MARKET PULSE for the week 09-13 April 2012
Currency market
USD/INR traded end-to-end of “inner ring” of 50.50-51.50 (down from 51.40 to 50.51; up again to 51.23) within set near term range of 49.80-52.20 before close of week at 51.11. The shift into new financial year has cut the demand (for dollars) but weak economic fundamentals continue to weigh the rupee down; deficit in Q3 BoP, uncertainty in FII flows and strong reversal in USD Index from below 78.80 (to above 80) contributed to this swift reversal from 50.50 without providing an extension into 50.30-49.80. What next? The worries (and concerns) in the Euro zone continue to support the dollar while RBI’s shift into growth supportive monetary stance would provide relief to rupee. Given the mixed cues, there is no clear trend on the way forward and USD/INR is expected to stay in consolidation mode. It was not considered prudent to chase excessive rupee gains below 49 and now it is not wise to chase rupee weakness beyond 51. Based on these expectations, we considered it good for exporters to sell December 2012 dollars above 54 and March 2013 dollars above 54.60 and the reversal was sharp from the high of 54.05 (December 2012) and 54.65 (March 2013); reversal in FX premium and time decay would help. Let us continue to watch these levels which would help arrest spot rupee weakness beyond 51.50 and extended weakness into 52.20 will get adjusted in premium. For the week, let us watch consolidation at 50.90-51.40 with overshoot limited to 50.65-51.65. Beyond there, let us not rule out extended move into 51.85-52.20 if USD Index maintains its uptrend into 80.70 (ahead of 81.30). On the other hand, good FII flows will dilute the traction of USD/INR moves with USD Index to get the focus back below 50.65 (into 50.30-49.80). Let us stay neutral on directional break-out beyond 50.50-51.50 at this stage and await more cues for clarity. Strategic traders can look to sell USD/INR in two lots at 51.40-51.45 and 51.60-51.65 and look to buy in two lots at 50.90-50.85 and 50.70-50.65 with tight stop.
EUR/USD lost steam at strong resistance zone of 1.3375-1.3400 (high of 1.3380) for sharp reversal (low of 1.3033) before close of week at 1.3095. EUR/USD has now traded end-to-end of set short term range of 1.30-1.35 (up from 1.3003 to 1.3486 and back into 1.3033). What next? The bullish expectation on the US economy (resultant dilution in QE3) and absence of strong cues from the Euro zone (risk of shift into low growth; high inflation dynamics) will provide safe-haven support to the greenback. It is possible that EUR/USD has shifted into a new short term range of 1.27-1.32 with bias into the lower end. It is important for EUR/USD to hold above 1.2950 to get the focus back into 1.3250-1.3450. For the week, let us watch consolidation at 1.29-1.32 and stay neutral on break-out direction. The strategy is to play end-to-end of this range by selling at 1.3150-1.3200 and buying at 1.2950-1.2900 with tight stop on break thereof. Let us also keep the possibility of extended weakness into 1.2650-1.2600 on clear break below 1.2900 (initiating a stop-loss sell below 1.29 will set up a good risk-reward trade).
USD/JPY was in volatile mood but stayed within the “outer ring” of 81.00-83.50 range (high of 83.28 and low of 81.29) before close of week at 81.65. We expected this consolidation at 80-85 before getting the desired momentum for break higher. For the week, let us watch strong support above 80.50 and resistance at 83.50 (ahead of 84.25). The strategy is to trade end-to-end of this range by buying in two lots at 80.75 and 80.25 (with stop below 80.00) for 83.50-84.25. Let us also sell in two lots at 83.50 and 84.00 (with stop above 84.25) for 80.75-80.00.
EUR/JPY stayed weak on the back of Euro woes to hold below earlier sell zone of 111.25-111.50 (high of 111.11) and sharp reversal in USD/JPY provided momentum for swift reversal into 106.52 before close of week at 106.80. The focus is now on strong support at 105.64 and it is important for this level to stay safe to maintain short term consolidation at 105.50-111.50. For the week, let us watch sideways trading mode at 105.50-108.50. It is important for USD/JPY to hold above 80.50 to prevent extended weakness into 104.00-103.75. Let us stay aside on this pair this week but would look to buy extended weakness into 104.25-103.75 (with stop below 103.50) for sharp reversal into 110.00-111.50 in due course.
Interest rate market
The shift into FY13 has released pressure on the short term money market rates with overnight MIBOR down below 8.75% and 3-12M term money rate below 10.5%; draw down from LAF counter is also down below Rs.50K Crores at end of reporting fortnight cycle. 1Y OIS rate traded steady at 8.0-8.05% before close of week at 8.0% while 1Y Bond yield traded steady around 8.4%. The shift into new reporting fortnight cycle (starting 7th April) will generate higher demand for funds this week with LAF drawdown expected to be around Rs.1 Trillion and call money rate trading around 8.75%. For the week, let us watch 1Y Bond yield steady at 8.30-8.40% and 1Y OIS rate at 7.95-8.05%. The immediate bias is for move into lower end by end of week in anticipation of lower demand for funds in the following week and good chances of rate cut on 17th April. Strategy is to stay invested in 1Y bond and stay received in 1Y OIS rate for post-policy objectives at 8.10% (1Y Bond) and 7.85% (1Y OIS) where we square positions and await fresh cues on the way forward.
