Indian economy: towards 2020 or 1991

Indian economy: Are we on track towards our 2020 aspirations? Risk of turn towards 1991!

The journey so far into FY13 is rough and bumpy. The health of the economy reflects in the exchange rate; rupee is down and weak, highly undervalued despite various measures (and actions) from RBI and most importantly, there is lack of confidence on rupee getting into bullish reversal soon. The expectation on the economy (by most stake holders) is negative: downtrend in GDP growth momentum into 6%; slippage in fiscal deficit into 6% and elevated current account deficit around 4% of GDP. The comfort is from moderation in headline inflation around 6% supported by administered prices on fuel and huge cost subsidisation on food and fertilisers. These expectations obviously do not reflect optimism into the rest of FY13. The monetary dynamics has not yet turned supportive to growth despite 50 bps rate cut and tremendous infusion of liquidity through 125 bps CRR cut and aggressive OMO bond purchases. The system is short of liquidity by around Rs.1 Trillion and money market rates continue to stay at elevated levels; in short, the impact of monetary actions (to support growth) has been ineffective. Why? All the good has been undone through aggressive dollar sales by RBI to defend rupee; shift of credit demand from foreign currency to rupee driven by weak rupee and negative Balance of payment (in the absence of robust capital account flows) resulting in flight of domestic capital. The factors that provide strong headwinds to economic growth (and prosperity) are increasing in the absence of strong remedial measures to provide course correction. There are no positive factors at this stage to act as strong tailwinds; other than the strong India story, termed as giant elephant!

It is not that “powers that be” are not aware of remedial actions. The priority at this stage is on economic reforms to pull off-share investments; cut cost subsidisation to release pressure on fiscal deficit; shift system liquidity from deficit to surplus mode to attract domestic investments (and to release pressure on interest rates) and cut non-essential imports to release pressure on current account deficit (and balance of payments). These four priority actions will address all other woes of the economy to drive optimism into the future. The system is in a stage where it is easier than done. The political structure is weak to roll-out economic reforms and to cut cost subsidisation. Efforts to cut non-essential imports have been reversed in quick time. It is difficult to shift system liquidity to surplus mode till rupee is under pressure. Where we go from here? Is it dead end? The current political structure will stay till 2014. There is no guarantee that people of India will deliver decisive mandate to a political party which can go aggressive on reforms and bite the bullet on cost subsidisation. But, it is a long way to wait for revival; damage by then would be severe and recovery time will be an extended one into 2020. I recollect the dreams that we had in 2000 of turning India into an economic super power by 2020 and now I am afraid we travel back to 1991 where we began the economic liberalisation story. It is scary but not unrealistic and it is high time that “powers that be” take serious note of consequences and deliver remedial actions soon. The Government on its part need to do whatever that is required to attract foreign capital (and liquidity) and address fiscal consolidation through cost reduction. RBI needs to get into aggressive growth supportive monetary stance (may be at the cost of inflation) to drive the system liquidity to surplus mode. These actions are considered essentials to arrest strong bearish set up on asset markets and to revive the optimism on India growth story.

Moses Harding    

Report for 30 May - 01 June 2012

MARKET PULSE: 30 May – 01 June 2012

I will be away from 2^nd June for couple of weeks but will stay in touch with short updates and trading ideas through my blog and twitter@mosesharding........

Currency market

USD/INR extension below the set weekly range of 55.25-55.95 (low of 55.01) could not sustain for strong reversal into the higher end (high of 55.88) before close of day at 55.68; daily close above 55.65 is bearish for rupee. We had considered 55.25-54.80 good to cover short term payables and in any case advised not to stay “short” dollars there. This view is based on expectation of reversal into 55.95-56.40 (driven by USD Index rally into 82.60) where it is good to sell 3M/August dollars and in any case considered not to stay “long” dollars there (from where we saw sharp correction into 55.01). What next? There is tremendous bearish set up on rupee; petrol price hike did provide bit of relief but inability to roll-out price hike in diesel, kerosene and LPG highlighted the weak political structure to address serious concerns on reforms and cost subsidisation. The expectation for FY13 is bearish with risk of slippage in GDP growth and fiscal deficit to around 6% of GDP. There is no need to review the set weekly range and continue to watch overshoot beyond 55.25-55.95 (into 54.80 or 56.40) not sustainable. Let us stick to the strategy of selling August 2012 dollars on spot move into 55.95/56.35 based on hope (and confidence) that RBI would go all out to prevent rupee posting a new all-time low above 56.39; if it does, we may not only see test of 57 (higher end of set short term range of 52-57) but also extension of weakness into 58.25-58.50 ahead of 59.75-60.00 in due course. The combination of weak fundamentals and strong USD (against global currencies) will be deadly against rupee and needless to say, rally of USD against rupee will be much faster than against other EM currencies. Rupee is already undervalued and RBI should prevent further devaluation in the rupee; highly devalued rupee on the back of high inflation, high interest rates and tight liquidity will be very bearish on the Indian economy and it would seriously hurt growth prospects.  The “baby steps” approach (post strong measures on 15^th December 2011) has not yielded results and relaxation in rules on investments into debt capital market for FIIs and/or welcoming new set of foreign investors may not help. It will help when the going is good but not at this stage when there is not a single factor in support of rupee. The low forward premium (3M at 7% and 12M at 5%) will not be considered good to “receive” if expectation is bearish; thus shifting the forward market also into dollar demand-driven mode. RBI has no option but to go “big bang” to provide sharp reversal. For now, let us watch 55.35-56.10 with overshoot limited to 55.10-56.35. It is also critical that USD Index stays below strong resistance at 82.60-82.70 to prevent preparation of momentum for rupee move into new all time low. Fleet footed traders can look to sell at 56.10-56.35 (with stop above 56.40) for 55.35-55.10.

EUR/USD held at the higher end of set weekly range of 1.2250-1.2625 but reversal from high of 1.2624 found solid support above 1.2500 but could not hold to post a low of 1.2461. While we maintain the near/short term outlook for extended Euro weakness into 1.22-1.18, we may need to allow for bit of consolidation at 1.24-1.27 before move into 1.2250-1.2200. EUR/USD will face strong selling pressure around 1.2565/1.2620/1.2660/1.2690 before down into 1.22. The strategy is to stay “short” looking for sharp turnaround from one of these selling points for the said target and to get into new trading range of 1.22-1.25.

No change in view in USD/JPY and EUR/JPY (REFER TO WEEKLY REPORT)

Interest rate market

10Y Bond yield stayed in consolidation mode at 8.50-8.53% with test/break either-way could not sustain. However, weak rupee (and resultant dollar sales by RBI) will provide strong support to Bond market for gradual gains into lower end of set weekly range of 8.45-8.55%. Hold on to “long” entry at 8.53%; add at 8.54-8.56% if seen for 8.47-8.45%.

OIS rates eased into the lower end of set weekly range of 7.95-8.05% (1Y) and 7.45-7.55% (5Y) tracking easy call money market (ahead of reporting Friday) and downtrend in bond yields. The spread between 10Y Bond yield and 5Y OIS rate is steady around 105 bps (midpoint of 100-110 bps range). Let us continue to watch these range as move below the lower end will be short-lived for strong bounce back on shift into new reporting fortnight and ahead of advance tax outflows.

