Market Pulse: Weekly report for 2-6 April 2012
Currency market
The rally in USD/INR from 50.62 passed through the first sell zone of 51.10-51.15 but lost steam ahead of second sell zone at 51.45-51.50 (high of 51.40) before strong reversal into 50.81 for close of FY12 at 50.88. The bearish set up on rupee post-budget (into 51.50) and high forward premium in 9-12M tenor provided good opportunity to cover December 2012 exports above 54.00 (high of 54.04) and March 2013 exports above 54.50 (high of 54.65). These are all very critical levels considered good to lock in higher rupee realisation (for exports) given the risk (and possibility) of reversal into recent low of 48.60 (and further into 47) on general dollar weakness; nothing is impossible in the market. Even if spot USD/INR moves up (beyond 51.50), adjustment in FX premium may not result in significant opportunity loss. It is important to avoid real losses unmindful of marginal opportunity loss; it is impossible to catch the tail or the head of the market moves. What next? There are some positive cues for the rupee. RBI may get into growth supportive monetary stance after delivery of an unexpected FY end OMO; crude oil is showing good signs of reversal and there is no risk of pull-out from FIIs at this stage. The deficit in Q3 Balance of Payment may be considered as one-off and expected to be back into positive in Q4/FY12 and into FY13. USD Index is unable to hold on to its gain above 79.20 and looks weak for reversal into 78.20-78.00 in the immediate term. Taking all these together, trading range for the week is at 50.30-51.15; break of lower end to get the focus into 49.80. The risk of test/break of higher end (into 51.50) is low at this stage. Over all, it is possible that USD/INR gets into consolidation mode at 50-51 in the near term. Let us now consider unwind of December 2012 shorts entered at 54.00-54.05 at 52 (current 53.26) on spot dollar move into 49.80 and March 2013 shorts entered at 54.50-54.65 at 52.50 (current 53.85). Strategic traders who are already short in spot at 51.15-50.40 can trail stop at 51.05 for 50.05-49.80. It is possible that USD/INR will get into consolidation mode in the short term at 50-51 with overshoot limited to 49.50-51.50. Let us have close watch on three factors which will set the directional break-out; BRENT crude at 120-130, USD Index at 78.00-79.50 and trend in FX premium – downtrend in FX premium below 7% in 3M and 5% in 12M will make forward dollars look cheap for importers. RBI may need to deregulate FCNR rates to arrest premium impact on spot rupee.
EUR/USD found good support at the buy zone of 1.3300-1.3250 (low of 1.3251) and reversal from there lost steam ahead of strong resistance/earlier sell zone of 1.3375-1.3425 (high of 1.3380). It is not in the interest of the Euro bulls to see repeated failure at the strong resistance zone of 1.3375-1.3400 but dollar bulls do not have the strength to provide sustainable push below 1.33. The immediate term range is now seen at 1.3250-1.3450 with overshoot limited to 1.32-1.35. The strategy is to play end-to-end of this move by buying at 1.3250-1.3200 (with stop at 1.3175) and selling at 1.3450-1.3500 (with stop at 1.3525).
USD/JPY reversed sharply from 83.50 to take out immediate support at 82.50 for extension into the set buy zone of 82.25-81.75 (low of 81.82) for sharp reversal from there into 83.25-83.50 (high of 83.28) and back again into 82.50. Over all, in this run it has traded between the set buy zone of 82.00-81.75 and sell zone of 83.25-83.50. There is no change in view of looking for consolidation at 81.75-83.50 with overshoot limited to 81.00-84.25. The strategy is to play end-to-end of this range by buying at 82.00-81.75 and selling at 84.00-84.25. Over all, short term range is set at 80-85 with test/break either-way not expected to sustain for long.
EUR/JPY is in consolidation mode at now familiar range of 108.50-111.50 (low of 108.73 and high of 111.11) with no momentum to test/break either-way. The upside break is resisted by lack of strength in EUR/USD above 1.3400 and extended weakness below 108.50 is losing steam on USD/JPY rally from below 82.00. Given the EUR/USD stability at 1.33-1.34 and USD/JPY at 82.50-83.50; EUR/JPY is expected to be boxed at 109-112. The strategy is to play trade end-to-end of this move by buying at 109.00-108.50 (with stop below 108.25) and selling at 112.00-112.50 (with stop at 112.75).
Interest rate market
The shift into FY13 will release pressure on money market rates and tight liquidity. The deficit system liquidity will ease into RBI’s comfort zone of 1% of NDTL soon and 3-12M money market rate curve to stabilise within 9.0-10%. The expectation in Q1 is for maintenance of operative policy rate at higher end of LAF corridor and 50 bps rate cut action; either in one-shot or in two phases. The bias is in favour of 25 bps rate cut on 17th April followed by the next one in June mid quarter review for end Q1 operative policy rate of 8%. Given these expectations, 1Y Bond yield remained steady around 8.40% and 1Y OIS rate has eased into the set objectives at 8.0-7.90%; low of 7.97% (take profit zone for received book entered at 8.25%) before close of FY12 at 8.06%. There will be good appetite for shorter tenor bonds (up to 1 year) in expectation of much higher yields on medium/long tenor bonds. For the week, let us watch call money rate around 8.65%; 1Y Bond yield at 8.25-8.40% and 1Y OIS rate at 7.95-8.15% with bias into lower end. The trading strategy is to hold on to 1Y Bond investments entered at 8.40-8.50%; add at 8.40-8.45% (for Q2 objective at 7.90-8.0%). It would be good to re-build 1Y OIS book by receiving at 8.10-8.15% (for Q2 objective at 7.65-7.75%).