10Y bond price fell post-auction to hit a high of 8.79% (8.79% 2021 bond trade at close to par value) but extended weakness (above 8.75%) attracted interest for weekly close at 8.68%. Our strategy was to stay invested on weakness into 8.75-8.85% keeping room for adding more at 8.95-9.0%; these levels are considered very attractive for strategic investments (into HTM), hence not expected to sustain. 5Y OIS rate has now traded end-to-end of set near term range of 7.50-7.65% (low of 7.49% and high of 7.64%) before close of week at 7.60%. There is strong bearish set up on the bond market with partial devolvement of the first weekly auction for FY13. The supply side concerns remain valid and despite higher yield, investor appetite is low. RBI needs to give clear road map on liquidity; cost of liquidity and OMO. It is important to shift system liquidity into surplus mode with 50 bps rate cut to have smooth sailing on RBI’s auction schedule. For the week, let us watch 10Y bond yield at 8.60-8.75% and 5Y OIS rate at 7.50-7.65% with test/break either-way to attract. The strategy is to exit long entered above 8.75% at 8.62-8.60% while fleet-footed traders play end-to-end of the set range with tight stop on break thereof. It is considered good to trade 5Y OIS from paid side (to enjoy decent carry); hence recommend staying paid at 7.53-7.48% (with stop below 7.45%) for 7.63-7.68%.
FX premium traded around midpoint of set ranges of 7.5-8.0% (3M) and 5.75-6.25% (12M) before close of week at 7.7% and 6% respectively. The strategy (after unwind of 12M received book at below 6%) was to reinstate received book in 12M at 6.10-6.25% (high of 6.15%) for post-policy objective at 5.65-5.50%. The moves in FX premium is now cut-off from interest rate play and driven by exchange rate play and given the expected consolidation in spot rupee at 50.50-51.50 in the immediate term, FX premium is expected to stay in consolidation mode within the set near term ranges. For the week, let us continue to watch 3M at 7.50-8.0% and 12M at 5.75-6.25% with test/break either-way to attract. The strategy is to receive 3M at 7.85-8.0% and 12M at 6.10-6.25% and await move into 7% (3M) and 5.5% (12M) where a short term base is expected to be formed.
Equity market
NIFTY was boxed between strong support at 5175-5125 (low of 5135) and resistance at 5375-5425 (high of 5378) before close of week at 5323; weekly close above 5225 provides great comfort to the bulls. In the meanwhile, DJIA lost momentum ahead of strong resistance below 13300 (high of 13297) for swift reversal into psychological big figure support of 13000 (low of 13012) before close of week at 13060. What next? The domestic factors have turned supportive for the bulls; sharp decline in MM rates and rate cut expectations on 17th April will generate good appetite from domestic investors. The appetite from FIIs is set to accelerate on confirmation of shift of stance from RBI from neutral to growth supportive monetary policy. There is high possibility of extended strength in NIFTY into 5500 (ahead of 5630). The risk factor to this move will be on extended reversal in DJIA below 13000 into 12750-12725. Over all, undertone into the week is neutral to bullish. For the week, let us watch sideways trading mode at 5225-5500 with test/break either-way not expected to sustain. The strategy is to stay “long” for post-policy rally into 5630 while weakness below 5225 (into 5175-5125) will set up good short term buying opportunity for strategic investors.
Commodity market
Gold traded end-to-end of set weekly range of 1615-1685 (high of 1680.60 and low of 1611.80) before close of week at 1638. What next? Gold is in consolidation mode within the set short term range of 1600-1700; bulls losing steam on strong dollar and dilution in expectation of QE3 while low interest rates and abundant liquidity bring the bulls into the street at lower end. The bias has now shifted for extended weakness into 1565 (ahead of 1525) if strong support at 1605-1600 gives way. On the other side, the risk of extended gains beyond 1670-1680 (into 1700-1715) resistance is low. These expectations set up short term range play within 1565-1665 with overshoot limited to 1525-1705. For the week, let us watch consolidation at 1605-1670 and stay neutral on break-out direction. The strategy is to sell correction into 1665-1680 for eventual test/break of lower end for extended weakness into 1565-1550.
NYMEX Crude lost steam above the outer end of set weekly range of 100-105 for sharp reversal from high of 105.49 into 101.68 before close of week at 103.31. Over all, bulls have lost momentum by allowing gradual reversal from recent high of 110.55 into lower end of set short term range of 100-110. Now, we have shifted into a new short term range of 95-105 with bias into the lower end while gains above 105 may not hold. For the week, let us watch consolidation at 101-105 with bias for extended weakness into 98.50 while gains into 107 not expected to sustain. The strategy is to sell in two lots at 104.50-104.75 and 106.50-106.75 (with stop above 107) for 101.25-101.00 ahead of 98.75-98.50.
Have a great week ahead.........................Moses Harding
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