12M FX premium completed the move from 4.90% to 5.60% and reversed sharply to 5% on combination of profit booking, higher spot USD/INR and aggressive dollar sales by RBI. In the meanwhile 3M premium was steady around 7%. The focus is now back to 4.90-5.40% in 12M while 3M premium stays in consolidation mode at 6.75-7.0%. The strategy is to stay paid in 12M at 4.90-4.80% (with stop below 4.75%) for 5.40-5.65%.

Equity market

NIFTY took out strong resistance at 5000 (high of 5020) before close at 4990. It is great comfort to bulls that not only correction from above 5000 is shallow (low at 4982) but the rupee impact is not felt. Let us continue with the set weekly range of 4800-5100 and look for gradual move into upper end (into set sell zone of 5075-5125) before sharply down to 4800 (into buy zone of 4825-4775).

     

Have a great day ahead....................Moses Harding

Weekly report for the week 28 May - 01 June 2012

MARKET PULSE: Weekly report for 28^th May – 01 June 2012

 Special Market Operations or USD Bond issuance – which is the better option?

RBI deployed strong ammunitions to dilute the momentum in rupee fall but could not prevent the “run” into 56-57 (low of 56.39). This is seen as strong support zone for rupee where genuine dollar supplies will come in and would hurt importers to acquire dollars at such high rate; August 2012 dollars above 57.25 and 12M dollars above 60.00 is not a bad hedge for exporters to lock in higher export realisation. The pain (for importers) and gain (for exporters) will shift the forward market into supply-driven mode. This is what precisely happened (to dilute the bearish set up on rupee) and RBI’s physical intervention was effective to guide weekly close at 55.40; one rupee relief from all-time low. So, it validated our belief that rupee should be allowed to find its own floor where lumpy dollar supplies comes into the market while demand is cut. Rupee is not yet out of trouble. The concerns over structural issues stay valid. The domestic issues revolve around policy catalysis and fiscal consolidation. There is no hope at this stage that UPA Government has the power to open up the flood gate to attract external liquidity and capital. There is not much optimism in removal of the fear on policy/reform paralysis. Can the Government work on fiscal consolidation? Government tested the water with petrol price hike (considered as low hanging fruit) but faced stiff resistance from within and outside UPA. The next action will be on Diesel, Kerosene and LPG but the quantum of hike may not be enough to have significant reduction in cost subsidisation. So, there are no bullish cues from domestic sector. The external sector is very fragile with threat of Greece exit from the Euro zone. The “price” that Global Economy pays to keep Euro zone intact is huge. There are no positive signs from here which carries the risk of extended rally in US Dollar against global currencies and dilution in downtrend in commodity prices. Given these factors in play, there is no guarantee that rupee weakness may not extend beyond all time low of 56.39. Rupee could fall beyond immediate support at 56.50-57.00 if USD Index extends it rally beyond 82.60-83.10 resistance zone into 85.25-85.50, pushing EUR/USD into 1.22-1.18. These market developments can put rupee at risk for deeper fall into 58.25-58.75 ahead of 59.50-60.00. RBI should stay prepared to arrest this move.

RBI has two options to guide the rupee back to its realistic value: one, to open up special dollar counter for Oil PSUs and large ticket dollar demand (FCCB/ECB repayments) from other companies. It is fair to provide access to this counter for everyone and not restrict to PSU entities alone. What will be the impact? While RBI may provide dollars on spot delivery basis, it will open up huge demand in the forward market with spot dollar being sold at subsidised rate. The resultant high FX premium will exert upward pressure in MM rates. The “lead” of 3-6M import will generate additional dollar demand of minimum $50 Bio in spot market exclusive of oil PSUs. This can also trigger FII’s exit from debt/equity capital market at subsidised dollar rate. The benefit from this “operation” can provide stability in rupee at 54-55 if RBI is comfortable to run down its dollar currency reserves to USD 200 Billion. The cost of this operation will be huge depletion in RBI’s USD reserves; spike in LAF draw-down to Rs.1.5-2.0 Trillion and the need to provide rupee liquidity through aggressive CRR cut and OMO bond purchases. The end result is that of shift of dollar asset to rupee asset in RBI’s Balance sheet. The cost-benefit seems to be not in favour. The other option is the issuance of sovereign USD bond to NRIs and other eligible foreign investors who have access to Sovereign/Corporate Bond market. The earlier issuance (RIB and IMD) were done when LIBOR was high; now LIBOR is low to keep the coupon rate much lower than the earlier issuances. The impact on RBI’ Balance sheet will be that of creating a USD liability (direct or through a PSU Bank, the bond issuer) and build up of rupee asset through OMOs. The only difference (between the two options) is that of using borrowed USD funds instead of dipping into the reserves with no fear (or risk) of creation of demand for forward dollars. The execution and operation process will be simple providing flexibility to RBI to sell dollars as and when needed...this “fear of unknown” will itself drive the USD/INR pair down to 52-53. So, it seems USD Bond issuance (with equivalent OMO) may be a better option. It will indeed send positive vibes (and great relief) into stake holders and revive investor confidence on market stability; USD/INR around 52.50, 10Y Bond yield around 8.25% and NIFTY into 5600. Isn’t a great feeling? Let us see what is in store?

Currency market

We looked for USD/INR to lose steam at 56.00-56.45 and advised exporters to sell August 2012 dollars at 57.00-57.25; rupee posted an all-time low of 56.38 (August 2012 dollars high at 57.40) and reversal from there held at the door step of support window of 55.25-54.80 (dollar low of 55.24) before close of week at 55.37. The close below 55.65 and above 55.25 is neutral with no clarity on immediate direction. The sharp reversal was triggered by all factors turning in support of rupee. USD Index held below strong resistance at 82.50-82.60; EUR/USD rallied from 1.2495 to 1.2602; RBI’s aggressive dollar sale was effective when dollar bulls were weak and attractive forward dollar pulled in dollar supplies in the forward market. What next? Rupee seems to have formed a strong support at 56.35-56.50 and should stay protected (by RBI) to avoid reinstatement of bearish set up on rupee. On the other hand, till measures are taken to address structural woes it is difficult for rupee to sustain its gains beyond 54.80 (ahead of crucial 54.30). The effort of the Government to cut fuel cost subsidisation provides good comfort. On the assumption that domestic cues will turn neutral in the near/short term, developments in the Euro zone and its impact on USD will be seen as critical to provide directional guidance from now on. Rupee will be at risk if USD Index rallies beyond 82.50 into 85.25-85.50 (and EUR/USD into 1.22-1.18). This will drive rupee beyond 56.38 into 58.25-58.75 and thereafter into 59.50-60.00. Let us consider this as very low probability but keep this in back of our mind. For the week, let us watch consolidation at 55.25-55.95 with overshoot limited to 54.80-56.40. The strategy for importers is to buy 1-2M forward dollars at value below 55 absorbing rupee strength into 54.80-54.30. On the other side, it is good to sell 3M forward dollars at value above 57.00 and 12M forward dollars around 59.50 absorbing dollar strength into 55.95-56.40. Fleet footed traders need to be very alert tracking USD Index; EUR/USD and of course, keeping eyes and ears on RBI. The art of trading this market is to know the trick of “wind surfing” (to wait for the right/big wave to ride and exit before getting consumed by another big wave) and “fishing” (to stay in patience till the market trades close to either end of the set ranges); setting up trades with very low risk but with huge reward in ratio of minimum 1:5. It is better not to be a “boxer” in this volatile market, the chances of getting hurt are more and the punches that hit the target may be few.         

