%; let us set the second entry level in due course.

OIS rate held well at strong support of 8.10% (1Y) and 7.50% (5Y) before close at 8.14% and 7.56% respectively; in the process triggered the 5Y pay at 7.50%. No change in view in looking for consolidation at 8.10-8.20% and 7.50-7.65%. The strategy is to hold on to 1Y receive book entered at 8.25%; add at 8.20-8.25% and hold on to 5Y paid book now average at 7.51%; add at 7.50-7.45%. The unwind target for 5Y is at 7.65-7.70% and 1Y at 8.0-7.90%. Till then, enjoy the carry of over 70 bps.

Equity market

NIFTY met the first objective at 5175 (low of 5174.90) before close at 5184; thus providing exit on our “shorts” entered at average 5350. Now, immediate resistance zone is at 5265-5280 and support zone is at 5125-5145 (ahead of 5010-5040). For now, let us watch 5050-5250 with overshoot limited to 5000-5300. The strategy is to sell at 5250-5300 (with stop above 5325) for profit in two lots at 5125 and 5025. Strategic investors can stay away for 5025-4950 to open the investment book for FY13.

Commodity market

Gold gained from USD weakness for move into strong resistance at 1685-1700 and looks good for further extension. Having traded end-to-end of 1635-1685 (sharp gains from 1627 to over 1685), we may now need to revise near term range into 1665-1715 with bias into higher end. It is important for USD Index to hold above 78.20-78.00 to prevent extended rally in gold. For now, stay cautious buyer on dips with stop below 1660 for 1700-1715.

No change in view for NYMEX crude; same as prescribed in the Weekly Report.

Have a great day ahead.............................Moses Harding

MARKET PULSE - Weekly report for 26-30 March 2012

MARKET PULSE: Weekly report for 26-30 March 2012

RBI into act of compromise to prevent hard landing of Indian economy

We are into the last lap of FY12 and Indian economy (and its asset markets) is beaten down badly in the second half of this financial year. The first half was rather smooth; the trigger for reversal since July 2011 was from the Euro zone on which the authorities had little control. But for the aggressive OMO bond purchases and FX intervention (and related strictures) by RBI and aggressive liquidity injection in the Euro zone through QE/LTRO, the situation would have been worse. Since then, Indian economy has got into vicious trap with all kinds of woes such as low growth; high inflation; high fiscal deficit; high trade deficit; weak rupee; high crude oil price; high cost of subsidy; lack of investor confidence; weak consumer sentiment; low economic productivity and low efficiency. The list is big and there is conflict of interest in addressing these issues. There has to be compromise to protect some with little damage to others. It is impossible to tackle all these woes at the same time. The asset markets are under pressure post-budget with little optimism on the way forward without monetary support from RBI. Stock, Bond and Rupee values are down and weak. In hindsight, things would have been better had RBI delivered 25-50 bps rate cut on 15^th March ahead of release of Budget FY13. The prioritisation to get the Indian economy out of the woods has to be on growth and fiscal consolidation. RBI will be under obligation (and “pressure”) to shift into easy liquidity and moderate interest rate monetary policy regime without getting into aggressive rate reversal cycle. Let us set the road map for FY13 with the belief that RBI will remain supportive to the Government in its efforts to achieve the set budgetary target for FY13 on the most critical parameters of growth at 7.6%; fiscal deficit at 5.1% and cost subsidisation at below 2% of GDP. It will be extremely difficult for the Government to achieve these numbers without the magnanimity of RBI; to get into act of compromise by releasing its grip on monetary policy.

It is possible that RBI may not like to deliver more than 50 bps rate cut during FY13 for shift of LAF corridor to 7.0-8.0% from current 7.5-8.5%. This is considered as a moderate stance on interest rate. The cut in policy rates is expected to be in 2 phases of 25 bps each in April annual review and June mid quarter review or in one-shot before end of June quarter of FY13. The downward shift in operative policy rate from 8.5% to 8.0% before end of June 2012 will provide good relief to the FM. Beyond there, next phase of compromise for shift of operative policy rate from Repo rate to Reverse Repo rate through injection of primary cash (CRR cuts and OMO) will be linked to key deliverables of setting downtrend in core inflation; continued pressure on growth momentum; extent of pass-through of subsidy and Q1 revenue collections. RBI will also monitor impact of crude oil price and rupee exchange rate on headline inflation and cost subsidisation. If all goes well, we can expect shift of operative policy rate from 8% to 7% by end of Q2 ahead of move into busy season. It would not be fair (and prudent) to expect beyond this in FY13. RBI’s concern on real inflation after adjustment of cost subsidisation will limit extension of compromise support beyond these two phases of monetary actions. It would need sharp fall in headline inflation below 4% (real inflation at 6-6.5%) to push RBI into the next phase of delivery of more rate cuts; considered wishful at this stage. So, let us stay prepared for two rounds of actions from RBI; 50 bps rate cut in Q1 and shift of operative policy rate to the lower end of LAF corridor in Q2. This stance will provide price stability across all asset markets in FY13 without getting into a bullish or bearish trend.

Fixed Income market

Let us get into Q1/FY13 outlook as most market participants would have closed books for financial year end. The liquidity (and cost of liquidity) continues to stay tight (and high) but expected to ease by second week of April. It would be with the combination of release of cash by the Government and reduced demand from the banking system having shifted into new financial year. The draw down from LAF counter (on fortnight average basis) is expected to fall to Rs.50-75K Crores by middle of April within RBI’s comfort zone of 1% of NDTL. Banks are already in excess SLR mode to the tune of 3-4% of NDTL and pick-up in credit demand will result in these funds being used for productive purpose. It is also considered inefficient if RBI provides funding through LAF counter for excess SLR investments on regular basis. This round tripping exercise impacts Banks’ NII; client deposits (at cost above 10%) are used to fund investments (yielding sub 8.5%) which in turn refinanced at 8.5%. If not refinanced in full; high cost bank deposits are invested in low yielding SLR investments. There will be sharp downward shift in money market rate curve irrespective of delivery of 25-50 bps rate cut in April review (17^th April) with 1-3M rates at 9.0-9.5%; 3-6M rates at 9.5-10.0% and 6-12M rates at 10.0-10.5%. This shift in money market rate curve below Banks’ Base rate (on pre-stat cost basis) will be prerequisite to enable Banks to prepare for cut in lending rates on delivery of rate cut by RBI. For the week, average draw down from LAF counter will be over Rs.1.25 Trillion on higher demand in the first week of current reporting fortnight cycle with pressure on overnight MIBOR into 9.5%. Let us not rule out extension beyond MSF rate of 9.5% into double-digit by close of week/financial year end. The shorter end of the money market rate curve will be high with 15-30 days rate at over 12%; 31-45 days at 11.5% and 46-90 days above 11%.

