MARKET PULSE: Research report for 14 March 2012
Currency market
USD/INR held above the set near term range of 49.75-50.75 (low of 49.79) before close of day at 49.92. Our strategy was to exit “short” dollar positions on this move for reinstatement on rupee weakness into the higher end. The concern for rupee bulls will be from its inability to extend strength beyond 49.80 into strong support zone of 49.70-49.55 despite higher EUR/USD; bullish stock market and high FX premium. This is mainly on higher demand for dollars ahead of month/financial year end. Let us continue to watch support at 49.80-49.55 for gradual move into strong resistance zone of 50.65-50.80 in the immediate term. Exporters can stay away for this move considered good to sell 1M dollars above 51 and 3M dollars around 52. In the meanwhile USD Index is expected to stay in consolidation mode at 79.50-80.50 with no strong cues to provide directional break-out. For now, let us watch sideways trading mode at 49.80-50.30 with bias into higher end. The strategy is to buy in two lots at 49.85-49.75 and 49.65-49.55 with stop below 49.50 for immediate objective at 50.35-50.50. The near term trading range is now at 49.80-50.50. Exporters who have absorbed March/February premium (on extension into 285-288) can await higher spot at 50.50-50.65 to lock February 2013 dollars at value above 53.50. The risk of extended rupee weakness beyond 53 in 2012 is very low; hence it is good to sell future dollar receivables up to December 2012 at value above 53; hence the suggestion for exporters to stay away for spot move into 50.35-50.50 to sell December 2012 dollars for value above 53.
FX premium stayed bid tracking bearish set up in money and bond market despite aggressive CRR cut from RBI; 3M premium knocked the higher end at 8.75% while 12M premium broke through the outer end at 6.25% for extension into 6.40%. In the process, March/February premium hit the higher end of 6.15-6.25% receive zone at 288 before close at 284. What next? The current upside momentum should ease in the immediate term for sharp reversal into 8% in 3M and 5.75% in 12M; so not advised to get panic at this stage. For now, let us watch 3M at 8.25-8.75% and 12M at 6.0-6.5% not ruling out re-test of higher end before reversal. The strategy is to hold on to “receive” book in March/February entered at 6.15-6.25% and add on overshoot above 6.25% for reversal back into 5.75-5.65%. There is no change in expectation of sharp reversal into 7.5% (3M) and 5.5% (12M) on shift into FY13. The build-up of combined force of interest rate and exchange rate play will drive FX premium lower into the set objectives.
EUR/USD held well at 1.3077 for sharp reversal into the first sell zone of 1.3175-1.3200 (high of 1.3191) and sharp turnaround from there found support at 1.3050 and now in consolidation mode at 1.3050-1.3130. Now, it is important for EUR/USD to hold at immediate support zone of 1.3000-1.2975 to prevent extended dollar strength bringing 1.2625 into play. The strategy is to hold on to short EUR/USD entered at 1.3175-1.3190 with trail stop at cost for 1.3000-1.2975. If stopped, sell again at 1.3275-1.3300 with stop above 1.3325. Fleet footed traders can try a quick trade by buying at 1.3000-1.2950 (with stop below 1.2925) for correction into 1.3125-1.3150 before gaining momentum for conclusive test/break of 1.2975 for 1.2650. Over all, near term range play is expected to shift into 1.2650-1.3150.
USD/JPY held well at big figure support of 82.00 (low of 81.95) and regained strength for pass through into the sell zone of 82.75-83.25 (high of 82.85). Let us hold this “short” USD/JPY entered at 82.75; add at 83.25 with stop at 83.50 and t/p at 82.25. In the meanwhile EUR/JPY held at the lower end of set near term range of 107-110 (low of 107.48) for swift rally above immediate resistance at 108.50 (high of 108.72). Let us continue to watch consolidation in EUR/JPY at 107-110 and lift the trading range for USD/JPY to 82-84. The strategy is to buy USD/JPY at 82.25-81.75 (with stop below 81.50) and sell at 83.75-84.25 (with stop above 84.50). Let us also buy EUR/JPY at 107.25-106.75 with stop below 106.50 for 109.75-110. EUR/JPY carries the risk of sharp reversal into 105.75-104.50 driven by Euro weakness and JPY stability; watch out for set up of 500 pip trade for sharp reversal from 110 to 105 or a bounce from 105 to 110.