EUR/USD held well at the strong support zone of 1.2525-1.2475 (low of 1.2495) and recovery from there lost steam at strong resistance zone of 1.2600-1.2625 (high of 1.2619); nevertheless it provided good two-way moves for fleet-footed traders. The inability to take out 1.2625 and weekly close at the support zone (1.2515) is neutral to bearish for the Euro.  For the week, let us watch 1.2250-1.2625 with bias into lower end while 1.2625 stays firm; if broken can extend to 1.2775-1.2825 before down. The strategy is to stay “short” with stop/reverse at 1.2625 for test/break of 1.2475-1.2485 which would get the near term focus into 1.20-1.18 in due course.

USD/JPY was in consolidation mode at 79-80 (high of 80.07 and low of 79.20) before close of week at 79.65; as expected gains above 80 could not sustain but did not have the momentum for extension into next target at 78.25. For the week, let us watch 78.25-80.50 with bias into lower end. The strategy is to stay “short” at 80.00-80.50 (with stop at 80.75) for 78.25-77.75. Beyond there, the focus will be on 76.00-75.50 before strong reversal.

We had set EUR/JPY near term target at 102-97 and looked for quick move below 100 into the lower end; as expected reversal from high of 102.12 was sharp to post a low of 99.33 and bounce from there held at immediate resistance at 100.50 (100.32) before close of week at 99.75. Given the weak undertone both in Euro (against USD) and USD (against JPY), the downward pressure is severe on EUR/JPY currency pair. For the week, let us watch 97.00-100.50 with bias into lower end; the pressure is clearly on move below 97 while any upside attempts fail at 102. The strategy is to stay “short” with stop above 100.50 for 97.00-97.25. If stopped sell again at 101.75-102.25 with stop above 102.50.

Interest rate market

Money Market continues to stay tight with LAF draw drawn around Rs.1 Trillion and overnight MIBOR around 8.25%. The FX impact has pushed 3-12M CD rates into 9.75-10.0%; sharply up from recent low of 9.25-9.5% despite delivery of 50 bps rate cut. 1Y Bond yield is also up from 8.20% to 8.35% while 1Y OIS rate up from 7.95% to 8.05-8.10%. What next? Let us look for stability at current levels till RBI continues to release rupee funds to off-set FX impact on MM. For the week, the draw down from LAF will stay below Rs.1 Trillion on lower demand on move into end of reporting fortnight with overnight MIBOR at 8.15-8.25%. Let us watch 1Y Bond yield at 8.25-8.35% and 1Y OIS rate at 7.95-8.05% and test/break either-way not expected to sustain. The strategy is to stay invested in 1Y Bond (and hold as excess SLR); it will be useful when we get into churning of investment book on sharp rally in long bonds.

10Y Bond yield traded end-to-end of set weekly range of 8.47-8.58% before close of week at 8.51% while 5Y OIS nicely edged up from lower end to higher end of 7.40-7.50% before close of week at 7.50%. The stability in Bond market is thanks to weakness in FX market as RBI is expected to conduct its OMOs. Given the strong bearish set up on rupee, RBI is expected to provide dollar supplies in FX market for extended period of time. This also puts off rate cut expectations and more CRR cuts ahead. The directional break-out beyond 8.45-8.60% will be on rupee getting back its strength into its fair value (for push into 8.75%) and issuance of USD Bonds (for sharp rally into 8.30%). 5Y OIS is expected to maintain its 100-105 bps spread (with 10Y bond yield) for consolidation at 7.40-7.55%. For the week, let us watch 10Y Bond yield at 8.45-8.55% and 5Y OIS rate at 7.45-7.55% with test/break either-way not expected to sustain. Fleet-footed traders can play end-to-end of these ranges while strategic players look stay invested in 10Y bond at 8.53-8.58%. Let us also unwind 5Y paid book (entered at 7.40%) at 7.55% with trail stop at 7.45% and look to build receive book on extension into 7.55-7.60%.

FX premium maintained its uptrend; 3M up from 6.75% to 7.1% and 12M sharply up from 4.9% to 5.5% before close of week at 7% and 5.4% respectively; but for RBI’s B/S swaps (to shift spot sales to forward date), it would have been much higher tracking interest rate play. For the week, let us watch 3M at 6.90-7.40% and 12M at 5.25-5.75% with bias into higher end. The strategy is to pay 3M at 6.90-6.75% (for cost reduction through USD sources); hold on to 12M paid entered at 5.0-4.90% and add at 5.35-5.25% with trail stop below 5.25% for 5.70-5.75%.  

Equity market

NIFTY played within the set weekly range of 4775-4975 (low of 4789 and high of 4956) before close of week at 4920; thus trading end-to-end of sell zone at 4950-4975 and buy zone of 4800-4775. The moves in NIFTY more or less mirrored DJIA trading end-to-end of 12300-12600 (low of 12311 and high of 12575) before close of week at 12454. What next? There are more negative cues in play at this stage. The domestic macros are weak; rupee needs strong support from RBI to arrest extended weakness driven by strong USD and limited signs of optimism from the external sector. There is no buying appetite from domestic investors while off-shore investors are nervous keeping close watch on rupee and policy paralysis. However, there is bit of comfort from the efforts of the Government to cut fuel cost subsidisation and RBI’s open support to rupee in the form of Special Market Operations and/or Sovereign USD Bond issuance to NRIs and off-shore investors. Now, it is important that DJIA stays above strong support at 12220-12200 for relief rally into 12550/12700 to support NIFTY above 4775 for extended gains into 5075-5100. For the week, let us watch NIFTY at 4800-5100 and stay neutral on break-out direction. The strategy is to trade end-to-end by buying at 4825-4775 (with stop at 4750) and selling at 5075-5125 (with stop at 5150). The entry level for strategic investors is revised upwards to 4775/4650/4525 in three lots with stop below 4500 for 5600.

Commodity market

Gold is firmly in consolidation mode within the set near term range of 1520-1620; initial rally from 1527 lost steam at 1599 before sharp reversal to 1533 bouncing back again for weekly close at 1573. The strategy to buy dips into 1535-1525 (with stop below 1520) for move into 1600-1620 has worked well. What next? There are good signs of build up of momentum for extended rally above 1620 into 1670 for 100% reversal of fall from 1671 to 1527; resistances on the way at 1599/1616/1640 while reversal below 1550 (into 1530) stays firm. For the week, let us watch consolidation at 1535-1615 with test/break either-way to attract. The strategy is to trade end-to-end by buying at 1550-1535 (with stop below 1525) and selling at 1600-1615 (with stop above 1625).

NYMEX crude could not sustain its move above 93 (upper end of set 88-93 range) and fell sharply from high of 93.06 to 89.28 before close of week at 90.86. The downtrend in NYMEX crude is firmly in place till recovery in global economy is sighted and the bigger comfort is from G3/OPEC support to arrest rally through increase of supplies into the market. The tension between Iran and the West is seen to be out of the radar given other major issues on priority. For the week, let us continue to watch 83-93 with bias into lower end. Our strategy is to hold on to “shorts” entered at 110 for all the way to 75; let us hold on to this with trail stop at 95 and review the same after meeting the immediate objective at 83.50. Fleet footed traders can look to sell at 91.5-94.5 (with stop above 95) for 83.50.