10Y bond found support at the higher end of set near term range of 8.35-8.45% (high of 8.45%) for gradual reversal into the lower end (low of 8.36%) before close of week at 8.38%. The immediate attention will be on FY12 IIP/WPI/GDP numbers and H1 borrowing calendar of RBI. The supply side concern is back into focus and it would need combination of OMOs and CRR cuts to drive the Bond market into consolidation phase. Given the expectation of best case scenario of operative policy rate at 8% latest by end of June (with lot of strings attached for further downtrend in Q2), it would not be prudent to expect rally in 10Y bond yield beyond 8.25%. On the other hand, weakness into 8.50-8.65% will be considered good to invest subject to improvement on factors considered as major risk to inflation. It would need 50-75 bps CRR cut and shift of operative policy rate from Repo to Reverse Repo rate (at 7%) to get the focus back into 8.10-8.0%. Let us keep this option valid in the event of sharp downtrend in inflation and continued pressure on growth. Over all, these factors set up short term range play in 10Y bond yield at 8.25-8.50% within 8.10-8.65%. The risk factor of extended weakness beyond 8.65% into 9.0% will be driven by high BRENT Crude (above $135) and weak rupee (above 53). On the shorter end, stay invested in 1Y bond at 8.40-8.50% for final objective below 8%. For the week, let us watch 10Y bond yield at 8.30-8.45% with test/break either-way not expected to sustain. Strategic players can look to exit 10Y bonds on extended gains into 8.30-8.25% (for shift into 1Y bond at 8.40-8.50%) and await 8.50-8.65% for re-entry. Fleet footed traders can looked to trade end-to-end by buying at 8.43-8.46% and selling at 8.32-8.29% with tight affordable stop.

1Y OIS rate nicely held at the door step of receive zone of 8.25-8.28% (high at 8.25%) for reversal into the lower end of set near term range of 8.10-8.25% (low at 8.11%) before close of week at 8.12%. On the 5Y OIS, rate eased from  close to the higher end of set near term range of 7.55-7.65% (high of 7.64%) into the set pay zone of 7.55-7.50% (low of 7.50%) before close of week at 7.53%. Let us hold this 1Y OIS received at 8.25% and 5Y OIS paid at average 7.52% (with carry of 73 bps). The Q1 outlook on OIS is for downtrend in 1Y OIS below 7.90% (ahead of 7.65-7.50% in Q2) while 5Y OIS continue to stay in consolidation mode at 7.50-7.65% to squeeze the 1X5 spread close to par by Q3/FY13. The risk factor to this expectation will be on spike in 10Y bond yield above 8.65% which could trigger sharp spike in 5Y OIS rate into 8% while 1Y OIS rate stay steady around 8%. In either of the case, it is low risk; high reward trade to stay received in 1Y and paid in 5Y with positive carry of over 70 bps. For the week, let us watch consolidation in 1Y at 8.05-8.20% and 5Y at 7.50-7.65%. The strategy is to receive 1Y OIS at 8.20-8.25% and pay 5Y OIS paid at 7.50-7.45% (for minimum carry of 70 bps); spike in call money rate above 9.5% will keep the market bid for move into higher end of set ranges before reversal into the lower end on shift into FY13.

Currency market

The lack of optimism in FY13 Budget (and conflict of interest between the FM and Governor to manage growth-inflation dynamics/expectations) has triggered this strong bear run on rupee despite downtrend in USD Index and consolidation in stock market/crude oil price. The disappointments from RBI policy review and FM’s Budget coincided with strong month/financial year end demand for the greenback. The move from 49.80 to 50.80-50.90 was not a surprise but overshoot above 51 was not in the radar. Taking all these risk factors, had suggested importers to cover short term imports (up to end April 2012) on recent run into 48.85-48.60 (low of 48.60) and 49.80-65 (low of 49.79). Now, the strong bounce from there has made forward dollars attractive for exporters; December 2012 dollars above 53.65 and 12M dollars above 54.30 (recent high which triggered RBI’s aggressive action to push USD/INR down all the way into 48.60). It is also seen that 12M premium is getting adjusted to higher spot with not much of difference in 12M value of the dollar on extension in spot value from 50.90 to 51.20. What next? The immediate resistance is at 51.40-51.50 zone followed by 52.05-52.15 while 50.80-50.70 holds firm in the near term. There is no risk at this stage looking for extended weakness in spot rupee beyond 53.50 in 2012 or beyond 54.30 in FY13; hence rupee weakness from now on would be good to cover long term export receivables. It would not be in the interest of the Indian economy to get the focus back above 53 when RBI is expected to take growth-supportive stance. It is possible that USD/INR has shifted to a new range of 50-51 in the immediate term before shifting the focus back into 49-50. It was advised to avoid chasing rupee gains below 49.00 (into 48.60) with suggestion to cover short term imports; now it may not be prudent to chase rupee weakness beyond 51.00 (into 51.40) and would be good to cover January-March 2013 exports at 53.65-54.35. For the week, reduction in dollar demand and bunched up nostro supplies would provide relief to rupee. The concern will be from weak stock market but RBI’s shift into rate cut mode will provide stability. USD Index is expected to stay under pressure for test/break of 79.10-79.00 into 78.20. Over all, there will be significant dilution in the current bearish set up on rupee for shift into consolidation mode. Let us look for stability at 50.70-51.50 with bias into lower end (not ruling out extension into 50.30) while extended weakness into 51.50 will attract exporters’ interest and attention of RBI. It is important to get the short/medium term range into 49-51 for good of the Indian economy and its asset markets. The strategy is to stay cautiously “short” dollars on move into 51.40-51.50 (with stop above 51.60) for 50.70/50.30. The risk of extended weakness into 52.05-52.15 will be on USD Index rally above 80, considered now as a low risk factor. Over all, extended gains in rupee beyond 49 was considered good for importers and now believe extended weakness above 51 will be good for exporters.

The rally in FX premium halted at upper end of set ranges of 8.35-8.85% (3M) and 6.25-6.75% (12M) for sharp reversal from there for close at 8.6% in 3M and 6.3% in 12M. The trigger was strong exchange rate play driven by sharp spike in spot rupee into 51.20 from 50.75. The interest rate play continues to provide support but adjustment of over valuation of forward dollar (in the 9-12M tenors) was too strong. The interest rate play will stay valid on shift into last week of financial year and first week of new reporting fortnight cycle. It is also possible that spot rupee sets into reversal mode from below strong support at 51.40-51.50 (into 50.50-50.30). The traction now will be more with exchange rate play while staying neutral on interest rate play given the fact that money market rate will ease sharply on shift into FY13. For the week, let us watch 3M at 8.25-9.0% and 5.75-6.75% in 12M. We have already seen end-to-end moves within these ranges couple of times and it would need strong momentum for convincing break thereof. Strategic players who have received 3M at 8.75-9.0% (to fund PCFC book) can look to unwind this position on shift into FY13 when 3M premium is expected to get into consolidation mode at 7.0-8.0%. Traders who have received 12M at 6.75% or Mar/Feb at 308-313 can look to unwind at S/Feb move into 6.0-5.75%. Also, track 12M forward dollar at 54.40 to trade 12M premium (in alignment with spot value); most actions are expected to be in the longer end tracking spot rupee moves while high money market rates provide stability in the shorter end.  