Money Market (Bond/OIS)
RBI’s action of 75 bps CRR cut helped to limit drawdown from Repo counter at Rs.1.0-1.5 Trillion with call money rate steady around 8.80%. There was not much of damage in the money market rate curve; steady at 11.0-11.25% (1-3M tenor) and 10.75-11.0% 6-12M tenor. The behaviour in the money market was to the expectation post delivery of 75 bps CRR cut to prevent overshoot in LAF drawdown over Rs.2 Trillion and shift of money market rate curve above 12%. There is panic from Banks to meet huge deposit maturities lined up by cash rich entities for this spike in term money rates. The surprise is from the bearish set up in the Bond/OIS market on fear of closure of OMO counter on aggressive liquidity injection through CRR cuts. 10Y bond yield spiked above 8.35% (high of 8.36%) and 5Y OIS rate above 7.55% (high of 7.56%) while 1Y OIS rate was steady around 8.10%. However, the market closed within the set short term ranges of 8.10-8.35% (10Y Bond) and 7.25-7.55% (5Y OIS) for close of day at 8.32% and 7.49% respectively. What next? There is no reason to chase this weakness and would consider this as good investment opportunity into the short term. RBI’s delivery of 50 bps rate cut (on 15th March) will help to ease pressure to send bullish cues ahead of financial year end. For now, let us watch 10Y bond yield at 8.25-8.35%; 1Y OIS rate at 8.05-8.15% and 5Y OIS rate at 7.40-7.55% and would not prefer test/break of higher end; if it does, it will be seen as temporary and unsustainable. The delivery of 50 bps rate cut on 15th March will get the focus back into 8.15-8.10% (10Y Bond) and 7.35-7.25% (5Y OIS). There is tremendous “pressure” on RBI from the Government (and weak market sentiments) to deliver 50 bps cut in policy rates on 15th March to drive the LAF corridor to 7.0-8.0% which can stay good till end of H1/FY13. The confirmation of downtrend in headline inflation into 6% will enable RBI to drive the operative policy rate from 8.0% to 7.0% through shift of system liquidity from deficit to surplus mode; thus giving an impact of 150 bps rate reduction in operative policy rate from 8.5% to 7.0%. There is very strong case for rate reduction given the macroeconomic, monetary and market dynamics; hence it would send strong bearish signals if RBI decides to retain policy rates unchanged.
Commodity market
Gold is in consolidation mode and tightly boxed within 1680-1715 (low of 1683 and high of 1714) and immediate term bias is mixed but given the strong bullish momentum for USD, the risk is for extended weakness into lower end of the set near term range of 1650-1750. The immediate term trading range will be at 1665-1715 with test/break either-way not expected to sustain. The trade strategy is to buy at 1665-1650 (with tight stop) for swift reversal into 1735-1750. Fleet footed traders can sell at 1710-1715 (with stop above 1720) for 1665-1650.
NYMEX crude found solid support at set buy zone of 105.50-104.50 (low of 105.38) for sharp reversal into higher end of set immediate term range at 105-108 (high of 107.56) but could not gain momentum for extension into the set sell zone of 109.50-110.50. No change in view as we look for sideways trading mode at 105-110 not ruling out extended rally into 115. The near/short term outlook remains unchanged for sharp reversal into 95-93. The trade strategy is to hold on to long entered at 105.50; add at 104.50 (with stop below 104) for t/p at 109.50-110.50. We would also look to sell here with tight stop above 111.00 for reversal back into 105.50-104.50.
Equity market
The sharp reversal in NIFTY from the set buy zone of 5200-5175 (low of 5171) is losing steam ahead of first pit stop at 5450 (high of 5438) before close of day at 5429. The market continues to stay in bullish undertone despite lack of support from domestic investors who are set to enter post RBI’s rate cut action. There is no change in outlook at this stage and we look for extended gains into 5525 ahead of 5625 in the immediate term where we look to unwind long positions. For now, let us watch consolidation at 5350-5550 with extension limited to 5275-5625. Strategic investors can hold to long entered at average 5225 with trail stop at 5350 for 5575-5625. Fleet footed traders can look to buy in two lots at 5375-5350 and 5300-5275 (with stop below 5250) for 5525-5550. There is no change in expectation of extended rally into 5750 (ahead of 5950) on rate reversal action from RBI and growth supportive Budget from the Government with least pressure on fiscal deficit.
Have a great day ahead.........................Moses Harding
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