Have a great week ahead.................................Moses Harding  

twitter updates @ mosesharding

There is demand for intra-day views given the excessive volatility. I am unable to attend calls from many. So, will provide quick updates on my twitter account......catch up there.

Moses Harding

Will RBI use the ultimate weapon to save rupee?

What can RBI do to prevent Rupee fall?

Rupee is now at the door of the set short term target of 56-57 (low of 55.87). There should be genuine dollar supplies at 55.95-56.20 considering 57.00-57.25 attractive to sell August 2012 dollars. Exporters have been realising higher export receivables by selling 3M dollars first at 55.00-55.20; then at 56.00-56.20 and now prepared to sell at 57.00-57.20. It is not because we have seen the “low” for the rupee but in anticipation of sharp gains in rupee into 52-53 considered as fair value. So, the objective is to realise higher gains unmindful of opportunity loss. It is not prudent to wait for the head or the tail of the move....locking 60-80% (of end-to-end move) is considered sensible given the market volatility.

Now, it is not fair to expect the Government to come to the rescue of the rupee. They could do very little at this stage. All stake holders look up to RBI to provide relief. It is not that RBI is quiet; all possible measures are being rolled-out, unfortunately the measures could only reduce the pace of movement from bad to worse.

It is time for RBI to take the “ultimate weapon” by announcing sovereign bond issuance to the tune of not less than $20 billion; keep selling dollars in the market to take out excessive “long dollar” positions in the market and announce Rs.1 Trillion of OMO bond purchases to absorb resultant rupee liquidity squeeze in the system.

What’s the impact on the market?

·        RBI will have USD liability in its books at cost say 6.0-6.5% for 3-5 year tenor

·        RBI will add to rupee assets at yield 8.25-8.5% for 3-5 year tenor

·        USD/INR will sharply gain to 53.50 and get into consolidation mode at 52-53 considered as fair value factoring in extended dollar rally against global currencies

·        10Y Bond yield to settle around 8.20-8.35%; considered affordable borrowing cost for the Government

·        Open up expectation of rate cut for shift into aggressive growth supportive monetary stance

I don’t see any other option at this stage to save rupee and to get positive vibes into the economy and markets. The end result is not important at this stage; the first aggressive step to prepare for soft-landing is important and critical. Will RBI act? It is crisis situation and it is time to act strong and hard. Let us see how things unfold.

Moses Harding

MARKET PULSE: 23-25 MAY 2012

MARKET PULSE: 23-25 MAY 2012

Currency market

Rupee into a new all-time intra-day low of 55.47 with daily closing low of 55.40......it is no more a breaking news story for the media as it happens on a regular basis now. Such is the plight of rupee! It is sad to note that despite all-out efforts from RBI, there is no sign of relief for rupee. What next? It is matter of time before we hear about large bond issuance of huge size to see a sustainable “correction” to 54.00 (and 53.50 as best case scenario). Now, having taken out 55.25 without much resistance, the next objective is at 56.00 with final pit stop to be expected around 57.00. This is the level which could attract genuine supplies (12M forward dollar above 60 bucks); keep importers away to drive the forward market into supply-driven mode; in the absence of adequate inflows into capital account, this is the only way through which current account deficit can be bridged through lead of dollar receivables and lag of dollar payables. The near term range is already shifted upwards to 54-57 and for now (into end of week), let us watch 55.25-56.00 with overshoot limited to 54.80-56.45. It is prudent for exporters to start hedging uncovered receivables with the objective to lock in higher realisation unmindful of bit of opportunity loss. It is good to sell August 2012 dollars at value 57.00-57.25 (spot at 55.95-56.20). Importers can stay away for sharp correction below 54.60 (into 54.00).

EUR/USD lost steam at the sell zone of 1.2825-1.2875 (high of 1.2824) for sharp reversal into support zone at 1.2640-1.2625 (low of 1.2644). In the meanwhile USD Index found support below 81 (low of 81.83) for 100 pip rally into 81.83. No change in view of looking for extended rally in USD Index into 82.50 to drive EUR/USD into 1.2550-1.2475; solid support zone to prevent extended run into 1.22-1.18. For now, let us watch 1.2550-1.2750 with overshoot limited to 1.2475-1.2825. The strategy is to hold “shorts” with trail stop above 1.2750 for 1.2550-1.2475.

USD/JPY rallied into 80 (high of 80.14) on the back of sovereign downgrade of Japan but could not sustain there for push back to 79.50. Will continue to see USD/JPY “heavy” above 80 for next objective at 78.25 which should hold; else 75.50 comes into the radar. In the meanwhile EUR/JPY failed at the higher end of set short term range of 97-102; hit our sell zone of 101.75-102.25 (high of 102.12) before down to 100.70 ahead of recent low of 100.17. No change in view of looking for test/break of 100 into 97.

Interest rate market

10Y Bond has nicely traded end-to-end of 8.48-8.58% before close at 8.52% and similar moves in 5Y OIS at 7.40-7.50% before close at 7.47%; it is traders’ delight to trade end-to-end of this familiar range as test/break either-way unable to hold on for long. There are no strong cues to look for range break-out till OMOs are there to stay. It is irony that bullish bond market is dependent on weak rupee and OMOs will be seen till RBI is in dollar sell mode in FX market. The risk factor beyond there is for extension into 8.65% in 10Y bond and 7.65% in 5Y OIS to retain Bond spread of 100 bps. For now, let us continue to watch 10Y Bond yield at 8.48-8.58% and 5Y OIS rate at 7.40-7.50% and play end-to-end with tight affordable stop on break thereof. Strategic players to cut duration of bond portfolio on extended gains in 10Y Bond yield into 8.48-8.45% and stay paid in 5Y OIS at 7.40%. The extended rally in 10Y Bond yield below 8.45% (into 8.35-8.30%) and 5Y OIS rate below 7.40% (into 7.25%) is dependent on issuance of USD Bonds by RBI; in which case we can see matching OMO operations to get the Bond market into bullish mode.

12M FX premium has nicely moved from the set pay zone of 5.0-4.90% to 5.5% and looks good for extension into 5.75%. Watch 5.25-5.75% with bias into higher end. Now, 5.35-5.25% is considered good to pay reinstate “paid book” with stop below 5.2%. Keep in mind for possible near term bullish extension into 6.25-6.5%.

Equity market

NIFTY lost steam at the sell zone of 4950-4975 (high of 4956) to set up a 100 pip trade for gradual reversal into first support zone at 4850-4825 (low of 4850) before close at 4860. There is no change in view of NIFTY moving into the lower end of set weekly range of 4775-4950 to complete end-to-end move. Thereafter 4650-4500 will come into focus, considered as good entry point for strategic investors. For now, let us watch 4775-4900 with bias into lower end, not ruling out break thereof into 4650.

Have a great day..........................Moses Harding 

God to the rescue of RBI to save rupee

RBI unable to arrest rapid fall in rupee.....who else can? God save rupee!!!