We could not have asked for more; G3 currencies traded to the script within the set ranges of 1.31-1.33 (EUR/USD); 81.75-84.25 (USD/JPY) and 108.50-111.50 (EUR/JPY). It first triggered our sell at 1.3275-1.3325 (high of 1.3293); 84.00-84.25 (high of 84.09) and 111.25-111.75 (high of 111.43) for sharp reversal to 1.3133; 81.97 and 108.46 respectively. The bounce from there has been sharp for weekly close at 1.3271; 82.31 and 109.27 respectively. What next? USD has lost its momentum with sharp reversal in USD Index below 80 (high of 79.95) into immediate support at 79.10 (low of 79.21) before close of week at 79.30. Now, the bias is for test/break of immediate support at 79.10 for quick extension into 78.10-78.00. This move has to be supported by Euro strength with USD/JPY pair looking weak. For the week, let us watch EUR/USD at 1.3175-1.3475 with bias for move into higher end to complete the end-to-end move within the set short term range of 1.30-1.35 (down from 1.3485 to 1.3002 and now back into 1.35). The trading strategy is to stay “long” for this move by buying at 1.3200-1.3150 (with stop below 1.3125) for 1.3475-1.3500. Fleet footed traders can look to sell at 1.3475-1.3500 (with stop reverse at 1.3525); break of 1.3475-1.3500 resistance will shift the focus into 1.3850-1.4000.

USD/JPY looks good for extended weakness below 81.75 into 80.50 before strong reversal. Over all, near term consolidation within 80-85 will be in order at this stage. For the week, let us watch 80.50-83.50 with initial bias into the lower end before sharp reversal into 84.00-84.25 and for further extension into 85.00-85.50. The trading strategy is to stay “short” by selling at 83.00-83.50 (with stop above 83.75) for 81.00-80.50. Let us also buy at 80.75-80.25 with stop below 80 for 85.00-85.50.

It was a good 300 pip trade (against 50 pip risk) in EUR/JPY from 111.50 to 108.50. The trend is down for immediate objective at 107.50 not ruling out extension into 105.64; trigger point for sharp rally into 111.43. For the week, let us watch 107.50-110.50 with bias into the lower end. The strategy is to reinstate “shorts” at 110.00-110.50 (with stop above 110.75) for 107.50-105.75. It is a good risk-reward trade with 50 pips on the table for 300-500 pips in the pocket.

Equity market

NIFTY lost momentum at the higher end of set weekly range of 5075-5400 (high of 5386) and in the process triggered our “sell” at 5325-5375; reversal from here held well at first support zone of 5200-5175 (low of 5205) before close of week at 5278. What next? In the absence of any positive take-away from either the pre quarter review of monetary policy or Budget FY13, set up of bearish mode in stock market was not a surprise and we turned “short” post-policy and pre-budget; since then NIFTY has reversed from 5445 to 5205, short of immediate objective at 5175. However, NIFTY is not expected to extend this bear run beyond 5080-4950 at this stage. It is possible that RBI gets into compromise mode to deliver 25 bps rate cut on 17^th April which would trigger entry of domestic investors. The aggressive flows from FIIs since end December 2011 may not be there in the near term as they would watch conflict of interest between FM and RBI in managing growth-inflation dynamics. For the week, let us watch sideways trading mode at 5075-5400 with test/break either-way to attract. The trading strategy is to sell in two lots at 5350-5375 and 5425-5450 (with stop above 5475) for 5175-5075. Strategic investors can stay away to buy in two lots at 5075-5050 and 4975-4950 (with stop below 4925) for reversal into 5400-5500; over all, prefer short term consolidation at 5000-5500 in Q1 of FY13; unexpected delivery of 50 bps rate cut on 17^th April will trigger extended gains into recent high of 5630, so need to stay invested for this move.

Commodity market

Gold traded to the script within the set weekly range 1635-1665 and overshoot attracting good interest (high of 1669 followed by low of 1627) before close of week at 1659. The short term trend continues to stay bearish for test/break of 1600 for quick extension into 1520 while 1690-1715 stays firm. The stability in USD Index at 79-80 is also keeping Gold in tight range but general weakness for the dollar can push Gold into the higher end of 1685-1700 before reversal. For the week, let us watch consolidation at 1635-1685 with bias into higher end, not ruling out extension into 1700. Strategic investors can look to “short” the Gold in two lots around 1685 and 1705 (with stop above 1715) for 1525. Fleet footed traders can look to stay “long” for this move by buying at 1635-1625 with tight stop for 1680-1690.

NYNEX crude is struck within the 105-108 range (low of 104.50 and high of 108.25) before close of week at 106.75. There is strong resistance at 108-110 where even bulls turn neutral but bears are unable to take control to provide strong reversal into 100. It is trading in neutral zone of 103-108 for long time now but has given good two-way opportunities for fleet footed traders.. For the week, let us continue to watch consolidation at 105-108 with overshoot limited to 103-110. The strategy remains the same to sell at 108-110 to buy back at 105-103 with tight affordable stop.

Have a great week ahead......................Moses Harding              

Review of G3 trades

EUR/JPY:

Triggered sell at 111.25-111.75 (high of 111.43) and has reversed sharply from there to 108.80 above support at 108.50 (lower end of set near term range of 108.50-111.50). Now leave trail stop above 109.50 and t/p above 107.50. The new range will be at 107.50-110.50. Look to sell again at 110.25-110.75 (with stop above 111) for 105.75. This will complete one round of end-to-end trade of strategic positions with buy at 105.75-105.25 and sell at 111.25-111.75.

USD/JPY:

Triggered both the sell level at 84.00-84.25 (high of 84.09) for reversal into the buy level of 82.75-82.50 (low of 82.75). Now, the pair should find support at 82.00-81.75 before sharp reversal into 84.00-84.25 ahead of 85.00-85.50. Buy at 82.25-81.75 (with stop below 81.50) for 84.00-84.25

EUR/USD:

Triggered the sell level at 1.3275-1.3325 (high of 1.3286) for sharp reversal into t/p at 1.3150 (low of 1.3135). Now, watch consolidation at 1.3050-1.3250 with overshoot limited to 1.2975-1.3325. Trade end-to-end of this range.

Moses Harding

MARKET PULSE: 21 March 2012 (Review)

USD/INR Spot:

The rally lost momentum above the upper end of 50.15-50.65 range (high of 50.68) triggering April 2012 dollar sell (high of 51.15). No change in view; let us stick to this range but not to chase beyond 50.15-50.00 (cover your shorts there and look to cover up to 15-30 day imports).

USD/INR FX Premium:

lost momentum above hgiher end of 8.35-8.85% (3M) and 6.5-6.75% (12M) for marginal reversal but no strong momentum seen for extension into lower end. Stay with this range.

EUR/USD:

Do not stay short as upward momentum is good for extension into 1.3325 for further extension into 1.34 minimum. Look to buy 1.3225-1.3175 for these objectives.

USD/JPY:

The upward momentum is losing steam ahead of  84.00-84.25 and looks good for correction into 83.25-82.50 before strong reversal. Can trade end-to-end of this zone.

EUR/JPY:

just short of the sell zone (t/p or initiation) at 111.25-111.75 (high at 111.15) but no sign of reversal as yet. Watch consolidation at 110.50-111.50; the reversal trigger can either be from EUR/USD or USD/JPY.