10Y Bond yield and 5Y OIS rate has now traded end-to-end of set near term ranges of 8.50-8.65% (10Y bond) and 7.50-7.65% (5Y OIS) before close of FY12 at 8.57% and 7.57% respectively; thus maintaining the 1% bond spread. The undertone is very bearish for extended weakness above the higher end of set ranges. Q1 is loaded with huge week-on-week supplies with very low investor appetite. There may not be significant impact on injection of liquidity through CRR cut; it would need aggressive rate cut and OMO to prevent extended weakness. The domestic fundamentals do not provide leverage (and/or required band width) for RBI to support Bond market; aggressive rate cut actions are not in the radar and it is not considered efficient if RBI choose to absorb entire Government borrowing in its books through OMO. The best case scenario for 10Y bond yield seems not beyond 8.35% (on delivery of 50 bps rate cut and alternate week OMO bond purchases) and in the absence of this support, 10Y bond yield will spike higher into 8.85%, considered as worst case scenario at this stage for short term trading range for 10Y bond at 8.35-8.85%. This sets up 5Y OIS rate at 7.35-7.85% with steady 1% spread between 10Y bond yield and 5Y OIS rate. For the week, let us watch 10Y bond yield at 8.50-8.65% and 5Y OIS rate at 7.50-7.65% with test/break either-way to attract. The plan for strategic investors is to exit 10Y bond on gains into 8.50-8.35% (by shift into shorter tenor of 1-2 years); pay 5Y OIS at 7.50-7.35% and enter into Bond Swap trade on spike in 10Y bond yield into 8.65-8.85%.
FX premium nicely moved into expected FY13 range of 7-8% (3M) and 5.5-6.0% (12M) from recent high of 9% and 6.85% respectively for FY12 close at 7.80% and 5.90%. Let us wait to unwind “received book” entered at 8.75-9.0% in 3M and 6.70-6.85% in 12M on move into lower end of set ranges with trail stop above 8% and 6.0% respectively. It is important for premium to stay within the said ranges (in Q1 of FY13) to provide stability in both exchange rate and money market rates; sharp reversal in premium below the lower end will add to pressure on rupee while spike over higher end will arrest downtrend in money market rates. Beyond there, directional break-out will be triggered by exchange rate play on USD/INR setting the trend either into 47 or into 54. Given the lack of clarity on the trend, we prefer consolidation at this stage. For the week, let us watch sideways trading mode at 7.5-8.0% in 3M and 5.75-6.25% in 12M with test/break either-way not expected to sustain. The trading strategy is to await test/break of either end and would prefer to trade from received side given the 50 bps rate cut expectation in Q1 which would guide 3M into 7% and 12M into 5%. These levels are seen as strong “floor” into short/medium term. The trade strategy is to receive 12M at 6.10-6.25% for 5.5%.
Equity market
The reversal in NIFTY from strong resistance/sell zone of 5250-5300 (high of 5278) extended below 5175 but held well at the next support zone of 5125-5145 (low of 5136) for sharp reversal into 5300-5350. There are no strong cues at this stage to establish a clear trend; factors and expectations are mixed and neutral. There is good support to NIFTY from bullish sentiments in DJIA and liquidity over-hang in the western markets; however emerging markets are into low-growth dynamics. The big economies of Asia; China and Japan are looking weak. On the domestic side, sentiments are very weak driven by all kinds of economic and monetary woes with limited comfort on roll-out of credible remedial actions. All attention is on the RBI now; its act of compromise to get into rate cut actions and shift of system liquidity from deficit to surplus mode would help to generate investment appetite from domestic investors. It is possible that NIFTY gets into consolidation mode till trend clarity emerges on fiscal deficit; current account deficit; rupee exchange rate; crude oil price; core inflation and growth. Till then, it would be in order to allow consolidation at 5000-5500. For the week, let us watch 5175-5475 and stay neutral on the break-out direction which can extend to 5000 or 5650. The strategy for now is to stay aside and await more clarity on the way forward. However expectation of rate cut either on 17th April or latest by mid June, should generate buying interest at 5225-5175; fleet footed traders can look to buy here with tight stop for 5450-5475.
Commodity market
Gold is in perfect traction with USD Index; consolidation at 78.20-79.20 triggered end-to-end trade between sell zone of 1685-1700 (high of 1696) and buy zone of 1665-1650 (low of 1645) for back into consolidation mode at 1660-1670. The trend seems to be down at this stage for gradual reversal into 1615-1610 ahead of 1585-1550. The bulls are not having the strength to push the value beyond 1685-1700. For the week, let us watch sideways trading mode at 1615-1685 with overshoot limited to 1600-1700. The strategy is to play end-to-end by selling at 1685-1700 for buy back at 1615-1600.
NYMEX Crude reversed sharply below the familiar range of 103-108 (low of 102.13) on G2 intervention (release from strategic reserves by US and UK) and in consolidation mode around 103. This is the risk factor that was highlighted to keep the bulls under check; however, bears are not in a position to take command given the vulnerable geo-political issues. However, it is good for the global economy to retain consolidation mode at 95-110. It is also possible that there will be dilution on political fears to get the focus below 100 soon. For now, the trading range is shifted to 100-105 within near term range of 95-108. The strategy is to play from “short” side for this move.
Have a great week ahead. Next update is on 9th April 2012. Have a great extended weekend
Moses Harding
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