Rupee has almost met the first downside objective set at 55.25 (low of 55.08) ahead of short term objective at 56.75-57.00, which is expected to complete the end-to-end of set short term range of 52-57; since then (set up of this short term range) rupee is down from low of 52.01 (seen on 23^rd April), covering 60% of the journey in one months’ time. Rupee is down by over 25% since July 2011 low of 43.85 and by over 13% from the February 2012 low of 48.60 (at annualised rate of over 52%). This sharp rupee depreciation is a serious concern for stake holders who have large uncovered dollar liabilities and sold most of export realisation. It is worse for those who have bought interest cost reduction derivative structures by shift of rupee liability to foreign currency, mostly to USD and JPY. It is a big worry for RBI as this sharp depreciation in rupee has knocked out the benefit of over 14% in BRENT Crude, down from high of 128.40 since 1^st March 2012. The expectation of shift into pro-growth monetary stance, on the back of accelerated rupee weakness beyond downtrend in crude oil price is not relevant now. RBI will continue to see inflation as major risk to growth.

RBI has done all it could to arrest rupee depreciation with no tangible impact; it could only delay the inevitable but could not deny it! The recent measure to cut the “arbitrage flows” between OTC spot market and ETF forward market is a major one. The integration between these two markets generates liquidity to cut the “lead and lag” play and enable efficient price discovery. It is a major decision to cut the integration between cash and futures market. Why this tough decision? The forward value of the dollar in OTC market is not a reflection of future expectation of spot value. It only captures the interest differential between the two currencies which are exchanged from start to end date. On the other hand, forward value in the ETF market builds in expectation of the future value; thus generating lead and lag play between the values in OTC and ETF market. How it impacts? When the going is tough for rupee, forward dollar in ETF is costlier than OTC market which generates dollar demand in the OTC market which flows into ETF market to cut the arbitrage. When the going is good for rupee, forward value in ETF is cheaper than OTC market which generates dollar demand in the ETF market which flows into the OTC market. What is the end result? When RBI comes to protect rupee (by sale of dollars), there is pent up demand for dollars in the OTC market and when RBI tries to arrest excessive rupee appreciation (by buying dollars), there is flush of dollar supplies in the OTC market. In either of the case, it makes life tough for RBI (by making intervention ineffective) and not seen as good for the economy and its stake holders. Unfortunately, even this measure could not provide decent “correction”; knee-jerk reaction held well at 54.60 and up sharply to post new intra-day low of 55.08 and but for RBI dollar sales would have taken out 55.25.

The market is closely watching next steps of RBI; mopping up of $10-20 billion of “India Resurrection Bond” issuance from NRIs (and other non-resident investors) may not help to guide rupee reversal beyond 53.50. The need is to address issues related to capital account flows and issues are complex with mix of woes from political, economic and monetary regimes. RBI is very vocal about the need of capital flows to bridge widening current account deficit. The threat is also that of India exit from BRICS group and moving out of the radar of foreign investors. The issue on hand is serious and no serious attempts are being made by the Government to provide course correction.

What next? The near term range now stands shifted to 54-57 with strong protection at 53.50. It is matter of time for 55.25 to give way on USD Index back into recent high of 81.75 (with EUR/USD holing below 1.29 for 1.26). It is also matter of time for NIFTY to extend its losses into 4500. These strong market forces (acting against rupee) will make it tough for RBI to defend extended rupee weakness into 56.50-57.00. We have completed 60% of the journey (from 52 to 57) in one month time and may not rule out faster pace for the remaining 40% of the journey towards 57.

Moses Harding

Head – ALCO and Economic & Market Research

IndusInd Bank, Mumbai   

Weekly report for 21-25 May 2012

     MARKET PULSE: Weekly report for 21-25 May 2012

Currency market

Rupee hit an all-time intra-day low of 54.91 but managed to close sharply lower at 54.43. In the meanwhile USD Index met its first objective at 81.75 and reversed sharply to 81.02 driven by EUR/USD rally from 1.2640 to 1.28. This validates our stance that rupee weakness is driven by strong dollar against global currencies and it would need unwinding of dollar strength to provide relief to rupee while RBI’s actions could only limit excessive traction between USD Index and USD/INR. What next? We have discussed enough of macro issues (political, economic and monetary) and huge uncovered dollar liability exposures in the system; in the absence of adequate inflows into capital account and bearish outlook on the economy, the forward market is firmly into demand-driven mode. With all these strong headwinds, RBI could not prevent rupee from posting new all-time low above 54.30. Rupee bulls should wish and pray for USD Index losing steam at 81.75-82.50 to protect rupee at 55.25; if not, it will open up steady weakness into 57. Now immediate support to watch in USD Index is at 80.50 which could drive rupee into 54.10 and further extension into recent low at 79.50 would extend rupee gains into 53.50; lower end of set near term range of 53.50-55.50. For the week, let us watch 53.50-55.00 and keep close watch on USD Index (and EUR/USD) for directional guidance. The expectation is that of USD Index holding its strong ground above 80.50 to get the focus back into 81.75 during the course of the week. Given this expectation, USD/INR should form a base somewhere between 54.10-53.50. It may be prudent for importers to cover 1-3M imports at forward value below 54.50, gradually absorbing spot gains from 54.10 to 53.50. Exporters who sold 3M dollars at 55.00-55.20 can look to exit below 54.50 (net of “carry” for the time decay).

EUR/USD met the first objective at 1.2625 (low of 1.2640) but expected “correction” from there into 1.28-1.29 (high of 1.2794) was sharp and driven by strong buying in Euro crosses and “short squeeze” ahead of weekend. What next? The trend for the EUR/USD is bearish and this sharp 150 pip correction may not be seen as trend reversal; having fallen sharply from 1.3283 since 1^st May 2012. There is no change in view of looking for test/break of strong support zone at 1.2625-1.2550 into 1.22-1.19 into the short term. The risk factor to this expectation is on EUR/USD break above strong resistance at 1.2850 which will then open up 1.3000; considered as low probability occurrence at this stage. For the week, let us watch 1.2625-1.2875 with bias into lower end, not ruling out extended weakness into 1.2550-1.2475. The strategy is to sell in two lots at 1.2825 and 1.2875 (with stop above 1.2900) for 1.2650-1.2625.

USD/JPY is firmly into its downtrend having posted a low of 78.97 despite strong 100 pip rally in EUR/JPY from 100.20. The risk of extended weakness in USD/JPY into 76.00-75.50 is opened up now for 100% reversal of its move from 75 to 85. For the week, let us watch 78.00-79.50 with bias into the lower end. The strategy is to stay short with stop above 79.50 for 78.10. EUR/JPY met its first objective at 100 (low of 100.17) on clear break below 102.50. Now, any cross inspired rally has to fail below 102 to retain its bearishness for extension into 97.00. For the week, let us watch 97-102 with bias into lower end. The strategy is to stay “short” with stop above 102 for 97.25.    

Interest rate market

Money Market is tight and facing severe liquidity squeeze on aggressive dollar sales by RBI and release of cash through OMO is not sufficient. RBI cannot afford to release cash through B/S swaps (or sale of outright forward dollars) as lower premium will increase demand for dollars in the forward market. The bearish sentiment is reflected in the rate curve with 3-12M rate curve sharply up at 10%. The 3M rate has moved up from 9.25% to 10% despite 50 bps rate cut; this is serious concern of the stake holders and highlights lack of optimism into the future with limited bandwidth to deliver rate cut in the short term. The positive take-away is that of possible delivery of 50-75 bps CRR cut ahead of advance tax outflows in mid June. For the week, higher demand for funds into first week of new reporting fortnight would keep drawdown from LAF at over Rs.1.25 Trillion and overnight MIBOR at higher end of 8.15-8.40% range. 1Y Bond yield is expected to stay steady at 8.30-8.40% with good demand from Banks to cut duration of bond portfolio without much compromise on the yield. 1Y OIS rate is down to lower end of 7.95-8.10% short term range and would not prefer test/break of lower end with bias into 8.05-8.10%. For the week, let us watch 7.95-8.05%; suggest not to stay received below 7.95%; considered good hedge against call borrowing book and 1Y Bond investment portfolio.