Bond/OIS market:

Pressure on RBI to cut rates is in play now providing bit of ease in 10Y bond yiled below 8.40%; 1Y OIS rate below 8.20% and 5Y OIS below 7.60%. Let us continue to watch consolidation at 8.35-8.45%; 8.15-8.25% and 7.55-7.65% respectively and be neutral on break-out direction. Needless to say, there is significant dilution in post-budget bearish set up. Need to plan trading strategies looking for 25 bps rate cut in April (policy rate at 8.25%); 25 bps rate cut in June (policy rate at 8%) and shift into CRR cut mode in July to ease operative policy rate from Repo rate to Reverse Repo rate. We may not see more than 50 bps rate cut in FY13 with possibility of 1.5% downward shift in operative policy rate. These expectations will limit weakness in 10Y bond at 8.50-8.65% and 5Y OIS rate capped at 7.75%.

Moses Harding

MARKET PULSE - 21 MARCH 2012

MARKET PULSE – 21^st March 2012

Currency market

USD/INR held above the strong support zone of 50.05-49.80 (low of 50.07) for gradual move into first resistance zone at 50.35-50.50 (high of 50.43) before close at 50.39. In the process, moved into the sell zone of December 2012 dollars at 53.00-53.15 (high of 53.15); managed to get higher value as premium maintained its uptrend despite higher spot. In the meanwhile USD Index traded around strong support of 79.50 (79.88-79.35) in a weak undertone. What next? The sharp reversal in USD Index from above 80.50 to below 79.50 is not a good sign for the dollar bulls. The immediate term bias is for gradual move into next support around 79.10 and get into consolidation mode at 79-80. This process is seen as correction (and consolidation) before getting the desired momentum for test/break of recent high at 80.74 for near term objective at 81.75-82.00. This expectation should push rupee bulls into back foot. The immediate term outlook for rupee is bearish tracking weak stock market and high crude oil price in addition to the usual month/year end dollar demand. The post-monetary policy and post-budget expectation on the Indian economy is negative and weak with risk of adverse comments from rating agencies. The near term bias therefore has shifted for gradual move into the higher end of set near term range of 49.80-50.80. The strategy for importers is to stay covered on 15-45 days payables at forward value below 50.25 (spot at 50.10-49.80) while exporters to stay aside for spot at 50.50-50.60 (to sell April 2012 dollars above 51) and await further extension into 50.80-50.90 (to sell June 2012 dollars above 52). For now, let us watch 50.15-50.50 with overshoot limited to 50.00-50.65. The strategy for traders is to buy at 50.15-50.00 with tight affordable stop for 50.65-50.80.

FX premium remained bid on strong interest rate play with limited impact from favourable exchange rate play. The outlook on money market has turned very bearish post monetary policy and Budget. Now, trades are within the set strong resistance zone at 8.50-8.75% in 3M and 6.50-6.65% in 12M. The set up of strong momentum in the uptrend is also driven by fear of delay in rate cut actions from RBI. Now, we may need to allow for consolidation at higher levels till end of March and expect release of pressure on shift into FY13. For now, let us watch 3M at 8.35-8.85% and 12M at 6.50-6.75% with test/break either-way to attract. Strategic players can look to build March/February received book above 6.65% (308). It is good to receive S/June at 8.75-9.0% for ALM play to fund PCFC loan book through rupee sources.

EUR/USD is in consolidation mode at 1.3150-1.3250 (low of 1.3140 and high of 1.3264) with test/break either-way could not sustain. The inability of the USD to extend its gains from 1.3264 to below 1.3150 (into 1.3050) provides comfort to the Euro bulls. There is no change in strong fundamentals of US over the Euro zone and the underlying dollar bullish trend is very much intact. For now, let us watch 1.3100-1.3300 with overshoot limited to 1.3050-1.3350. The strategy is to play end-to-end by selling at 1.3275-1.3325 (with stop above 1.3350) and buying at 1.3125-1.3075 (with stop below 1.3050).

USD/JPY is in consolidation mode at 83-84 (low of 83.00 and high of 83.82). The immediate term outlook is for consolidation with downward bias into 82.50-82.00 before reversal while 84.00-84.25 remains firm. We stay neutral at this stage on directional break-out of 83-84 which will be good for 100-125 points. The strategy to re-convert the JPY liability into USD at 85.00-85.50 is valid. For now, let us watch consolidation at 82.75-84.25 with test/break either-way to attract. The strategy is to trade end-to-end by buying at 82.75-82.25 (with stop below 82.00) for 84.00-84.25. Let us avoid trading from “short” side now given the underlying dollar bullish trend into 85.00-85.50 in the near term.

EUR/JPY maintained its uptrend since the reversal from 105.75-105.50 support window towards the final pit stop at 111.50-111.75 (high so far at 110.82). Let us continue to watch consolidation at 108.50-111.50 and look for sharp reversal from higher end to lower end; not ruling out test/break thereof for further extension into 107.50/105.50. The strategy is to sell at 111.25-111.75 (with stop above 112.00). It is a good risk-reward trade; 50 pips on the table for 300-500 pip in the pocket if objectives are met. It is worth making an attempt having chased the 500 pip up move from 105.75.

Bond/OIS market

There are good signs of nervousness in the Bond/OIS market despite consolidation above 8.40% (10Y Bond); 8.20% (1Y OIS) and 7.60% (5Y OIS). However, there is no momentum as yet to test/break the outer end of set near term ranges of 8.35-8.45% (10Y); 8.15-8.25% (1Y OIS) and 7.55-7.70% (5Y OIS). Let us continue to watch these ranges with bias into higher end and prepare for test/break thereof in due course. The strategy is to sell 10Y bond at 8.37-8.34%; pay 5Y OIS at 7.55-7.50% and receive 1Y OIS at 8.25-8.30%. It would need RBI’s rate cut action to release the strong bearish set up on the Bond/OIS market driven by lack of confidence on the ability of the Government to meet its FY13 targets.

Equity market

The downward pressure on NIFTY lost steam ahead of good support zone at 5225-5175 (low of 5233) but reversal from there failed ahead of set resistance window of 5300-5325 (high of 5297) before close at 5274. The mood of investors is negative and any spike will be seen as correction to set up good selling opportunity. The immediate resistances are at 5325 and 5400; higher end of set weekly range of 5075-5400. There is no change in view of looking for extended weakness into 5175 (ahead of 5080). For now, let us watch 5175-5325 with bias into lower end for further extension into 5080 in due course. The strategy is to sell on correction into 5325-5375 (with stop above 5400) for 5175.

Commodity market

Gold traded the inner ring of 1635-1665 (high at 1669 and low at 1647) within the set near term range of 1600-1700 and in consolidation mode around 1650. There is no change in view of looking for consolidation with bias into the lower end in the near term. For now, let us watch consolidation at 1635-1665 with test/break either-way to attract. The strategy for fleet footed traders is to trade test/break of this range with tight affordable stop while strategic investors can look to sell at 1685-1700 (with stop above 1710) for 1610-1600.

