MARKET PULSE: Short update for 11th April
Currency market
The rally in USD/INR failed at the first sell zone of 51.40-51.45 (high of 51.41) and reversal from there lost steam at immediate support of 51.05 (low of 51.06) to set up a 35 pip trade; followed by next round of rally into next resistance zone of 51.60-51.65 (high of 51.64) and now expected to stay in consolidation mode at 51.40-51.65. Despite stability in USD Index within 79.60-80.00, rupee weakness got extended on the back of weak stock market. It is good for rupee bulls to see failure of USD Index at 80 to prevent extended weakness beyond 51.65 into 51.85-52.20, considered as worst case scenario for spot rupee at this stage. Let us now watch near term consolidation at 51.40-51.65 with overshoot limited to 51.05-51.85. The strategy is to sell in two lots at 51.60-51.65 and 51.80-51.85 and to buy in two lots at 51.10-51.05 and 50.90-50.85. Continue to watch December 2012 dollars above 54.00 and March 2013 dollars above 54.65 considered to hedge export receivables.
EUR/USD held well above strong support zone of 1.3025-1.2975 (low of 1.3031) for reversal into strong resistance at 1.3150-1.3175 (high of 1.3144) and in sideways trading mode within 1.3025-1.3150. There is no strong momentum for test/break either-way and if it does, it should stay limited to 1.2950-1.3250 within the set weekly range of 1.29-1.32. The strategy to buy at 1.2950-1.2900 and sell at 1.3150-1.3200 stays valid.
USD/JPY is holding well above strong support at 80.50 (low of 80.62) but not getting enough momentum for sharp reversal. This brings into play risk of extended weakness into 80.00-79.50 before sharp reversal while 81.75-82.00 remains safe. Let us now watch consolidation at 80.00-82.00 with overshoot limited to 79.50-82.50. The strategy is to buy at 80.00-79.50 (with stop loss at 79.25) and sell at 82.00-82.50 (with stop loss at 82.75); it is possible that we see end-to-end moves before setting up next directional break-out, bias for move back into 84.00-85.50.
EUR/JPY maintained its downtrend into strong support at 105.64 (low of 105.42) and continues to look weak for extension below this support for 104.25-103.50 while 106.75-107.00 stays firm. The strategy is to buy extended weakness into 104.00-103.50 (with stop below 103.25) for sharp reversal into 111.00-111.50.
Interest rate market
10Y bond yield reversed sharply from recent high of 8.79 to below 8.60% for close at 8.59% on rumours of increase in FII limit for investment in Government bonds. We are out on “longs” entered at 8.75-8.79% on move into t/p zone of 8.62-8.60%. Now, extended gains below 8.60% look bit stretched and seen as over-reaction to the FII news. Given the expectation of rate cut by majority of the stake holders and supply side concerns staying valid; it is fair to expect short term consolidation at 8.50-8.75% within the medium term range of 8.25-8.75%. The strategy now is to buy into weakness at 8.65-8.75% (revised down from earlier 8.75-8.85%) and to stay “short” on extended gains into 8.55-8.50%.
OIS rates found good support at lower end of 7.95-8.05% (1Y) and 7.50-7.65% (5Y) but reversal from there is shallow tracking softening yields in the bond market for close at 7.96% and 7.51% respectively. OIS market has priced-in 25-50 bps rate cut and would expect squeeze in 1X5 spread to 25 bps in due course with end June objective at 7.75% in 1Y and 7.50% in 5Y; thereafter on shift of operative policy rate from upper to lower end of LAF corridor will squeeze the 1X5 spread to par at 7.50%. Now, let us watch 1Y at 7.90-8.0% and 5Y at 7.45-7.60% with test/break either-way not expected to sustain. The strategy is to receive 1Y at 7.98-8.01% and pay 5Y at 7.47-7.44%.
FX premium is in bullish mode with 3M just below strong resistance at 8% and 12M just above the resistance at 6.25%. Let us continue to watch 7.5-8.0% in 3M and 5.75-6.25% in 12M. The market has not yet priced-in rate cut expectations and delivery of the same will drive the premium to lower end. The risk factor to this expectation is reversal in USD/INR spot from 51.50-50.65 to 50.80-50.65 which would trigger exchange rate play for spike higher into 8.25% (3M) and 6.5% (12M) before reversal. Let us stay aside for now and await fresh cues. It is good to receive 8% in 3M for ALM play to fund PCFC/FCL book against rupee sources with 90 day money market rate down below 10%.
Equity market
The bearish momentum (triggered by weak western bourses) found good support below 5225 (low of 5211) before close at 5243; ability to close above 5225 sends caution bells to the bears. However, bulls are not seen strong to get the focus back into 5350-5500. Let us not rule out extended weakness into 5175-5125 which should hold to maintain the neutral to bullish undertone. For now, let us watch 5175-5325 with overshoot limited to 5125-5375. Strategic investor can look to buy one-third of appetite at 5175-5125 for post-policy objective at 5625.
Have a great day.......................Moses Harding
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