10Y Bond yield is in consolidation mode at 8.45-8.55%; OMOs driving the yield to 8.47% for sharp reversal from there to 8.54% ahead of Bond auction before close of week at 8.53%. It is obvious that RBI need to conduct its OMO on a regular basis to prevent weakness into 8.60-8.65% and beyond. So, Bond rally into 8.45-8.35% is subject to rupee staying under pressure for extended weakness into 56-57; else 8.65-8.75% comes into the radar. The stake holders will have close watch on core inflation and manufacturing data but the expectation on the way forward is that of release of liquidity through CRR cut (from current 4.75% to 3% through FY13). The next round of rate cut is not expected before July-September 2012. Let us stay with our short term range of 8.45-8.60% with extension limited to 8.35%-8.70%. 5Y OIS slipped below 7.40% (low of 7.39%) before close of week at 7.43%; Bond-swap spread is up from 100 bps to 110 bps. There are no strong cues to expect sustainability in 5Y OIS rate below 7.45-7.40% with risk of bounce back to 8.60-8.65% in due course. For the week, let us watch consolidation in 10Y Bond yield at 8.47-8.58% and 5Y OIS rate at 7.40-7.50% and test/break either-way not expected to sustain. The strategy is to play end-to-end by buying at 8.57-8.59% and selling at 8.48-8.46% with tight stop. It is not a good risk-reward to stay “received” in 5Y OIS below 7.40% (incurring 80-100 bps negative “carry”).

FX premium nicely held at strong support at 6.75% (3M) and 4.90% (12M) and reversed sharply for close of week at 7.05% and 5.3% respectively; the strategy to stay paid in 12M at 5.0-4.90% has worked well. Now, we will allow for test of immediate resistance at 7.25% (3M) at 5.40% (12M) and watch exchange rate play for next direction. Having said this, interest rate play will continue to exert upward pressure on move into lower end. For the week, let us watch consolidation in 3M at 6.90-7.40% and 12M at 5.0-5.40%. Hold on to “paid book” in 12M with trail stop at 5.0% for 5.60-5.70%. For others, look to initiate pay in 12M at 5.15-5.05% (with stop below 5%) for the set target. The high 3M rupee interest rate and demand for 3M dollars will not allow sustainability in 3M premium below 6.75%; not to miss this if seen for spike into/above 7.5%.   

Equity market

It was volatile week in NIFTY; held well at the resistance/sell zone of 4950-4975 (high of 4957) for sharp reversal into set target at 4825-4775 (low of 4788); followed by sharp rally into 4908 before close of week at 4891. Over all, it’s back-and-forth move between set sell zone at 4925-4975 and buy zone at 4825-4775 with no strong momentum to provide range break-out. The weekly close above 4850 and below 4925 is neutral and mixed. In the meanwhile DJIA fell sharply from weekly high of 12818 into set objective at 12220-12200 (low of 12336) before close of week at 12369. What next? The trend is bearish; there are no strong positive cues from either domestic or external sector to get the market into bullish mode. The domestic factors continue to weigh heavily against equity assets and it would be extremely difficult for RBI to maintain its pro-growth monetary stance and deliver rate cuts. It is less said the better about domestic liquidity and cost of funds; money market is facing the brunt of heat from actions in FX market. There seems to be endless flow of negative news from the Euro zone. The economic data from the US is also not encouraging and the expectation of stimulus support is strong. In short, the strength of equity asset market is not based on strong fundamentals or optimism into the future but the extent of liquidity support from Central Banks and economic stimulus packages being rolled out by the Governments. This scenario is not good for equity market into short/medium term; at best it could set up good trading opportunity for fleet footed traders while strategic investors get into wait-and-watch mode and stay invested in debt/fixed income assets. The investors are clearly on “risk-off” mode and it is negative that shift into “risk-on” mode is short-lived. Now, it is important for DJIA to hold above strong support at 12220-12200 to arrest extended weakness in NIFTY below 4825-4775 support zone; else December 2011 low of 4531 will come into play tracking extended weakness in DJIA into 11875. For the week, let us watch consolidation at 4775-4950 and stay neutral on break-out direction which then can extend to 5075 or 4650, first entry point for strategic investors. MARKET PULSE is bearish till entry into 4650-4350 considered good to enter for strategic investors in three lots at 4650/4500/4350. The strategy for fleet-footed traders is to sell at 4950-4975 with tight stop; if stopped sell again at 5075-5100 (with stop above 5125). On the other side, buy at 4775-4750 with tight stop; if stopped buy again at 4650-4625 (with stop below 4600). Over all, short term trading range is at 4500-5000; test/break either-way will not sustain.

Commodity market

It was volatile week for Gold; fell sharply from 1585 to 1527 and back again to 1597 before close of week at 1591. Over all, the strategy to stay “short” for 1525 worked well but sharp rally from there into higher end of set weekly range of 1520-1620 was surprise. It is obvious that move into 1525 attracted huge “short covering” to capture the 14% fall (from 1790) since first week of March 2012 and development of Greece exit out of the Euro zone generated relief rally in Gold. The strong rally in USD in recent times brought the shift to Gold as alternate to USD. What next? Given the extended rally in USD and very low sovereign yields, there is investor appetite for Gold on expectation of QE3 linked rally. We also anticipated a sharp reversal and identified 1495-1480 as the buy zone to catch this rally. It is now possible that the rally has begun targeting the strong resistance zone of 1625-1640 while support at 1560 stays firm. For the week, let us watch consolidation at 1560-1640 not ruling out 100% retracement of recent fall from 1671-1527. The strategy is to stay cautious buyer on dips into 1560-1535 (with stop below 1525) for 1655-1670.

NYMEX Crude maintained its downtrend from weekly high of 95.83 to 90.93 before close of week at 91.48; strategy to stay “short” for this move worked well. What next? The “gloom” in the global economy and sharp rally in USD Index has brought the market into bearish trend; 17% reversal since 1^st March 2012 high of 110.55 will significantly cut (excess) liquidity driven inflationary pressures on the global economy and provide comfort to maintain loose monetary policy to spur growth. Unfortunately, India lost its advantage with 25% depreciation in rupee from below 44 to 55 since July 2011 and 12% fall from 48.60 since February 2012.  For the week, let us watch 83-93 with bias into lower end. The strategy is to hold “shorts” with trail stop above 93 for 83.50. For others, look to sell at 94-96 with tight stop. There are no strong cues to look for reversal of current bearish trend above 95 with short term target at 75 (and BRENT Crude around 90).