NYMEX crude is unable to hold on to its strength into 108-110 resistance window but reversal from 108.24 found good support above 105.50 (low of 105.74). The undertone is slightly bullish despite intervention fears from the G3. The more time it spends above $105, the risk is higher for test/break of 110 (into 115) before sharp reversal. Let us keep this risk factor in mind at this stage. For now, let us continue to watch consolidation at 103-108. The strategy is to play end-to-end by buying at 103.5-102.50 and selling at 107.50-108.50 with tight affordable stop. It is possible that we see end-to-end moves by close of week.

Next update on 26^th March......It is a long week end; have fun..................Moses Harding

Compromise or perish.....state of Indian Economy

There has been serious debates in the media on the conflict of issues between the Finance Ministry and the RBI. I have tried to capture these issues in the form of communication between the FM and the Governor for better and easy understanding. Enjoy reading....here goes the chat....

Governor to FM: I have been running tight monetary policy since March 2010 and have hiked the operative policy rate from 3.25% to 8.5% to get headline inflation down to 7%. I have done my job well. I am now gearing up to get the print below 6% by end of FY13.

FM to Governor: But, this has added pressures on me as my GDP growth is down to 7%; my revenues are under severe pressure; I cannot cut subsidies and can’t think of any kind of reforms to get the growth back on track. I don’t have enough support in the Parliament or deep pockets to get out this pain; please bail me out by releasing your grip on the monetary policy.

Governor to FM: The impact of cost subsidisation continues to keep real inflation at elevated levels of 9-10% and I will have comfort to get into loose monetary policy only when headline inflation falls below 4% to cover subsidy cost; thereby keeping real inflation around acceptable 6-7%. Moreover, I am closely watching price of BRENT Crude; it needs to go below $115 to limit the cost subsidisation below your target of 2% GDP for FY13. Rupee is also weak and we continue to stay dependent on external flows; there seems to be no solutions to address the huge Current Account Deficit.

FM to Governor: I know and all these are structural issue; I also don’t have control over external factors but it will be tough to handle internal forces (within and outside UPA) if I don’t meet my targets in FY13. I missed the FY12 targets by big margin and I don’t want to have a repeat under performance in FY13.

Governor to FM: I understand your position but my hands are tied till I get comfort on sharp downtrend in inflation driven by significant fall in BRENT Crude and dilution of rupee impact on inflation. I also have my doubts to achieve FY13 fiscal deficit of 5.1%; which will be sharply down from FY12 actual of around 6%. The economy is in “business as usual” mode and it would be hard to fix this 1% gap between FY12 actual of around 6% and FY13 estimate of around 5%.

FM to Governor: Everything is ganging up against me and I want support from monetary policy to fix this gap. The system is short of cash; money supply is down; rates are up; investor confidence is bad; consumer sentiment is weak and all will start looking good only when you get into loose monetary policy. Else, achieving my growth and revenue targets will be extremely difficult and fiscal position will turn from bad to worse.

Governor to FM: Unless you give comfort on fiscal deficit and ability to limit cost subsidisation, it will be very difficult for me to go soft on monetary policy

FM to Governor: Unless you do this, it is impossible for me to provide comfort to you on fiscal deficit and avoid overshoot in cost subsidisation beyond 2% of GDP

Governor to FM: Where we go from here? Your deliverables are dependent on me and my deliverables are dependent on you....

FM to Governor: We cannot afford to sink together; we have to find a way out so that both are safe (communication ends without solutions).

Economy Stake holders (who overheard this conversation): Who will bell the cat? Who will take the first step of compromise?? FM could do very little at this stage. If at all, the Governor can help. High real inflation is major risk to growth; low growth is major risk to inflation and combination of low growth and high inflation is major risk to fiscal consolidation. Is there a way to get out of this vicious trap? Tough times ahead...................

Moses Harding

MARKET PULSE - 20th March 2012

MARKET PULSE: 20^th March 2012

Currency market

USD/INR is tightly boxed within 50.05-50.30 right at the middle of set near term range of 49.80-50.65. The downward pressure on the EUR/USD and usual month end dollar demand provides good support for the pair at 50.05-50.00 considered as strong support ahead of the lower end of set short term range of 49.80-50.80. The triggers for the rupee bears are from weak stock market; strong USD against major currencies and usual month/year-end dollar demand. However, there is comfort (for rupee bulls) from good dollar supplies in the forward market and loss of bullish momentum in crude oil price. Let us track consolidation in USD Index at 79.50-80.50 (within 79-81) and prefer USD/INR to find stability at 50.00-50.35 with overshoot limited to 49.85-50.50. The strategy for the day is to sell December 2012 dollars at 53.00-53.10 (spot at 50.35-50.50) and buy April 2012 dollars at 50.50-50.40 (spot at 50.00-49.85).

FX premium tightly boxed around set resistance of 8.5% in 3M/June 2012) and 6.5% in (12M/February 2013) and reversal from there is also shallow despite favourable exchange rate play. The high term money rates continue to provide strong support. The near term outlook (on shift into FY13) of sharp reversal into 8.0% (3M) and 6.0% (12M) continues to stay valid. For now, let us watch 3M at 8.15-8.65% and 6.15-6.65% in 12M. The strategy is to receive 3M at 8.50-8.65% and 12M at 6.50-6.65% for immediate objective at 8.15-8.0% and 6.15-6.0% respectively.  

EUR/USD rallied into the sell window of 1.3250-1.3300 (high of 1.3264) and in consolidation mode around 1.3225. The ability to hold above minor support at 1.3150-1.3120 and lack of momentum in reversal from the set sell zone puts the dollar bulls at the back foot. Let us now watch consolidation at 1.3150-1.3300 and consider test/break either-way not expected to sustain. Continue to stay “short” with stop loss above 1.3325 for 100 pip profit. At this stage, EUR/USD is set to stay steady at 1.30-1.33 till fresh cues come in to guide directional break-out.

Bond/OIS market

Bond/OIS market is under pressure but traded steady above 8.40% (10Y bond); 8.20% (1Y OIS) and 7.60% (5Y OIS). The next trigger will be from FY13 auction calendar and trending in IIP/WPI numbers. The supply side concerns are back into focus and it would need continuation of OMO or delivery of rate cut to release pressure both on Bond and OIS market. For now, let us watch 10Y bond at 8.35-8.45%; 1Y OIS at 8.15-8.25% and 5Y OIS at 7.55-7.70%. The bias is for gradual move into higher end while test/break of lower end is not expected to sustain. The strategy is to receive 1Y OIS at 8.25-8.30%; pay 5Y OIS at 7.55-7.50% and sell 10Y bond at 8.37-8.34%.

Equity market

NIFTY is in the process of gradual move into the lower end of set weekly range of 5075-5400 and fell 100 points from high of 5340 to 5238 before close at 5257. The focus is back into strong support at 5175 followed by 5080 while 5300-5325 stays solid. For now, let us watch 5175-5325 for bias into lower end; thereafter should gain momentum for quick push into 5080. The strategy is to trade from “short” side while strategic investors to await extended weakness into 5075-4950.

Have a great day.....................Moses Harding

Quote for the week

"What the caterpillar calls the end, the world calls it butterfly".......cheer up...

