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