Have a great week ahead........................Moses Harding

MARKET PULSE - Special update

MARKET PULSE: Special update (near term perspective)

Currency market

Rupee posted yet another new all-time intraday low at 54.58 but managed to end the day at 54.48, one paisa below the previous low of 54.49 (daily close basis) thanks to aggressive dollar sales by RBI above 54.50. Our recent strategy was to cover 3M payables at forward value below 54 and spot rupee could not extend its gains beyond 52.95 (post strictures on EEFC) for sharp reversal to take out 54.30 driven by USD Index rally into 81.50-81.75 resistance zone. It is not that we wish rupee to fall but the fact is that RBI does not have enough ammunition to fight against Tsunami like ferocious headwinds across all sides. To add fuel to fire, weak macro fundamentals and negative domestic sentiments hurt rupee more when USD is in rally mode and any gains remain shallow on correction in USD Index (and spike in EUR/USD). We also asked exporters to sell part of 3M dollar receivables at 55.00-55.20 on spot weakness into 54.10-54.30 (despite expectation of new low over 54.30) with sense of patriotism and support to RBI. It is true that rupee weakness beyond 54.30 is excessive, sharp fall in rupee from 43.85 (to 54.30) since Euro zone crisis in July 2011 more than adequately captures the weak macro fundamentals and negative investor/business sentiments but strong market forces in favour of USD has created panic in a heavily (dollar) over-sold market and risk of pull out of hot money/fair weather investments. It should be noted that most exporters are hedged, most importers are uncovered, short/medium/long term foreign currency liabilities are open and those who shifted rupee liability to dollar for interest cost advantage are in the red and if all these positions come up for closure, it would be very painful. Added to this, if 3-6M import cover comes up at the same time, it would be disastrous. RBI does not have deep dollar pockets or the domestic system in a position to absorb resultant rupee liquidity squeeze. The picture is grim and our dependence on hot money inflows and poor risk management practices (to stay oversold in dollars) is exposed yet again. It is high time the Government and the RBI set up high level committees to address structural issues (political reforms, fiscal consolidation and inflation control) once and for all. We are already into the third decade of economic reforms (since 1991) but continue to be swayed by forces beyond our control. What next? USD/INR will get into traction with USD Index and EUR/USD. USD Index is looking good for extended gains into 82.60 (on test/break of 81.78) with short term target at 85.25. This rally in USD Index can push EUR/USD down to 1.2550 with short term target at 1.22.  The mirror reflection of these moves sets up target for rupee at 55.25 with short term target at 57.00. Rupee recovery has to be driven by sharp reversal in USD Index into 78.10 which can then provide relief for rupee into 52.80-52.30; now considered as strong base for the USD/INR currency pair. All these validate the set short term range for rupee at 52-57. In the absence of reversal in USD Index, RBI can drive rupee reversal (to set targets) through measures like Special Market Operations (to absorb dollar demand from Oil PSUs); allowing importers to postpone import pay out through extended buyers’/suppliers’ credit beyond 12M tenor; forcing exporters to sell future realisation on post-shipment basis; removal of off-shore borrowing limits for Banks/companies and in worst case scenario to raise long term money from NRIs. The risk factor is that of possible exit by FIIs from equity market on availability of USD at subsidised rate which can drive the NIFTY below recent low of 4531. FIIs may prefer either to stay in cash or invested in debt till the Government starts taking aggressive steps to address structural issues on hand. For now, there will be dollar demand from importers to buy forward dollars below 54.50 which will limit spot rupee recovery to 54.10 but not beyond 53.50 (3M dollar below 54.50). On the other side, 3M forward dollars at 56-57 may lead supplies from exporters into the forward market; thus setting up strong support for rupee around 55.50, midpoint of the set short term range of 52.57. So, taking all these together it is good to watch consolidation at “inner ring” of 53.50-55.50 with bias into higher end. Strategy for importers is to cover 1M dollars around 54.50 (spot at 54.10) and 3M dollars around 54.50 (spot at 53.50) while exporters stay away for spot into 55.50-57.00 having already covered 3M dollars at 55.00-55.20.

EUR/USD is steadily trending down and has now convincingly taken out strong support at 1.2750 and looks good for test/break of 1.2625 (low of January 2012) which then could extend all the way to 1.22 and 1.1875 (low of January 2010). MARKET PULSE strategy since July 2011 Euro zone crisis was to stay fully hedged on exports; fall from 1.4939 since then has been steep. There will be bad news coming out of PIIGS to provide momentum to Euro’s fall but it has to reverse from some point. The trigger for this may be on exit of problem countries from the common Euro currency; so, let us not chase Euro weakness into 1.22-1.19 and consider this as good to unwind strategic “short” positions and to stay covered on imports. For now, any “correction” in EUR/USD should not extend beyond 1.28-1.29 resistance zone for gradual move into 1.22-1.19 on clear break below 1.2625-1.2550 support window.

USD/JPY traded as per script for sharp rally from 75.55 (low of November 2011) to 84.17 (high of March 2012) before losing steam for push back to low of 79.41 and now in consolidation mode around 80. The strategy of MARKET PULSE was to trade end-to-end of 75-85 and also suggested companies to convert USD liability to JPY at lower end for back into USD around 85. Now, it is possible that USD/JPY has shifted into a new range of 78-83; there may not be momentum for test/break either-way, hence would look for end-to-end consolidation.

Interest rate market

Money market is feeling the heat of RBI’s FX intervention; liquidity is tight and draw down from LAF continue to stay over Rs.1 Trillion despite CRR/OMO actions. 3-12M money market rate are up at 10% despite 50 bps rate cut. RBI has already completed two rounds of OMO for FY13 and next round of CRR cuts is round the corner, at least by 50 bps during the mid quarter review in June. Rate cut actions are out of the radar and expectation of shift of operative policy rate from Repo to Reverse Repo rate may be delayed given the severe strain on system liquidity. The system need to stay with 8% operative policy rate into the short term. Over all, impact of 50 bps rate cut and 125 bps CRR cut may not be passed through to borrowers when cost of money is expected to stay at elevated levels into the short term. Till mid quarter review, overnight MIBOR is expected to stay at higher end of 8.25-8.5% while 1Y Bond and OIS rates stay in consolidation mode at 8.35-8.50% and 8.0-8.10% respectively.

10Y Bond yield is in consolidation mode around 8.50% post trigger of OMOs by RBI. MARKET PULSE strategy to stay invested at 8.60-8.65% and to shift long term investments into shorter tenor on rally into 8.35-8.25% has been good; initial weakness into 8.69% reversed sharply to 8.30% post rate cut and back to consolidation mode at 8.45-8.60% on expectation of OMOs every alternate week if not on weekly basis. As before, stability in 10Y bond is highly dependent on extent of OMOs from RBI as all other factors point to high level of bearish set up for weakness beyond 8.65-8.75%. Let us watch consolidation in 10Y Bond yield at 8.45-8.55% taking comfort from OMO and extension if any will stay limited to 8.35-8.65%. The strategy is straight forward; to stay invested at 8.55-8.65% and not to stay “long” at 8.45-8.35%. It would be good to unwind longer end bonds with shorter end at similar yield, thereby creating room to absorb weakness into 8.55-8.65%. 5Y OIS rate is expected to maintain 100 bps spread with 10Y Bond yield to stay in consolidation mode at 7.45-7.55% with extension limited to 7.35-7.65%. The strategy is to stay paid on move below 7.45% and stay received on spike into 7.60-7.65%.

FX premium traded to the script as we chased 3M all the way to 6.75% and 12M into 4.9% from over 8.75% and 6.65% respectively. Now, market is in tight consolidation mode around 6.75% in 3M and at 4.90-5.20% in 12M. The interest rate play continues to favour upside momentum while exchange rate play is developing downside momentum. Given the deregulation in FCNR/NRE/Export Credit interest rates, FX premium should start aligning with corresponding money market rates to cut excessive arbitrage play between MM and FX yields. Let us watch consolidation in 3M at 6.5-7.5% and 4.90-5.40% in 12M. The strategy is to stay paid at 5.0-4.90% in 12M for eventual test/break of higher end into 5.75-6.0%.