Moses Harding

Budget 2012 Analysis and Weekly report for 19-23 March 2012

MARKET PULSE: Weekly report for 19-23 March 2012

Thumbs down to reforms and populist measures but intent on fiscal consolidation

There was no disappointment (neither pleasant nor unpleasant) from the Budget FY13 and the FM has done well within the available means; defensive and firm. FM did not have the bandwidth to go big-bang on reforms (economic or structural) to ramp up revenues or to cut subsidies to manage cost efficiency. Our expectation revolved around the main themes of GDP growth at 7.5%; fiscal deficit at 5%; net market borrowing of around Rs.4.5 Trillion; higher taxes (and coverage) to bridge fiscal gap and measures to ensure flow of cost subsidisation to the right target segment. It was also considered essential to pull off-shore liquidity to infrastructure and ensure availability of domestic investments to core sectors. The actual numbers are more or less in line with expectation with FY13 estimates of 7.6% GDP growth; 5.1% fiscal deficit with slippage in net market borrowing at Rs.4.8 Trillion and disinvestment target of Rs.40K Crores. The placement of cap at 2% of GDP for cost subsidisation without keeping it open-ended is a welcome move. The plan to make direct cash transfers through Unique ID system will avoid leakage in subsidy distribution and ensure reach to right audience. There are measures for infrastructure companies to access off-shore markets for debt and increase in issuance of tax-free bonds to domestic investors. It was not a surprise to see increase in taxation (move close to 2008 levels) and cutting the negative list for service tax for higher coverage. The FM has also released pressure on Current Account Deficit through higher taxes on import of Gold and precious metals. All other major aspects linked to economic or structural reforms are untouched. Over all, FM was not expected to do better than this given the political limitations and economic (and monetary) complexities on hand. But, this is not good enough to send bullish signals for the way forward. At best, FY13 could be a period of consolidation while the Government (and RBI) work for solutions to get the economy out of the vicious trap; caught between low growth and high inflation dynamics. There has to be a priority shift (from inflation to growth) to get the economy back on track. The phase since March 2010 to arrest inflation has been long and shift from neutral stance to growth supportive stance will help the Government to achieve the set targets. It is not that RBI has not done enough. It has pumped in huge liquidity; primary cash of over Rs.2 Trillion through OMO and 125 bps CRR cut and daily cash of over Rs.1 Trillion through LAF counter. But there is need to address cost of liquidity to pump up consumption and productivity. It is also important for the Government to address supply side concerns to get out of this trap firmly and quickly. Else, the chicken and egg situation will stretch further into FY14! To sum up, the Government stands exposed with no political power to bite the bullet or deep pockets to chew the ballet. What is the impact on markets?

Fixed Income (Bond/OIS) market

The draw down from LAF has crossed over Rs.1.75 Trillion (against the expected cap of Rs.1.5 Trillion for the week) and money market rates are through the roof with 1-3M rates above 12% and 6-12M rate at 11.0-11.5%. The shift into the second week of the current reporting fortnight cycle ending 22^nd March will provide bit of relief. We would see significant release of pressure from new reporting fortnight starting 23^rd March to drive the LAF draw down to below Rs.1 Trillion and shorter end of the rate curve below 11%. The deficit system liquidity is expected to be around Rs.50-75K on shift into FY13. Going forward, RBI is expected to maintain system liquidity around its comfort level of 1% of NDTL with mix of OMO bond purchases and CRR cuts. There is now divided house on expectation of rate cut in April annual policy review. The expectation now is for shift of LAF corridor into 7.0-8.0% by end of Q1/FY13 through 50 bps cut in policy rates. Thereafter, the timing of allowing pass through of operative policy rate from higher end to lower end of LAF corridor will be dependent on trending in headline/core inflation; BRENT Crude below $115 and rupee stability below 50. RBI should derive comfort from FM’s actions (and intent) to address fiscal consolidation. For the week, let us watch overnight MIBOR trending below 8.75% with LAF draw down below Rs.1 Trillion by close of week. There will be relief in term money market with rates trending down (beyond 3M tenor) despite higher demand from Banks to meet financial year end targets.

Bond market is in strong bear grip post monetary policy and the Budget. 10Y bond yield rose sharply into 8.45% on emergence of supply side concerns. RBI was able to address this issue through aggressive OMO purchases to the tune of over Rs.1 Trillion. If structural liquidity position becomes normal, then RBI may discontinue with its OMO operations; this is the fear at this stage. The system is already in excess SLR mode by over 4% of NDTL and there may not be demand till RBI gets into rate cut mode. Our “call” to cut policy rates by 50 bps was to maintain stability in 10Y bond yield at 8.10-8.35% to cover post-budget bear run and now RBI has to prepare for defending extended weakness beyond 8.50% to guide stability at 8.35-8.50% till trigger of rate cut. Now, the negative spread between 1 and 10Y bond yield will vanish to build tenor premium of minimum 10-15 bps. For the week, let us watch 1Y & 10Y bond yield at 8.35-8.50%. The bias in 1Y will be to the lower end while 10Y yield knocks at 8.50% to build premium of 15 bps across 1-10Y tenor. The strategy is to stay invested in 1Y bond 8.45-8.50% and await fresh cues to absorb weakness above 8.5% in 10Y (not ruling out extended weakness into 8.65%). The shift of focus into 8.20-8.15% is dependent on 50 bps rate cut and shift of operative policy rate into the lower end of LAF corridor.

OIS rates moved up tracking higher overnight/term MIBOR and bearish set up in the bond market. 1Y OIS rate was up into 8.25% and 5Y into 7.65%. Here again, the play will be on the spread squeeze with strong resistance in 1Y at 8.25% and good support in the 5Y at 7.55%. We highlighted the risk of extended weakness in 5Y rate above 7.55% if RBI leaves rates unchanged and advised traders to play stop/reverse strategy. Now, short term range play is expected to stay within 8.0-8.25% in 1Y and 7.55-7.80% in 5Y. For the week, let us watch 1Y at 8.15-8.25% and 5Y at 7.55-7.75%. The strategy is to receive 1Y at 8.25-8.30% and pay 5Y at 7.55-7.50%. The downtrend in money market rates and uptrend in medium/long tenor bond yields will limit extension beyond 8.30% in 1Y and arrest sharp reversal in 5Y below 7.50%.

Currency market

There is bit of relief for rupee from the Budget on commitment to keep Current Account Deficit much lower than the FY12E of 3.6% of GDP. FM has also taken measures to remove the bullion impact on the CAD and has cut the round-tripping trades in precious metals which are anyway neutral on the CAD. However, risk will be from FII interest in domestic stock market. There is no change in our stance of looking for short term consolidation at 49.80-50.50 with overshoot limited to 49.50-50.80. We continue with the strategy to sell 1M/April dollars above 51 (spot at 50.50-50.60); 3M/June dollars above 52 (spot at 50.85-50.95) and December 2012 dollars above 53 (spot at 50.35-50.45). On the other side, importers can cover 1-2M imports at 49.85-49.60. Over all, impact from the Budget is neutral at this stage and rupee direction will be driven by movement in USD Index and crude oil price. USD Index is now in consolidation mode at 79.50-80.50 unable to hold on to its gains above 80.50 but it is matter of time for extended gains above 81 with 79.20 forming a strong short term base. We need to have a close watch on FII behaviour. It is possible that FII may get into profit booking mode in the absence of appetite from domestic investors. For the week, let us watch rupee at 49.80-50.65 with test/break either-way not expected to sustain. Strategic players can look to play end-to-end of this range by buying at 49.80-49.65 and selling at 50.65-50.80 with tight affordable stop. Let us also look to exit December 2012 “shorts” entered above 53 for 50 pip profit on spot move into 49.85 (December 2012 dollars value below 52.50).

There is no change in FX premium outlook for consolidation in 3M at 8.0-8.75% and 6.0-6.5% in 12M. It is prudent to play end-to-end of these ranges as test/break either-way is not expected to sustain. It is good to receive June 2012 at 8.5-8.75% for ALM play (to fund PCFC book of L+3.5%) and to pay 12M below 6% for conversion of FC sources into rupee uses. There will be good arbitrage on these carry trades. It would need extended rupee weakness beyond 50.80 to drive premium down; very low probability at this stage. Strategic players can look to receive 12M at 6.50-6.65% and pay at 6.0-5.85%. 

EUR/USD held well at set buy zone of 1.3000-1.2975 (low of 1.3002) to complete the correction phase by revisit into 1.3175-1.3200 sell zone (high of 1.3184); hence the suggestion to exit “shorts” above 1.3000-1.2975 and “buy” there for correction back into 1.3150-1.3200. What next? EUR/USD has moved into consolidation mode at this stage; weekly close above 1.3150 provides comfort to Euro bulls for extended gains into 1.3250-1.3300 while 1.3050-1.3000 remains firm. For the week, let us watch 1.3050-1.3250 with overshoot limited to 1.2975-1.3325. The strategy is to play end-to-end by selling at 1.3250-1.3300 (with stop above 1.3325) and buy at 1.3050-1.3000 (with stop below 1.2975). Let us stay neutral on break-out direction and await fresh cues to provide momentum.

The rally in USD/JPY lost momentum ahead of strong resistance at 84.25 (high of 84.17) and in consolidation mode at 83-84. The rally in USD/JPY from 76.02 (2/2/12) and 80.56 (7/3/12) is sharp and it would be in order to allow for consolidation in the near term and await fresh cues for directional break-out. For the week, let us watch consolidation at 82.50-84.25. There is no clarity on directional break-out at this stage which could extend to 81.75 or 85.50. Let us stay aside for now and stay tuned to convert the JPY liability (entered below 76.50) back into USD on move into 85.00-85.50.

The rally in EUR/JPY from strong support zone of 105.75-105.25 has hit 110 for a 450 pip rally. This pair is looking good for extension into 111.50 while 108.50 provide good support. For the week, let us watch consolidation at 108.50-111.50 with initial bias into higher end. It is possible that we see sharp reversal from there into 108.50; break of which will extend to 107.50/105.50. The strategy is to sell at 111.25-111.75 (with stop loss above 112) for 107.50-107.00.

Equity market

NIFTY is down triggered by disappointment in mid quarter review of monetary policy (15^th March) followed by absence of optimism in Budget 2012 (16^th March). It is good that we had turned neutral ahead of budget asking investors to shift from equity to high yield fixed income and pre-budget rally into 5445 gave good exit (on long entered at average 5225) while weekly close below 5350 is bearish. What next? NIFTY rally from 4531 (20/12/11) to 5630 (22/2/12) was triggered by external cues despite negative sentiment in the domestic environment. During this time, DJIA rallied from 11735 to 13253 with gain of around 13% in three months time. NIFTY outperformed DJIA with gain of around 24% in two months time mainly driven by flow of FII liquidity into Indian equity market. Normally, FIIs don’t prefer consolidation market to stay invested with exchange rate risk. The bull-run since shift into 2012 is losing steam with no bullish expectation from the Budget and NIFTY is expected to stay in sideways trading mode into short/medium term. Given this expectation, it is possible that FII will get into wait-and-watch mode or slowly retreat from the scene. NIFTY is definitely in downtrend at this stage posting lower high’s (from 5630 to 5499) and it is important to hold at the strong support zone at 5170-5195 to prevent extended weakness into the lower end of set near term range of 5000-5500. The positive sentiment in DJIA would provide bit of relief; expectation is for gradual move into 14198 (level seen in October 2007 which triggered post Lehman collapse to 6470 by March 2009 in 18 months). DJIA is in the process of regaining the entire fall from 14198 to 6470. On the other hand, NIFTY is moving away from pre-Lehman high of 6357 (January 2008). As said, Indian economy is caught in vicious trap between growth and inflation. The authorities need to quickly shift priority towards growth to get the market out of its woods. For now, let us watch immediate supports at 5175 and 5080 which will come into play this week. Beyond there, it is important that this bear run lose momentum at 5000-4950; else recent low of 4531 will come into focus. The bulls need to take out strong resistance at 5400-5450 (ahead of 5525) to prevent bear set up in the market. For the week, let us watch 5075-5400 with overshoot limited to 4950-5525. The strategy is to play from “short” side by selling in two lots at 5400-5425 or/and 5500-5525 (with stop above 5550) for 5000-4950. Strategic investors can stay away for 5075-4950 and await trade initiation signals.

Commodity market

Gold is in consolidation mode at 1635-1665 for close of week at 1650; midpoint of the set near term range of 1600-1700. The moves in Gold are in alignment with USD Index. Given the consolidation mode in USD Index at 79.50-80.50 (within 79-81); Gold is expected to stay in consolidation mode at 1615-1685 (within 1600-1700). The strategy is to play the inner ring of 1615-1665 (for fleet footed traders) while strategic players can look to sell at 1685-1700 and buy at 1615-1600 with tight affordable stop.

NYMEX Crude traded end-to-end of set near term range of 103-108 (low of 103.78 and high of 107.34) before close of week at 107.15. The inability to hold below 105 highlights the strength of the bulls but given the strong political support to arrest excessive rally, bulls are not expected to chase gains into 108-110. For the week, let us continue to watch consolidation at 103-108 (within 100-110). Fleet footed traders can play end-to-end of 103-108 while strategic players can look to sell at 108.50-109.50 (with stop above 110.5) for 104.50-103.50.

Have a great week ahead................Moses Harding   

MARKET PULSE - 16 MARCH 2012

Low confidence level on macro fundamentals; shift to neutral stance

RBI has turned cautiously bearish on macro economic outlook. There is lack of confidence on favourable trending in key parameters of growth; inflation; fiscal deficit; commodity prices; trade deficit; exchange rate etc. This will lead to serious erosion in investor and consumer confidence into the Indian economy and markets. The ability of the Government to roll-out economic reforms or roll-back costs for fiscal consolidation is in serious doubt given the conflicts within UPA coalition. It is possible that foreign investors will get into wait-and-watch mode and may tend to trim positions. The build up of bullish expectations in the US zone may attract foreign investors; risk of reverse flow of funds or lower allocation to Indian markets. Now, mid quarter review of monetary policy is out of the way with disappointment; post-policy weakness across stock, bond and currency market says it all. Nothing significant is expected from the Union Budget and the risk of general election ahead of schedule has set in. It is prudent for investors to lock in to high yield fixed income assets till emergence of clarity on the way forward. It is good to preserve capital with not-so-bad return from fixed income at rates 11.5-12% for 3-6M tenor. India Inc is getting into a vicious trap – high inflation is detrimental to growth but low growth (with high cost subsidisation) is bad for inflation. The solution is to address second generation reforms in the budget to attract foreign capital and ensure flow of adequate domestic capital and liquidity to high growth centric sectors; delivery of populist budget with eyes on vote bank and coalition partners will be harmful at this stage to make things worse both on growth and inflation. Can the FM act bold and build consensus within UPA coalition? If FM can succeed, it would be a good sign for the way forward. Else, it would be tough to balance expectations on growth and inflation. What is the impact on asset markets in the short term?

Fixed Income (Bonds/OIS)

Money market rates are already at its peak with 1-3M rate at 12.0-12.5% and 6-12M rate at 10.75-11.25%. The draw down from LAF counter is at the higher end of expected Rs.1.0-1.5 Trillion for the week. This scenario is seen temporary till end of March and would see sharp reversal in money market rates with deficit system liquidity down at RBI’s comfort level of 1% of NDTL (at Rs.50-75K Crores). This is the time to stay invested for 6-12M tenor. Bond market will be in consolidation mode till April 2012 annual policy review with 1Y bond yield at 8.40-8.50% and 10Y bond yield at 8.25-8.50%. While it is good to stay invested in 1Y on weakness into 8.5%, it is prudent to trade end-to-end in 10Y bond; there will be no momentum for conclusive break-out either-way. 1Y OIS rate is back into 8.10-8.25% while 5Y rate is up at 7.45-7.70%. It is better to stay away on the 1Y and trade end-to-end in the 5Y; test/break either-way would lose momentum. It is good to get into 1X5 play by receiving 1Y at 8.25% and paying 5Y at 7.50-7.45%. Over all, RBI has supported growth (at cost of inflation) by pumping over Rs.3 Trillion of liquidity (through CRR cut; OMO and LAF); the Government needs to act with measures that would provide downtrend in inflation without compromise on fiscal deficit which then would trigger rate reversal cycle from RBI.

Equity market

The post-policy reversal found support above 5350 (low of 5362) before close of day at 5380. The domestic investor appetite is expected to be low while FII flows will dry up with risk of reverse flow on bearish cues in the Budget. Now, the focus is back into the lower end of the set near term range of 5200-5500 with risk of extended weakness into 5000 on bearish cues from the Budget. It may not be a one-way run given the bullish western markets with DJIA expected to form a strong base above 13000 for extended gains into 13800-14000. It is prudent for strategic investors to exit investments (for shift into short term fixed income assets) and stay away from equity assets for now. Let us watch price action (and the momentum) on move into 5200-5175 considered as strong base for bullish reversal. It is possible that NIFTY will be in consolidation mode at 5000-5500 till RBI’s shift into growth supportive monetary stance.

Currency market

USD/INR held well at the lower end of set near term range of 49.80-50.80 and moved sharply up from the low of 49.82 (buy zone of 49.85-49.75) to 50.49 (t/p zone of 50.40-50.50) before close of day at 50.38. In the process, it also triggered the December 2012 sell orders above 53.00 (high at 53.09). The (post policy) bearish set up on rupee is strong on fear of dilution in FII flows in the near term. NRI flows are also expected to be low on down trend in money market rates on shift into FY13. What next? Having traded end-to-end of set near term range of 49.80-50.50 in two trading days, the trading range now is shifted to 50.15-50.65 with overshoot limited to 50.00-50.80. There is no risk of extended weakness beyond 51 at this stage; it is considered good to sell 1M dollars above 51 (spot at 50.60-50.70) and June 2012 dollars above 52 (spot at 50.85-50.95). These actions will prevent extended rupee weakness beyond 51. It is important for importers to stay hedged on 1-2M payables on spot correction into 50.15-50.00 and 49.85-49.70. Those who are already covered on recent spot move into 48.85-48.60 can stay relaxed and not to chase this weakness. Over all, we watch consolidation at 50-51 with test/break either-way seen as excessive and await fresh cues to provide guidance for range break-out.

There is no change in FX premium outlook for consolidation in 3M at 8.0-8.75% and 6.0-6.5% in 12M. It is prudent to play end-to-end of these ranges as test/break either-way is not expected to sustain. It is good to receive June 2012 at 8.5-8.75% for ALM play (to fund PCFC book of L+3.5%) and to pay 12M below 6% for conversion of FC sources into rupee uses. There will be good arbitrage on these carry trades. It would need extended rupee weakness beyond 51 to drive premium down; very low probability at this stage. Strategic players can look to receive 12M at 6.50-6.65% and pay at 6.0-5.85%.  

G3 currencies have now traded to the script completing end-to-end of set near term ranges. USD Index is up from 78.20 (low of 78.10) to 80.50 (high of 80.73); EUR/USD is down from 1.35 (high of 1.3485) to 1.30 (low of 1.3002); USD/JPY up from 80 (low of 79.99) to 84 (high of 84.17) and EUR/JPY up from 105.50 (low of 105.62) to 110 (high of 109.63). What next? We advised to shift USD liability to JPY liability at 76.50-75.50; since then, JPY is down to 84 by more than 10% in less than 2 months. Let us not chase JPY weakness beyond 85.00-85.50 and would consider this zone as good to shift JPY liability back to USD. EUR/USD is now into 1.27-1.32 near term range with bias into lower end while USD/JPY is expected to stay in sideways trading mode at 82.50-85.50. Let us play end-to-end of these ranges with test/break either-way to lose momentum. There is big trade waiting in EUR/JPY considered good for 500 pips. It could be a sharp reversal anywhere from 110.00-111.50 for push back to 106.50-105.00; keep a close watch there.

Commodity market

The reversal in Gold found support at 1635 but bounce from there into 1665 is strong. The recent test/break of above 1700 into 1715 could only result in build up of strong momentum to take out strong support at 1665 for extension into 1635. The strong USD and uptrend in US interest rates will arrest bullish trend in Gold. Let us watch 1615-1685 with overshoot to stay limited to 1600-1700. The downtrend in US interest rates and release of QE3 by FED is essential to get the bullish momentum back on Gold. Else, the focus will shift to 1520. Strategic investors can play end-to-end by selling at 1685-1700 and buying at 1615-1600 with tight affordable stop.

NYMEX Crude is boxed at 105-108 range with no momentum to provide conclusive test/break either-way. There is no change in view and prefer near/short term consolidation at 103-108 with overshoot limited to 100-110. The short term bias is in favour of reversal into 95 while any rally into 110 will attract intervention fears through release of supplies from strategic reserves. Strategic players can sell rally into 108-110 with tight stop for 100 and further extension into 95.

It has been a hectic week; have a great weekend.........................Moses Harding