Equity market

NIFTY is under pressure but holding above strong support at 4850/4825 but bounce from there is losing steam ahead of strong resistance at 4950/4975. In the meanwhile global bourses are also under pressure with DJIA unable to regain strong support at 12710-12735. Equity assets are not looking good despite attractive valuation and low P/E multiples with combination of weak domestic cues and uncertainty in external sector. Euro zone is looking vulnerable and investors are clearly on risk-off mode at this point of time. Given the near term expectation of downtrend in DJIA into 12220-12200 and absence of domestic investor appetite, FIIs will get into wait-and-watch mode with close watch on rupee. The immediate bias is for move into December 2011 low of 4531 on clear break of immediate support at 4775/4650. It would be good for strategic investors to buy in three lots at 4650/4500/4350 for short/medium term recovery into 5600. For now, let us watch 4500-5000 with bias into lower end. The strategy is to sell in two lots at 4900-4925 and 4975-5000 (with stop at 5025) for take-profit in two lots at 4675/4550.

Commodity market

Gold met its objective at 1525 (low of 1527) and now in consolidation mode at 1525-1575. The strategy of MARKET PULSE to stay “short” from above 1665 has been met. Now, the down move is yet to complete with next objective at 1485 and the near term range stands shifted to 1485-1585 from earlier 1520-1620. The test of 1485 should complete the big picture move from 1670. The strategy is to reinstate “shorts” at 1560-1585 with tight affordable stop for 1500; let us switch sides there by buying at 1495-1480 with tight affordable stop.

NYMEX Crude is in consolidation mode around $93. The strategy of MARKET PULSE to stay short from $110 has met the set objective at 93-95. Now, the near term range stands revised to 80-95 with bias into lower end. The strategy is to stay “short” by selling at 94-96 for 82-80. There are no cues at this stage to provide sharp reversal above $100.

Have a great day ahead.....................Moses Harding

Rupee at all time low..........what next?

Rupee hits all time low driven by strong market forces in favour of the US Dollar

The rupee is weak since July 2011 based on weak macroeconomic fundamentals driven by low growth; high inflation; tight liquidity; high interest rates; high fiscal deficit and high trade deficit. The system is in the wrong side across all parameters. The sentiment into the future is also negative taking into account the ability to address these structural issues and constraints in attracting long term capital flows through policy reforms. The combination of weak fundamentals and negative sentiment has squeezed the Balance of Payment position, thus setting up the bearish trend for rupee. The quality of inflows is also in doubt as large component is from hot money FII flows and short term debt obligations. All these factors have been more or less captured in sharp rupee depreciation from 43.85 to 54.30 since July 2011 where rupee is seen to be highly undervalued. Then, why is this run on the rupee? The market forces have turned strongly in favour of the US Dollar (against major currencies); global investors are in risk-off mode resulting in sharp fall in hot money FII flows and combination of weak macro fundamentals, negative sentiment and bullish USD (and weak Euro) has caused demand over-run in the forward market in anticipation of more rupee weakness ahead. The only positive cue is from sharp fall in BRENT Crude by 13% but not seen good enough to counter negative forces in play.

Rupee stability is dependent on two main factors: regular net inflows through Capital account (whether hot or cold) and net supplies from forward market into spot market. The aggregate of both should be adequate to cover deficit in trade/current account. The other important factor that provides two-way volatility is the market behaviour of the US Dollar against major currencies reflected from movements in USD Index and/or EUR/USD. What is the outlook? There is no chance of overnight miracle to set right the fundamental issues on hand. These are seen as structural issues so as policy reforms; thus economic and political structures are weak, thus diluting the optimism into the future eroding the investor and business confidence. As long as these two structural issues are valid, it would need weak dollar (strong Euro) to get the forward market into supply driven mode. Exporters should get the confidence that there is no risk of rupee depreciation beyond what they get as premium. This confidence may not be there when dollar is extremely strong driven by all sorts of woes from the Euro zone; thus forward market may not get into supply driven mode till USD loses steam against Euro. The demand pressure on spot market on front-load of 3-6 month imports is enough to push rupee down and it would be worse if exporters are either already covered or refrain from hedging future receivables. RBI did its best to provide support but was not good enough to counter Tsunami like headwinds from all sides. RBI has not enough dollar assets to absorb the huge dollar demand over supplies or enough surplus rupees in the system to allow shift of dollar assets to rupees in RBI’s balance sheet. Given these structural issues (with no concrete solutions with the Government or RBI), rupee will be under tremendous pressure if market forces signal strong US Dollar. USD Index is up sharply from 78.50 to over 81.50 and looks good for further extension over 82.50 into 85.00 on strong downward pressure in EUR/USD below 1.25 into 1.18. It is also possible that moves in USD/INR will have excessive traction with USD strength and marginal benefit to rupee on recovery in EUR/USD. The domestic stock market is also weak with immediate objective for NIFTY at 4500 and FIIs are not seen to provide temporary relief by pushing in hot money flows. The risk of reverse flow of FII money is not ruled out. Therefore, taking all these together, outlook for rupee is for gradual weakness to 55.35-55.65 not ruling out extended run into 56.30-56.75 before sharp reversal into 52-51. It is important that Government work towards addressing structural issues relating to political and economic environment to get the confidence back into optimism. This will enable RBI to shift into aggressive growth supportive monetary stance for bullish outlook on the economy and its markets. It is possible that RBI will allow rupee to find its own floor and limit its intervention operation to halt excessive one-way volatility.

Moses Harding

Head – ALCO and Economic & Market Research

IndusInd Bank, Mumbai

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Cheers.................Moses Harding

MARKET PULSE for 16 May 2012

MARKET PULSE for 16^th May 2012

Currency market

USD/INR nicely moved into the sell zone of 53.90-54.30 considered good for exporters to cover 3M dollars at value above 55 (high of 54.06 in spot and high of 55.01 on 3M); this zone is considered critical in anticipation of RBI’s strong-arm tactics to prevent rupee posting new low beyond 54.30. RBI’s strong intervention (dollar sales over 54.00) could drive USD/INR to low of 53.59 (into the buy zone of 53.60-53.35; considered good to buy 1-2M forward dollar at value below 54) before close of day at 53.80. RBI has been successful so far to defend 53.90 (on daily closing basis) and to prevent extend rupee weakness into 54.30. The fundamentals have not turned supportive to rupee; the recent data on growth and inflation is negative. The flow into debt/equity capital market is scarce. The most critical factor will be to turn the forward market into supply driven mode; even a lead of 3M export receivables will matter a lot to drive the spot USD/INR down which in-turn will drive premium up to keep importers away from the scene. But, this is not going to happen overnight given the bearish sentiment in the external sector; specially trigger of disintegration fears in the Euro zone. The strategy of MARKET PULSE remains unchanged: to hedge 3M receivables at above 55 (despite risk of USD/INR spot weakness beyond 54.30 which can be used to cover exports beyond 3M tenor) and to cover 1-2M payables below 54.00; thus providing strong support to USD/INR pair at 53.60-53.35 and resistance at 54.00-54.20. Let us continue to watch consolidation at 53.60-54.10 with extension limited to 53.30-54.30; immediate bias is for move into 54.10-54.30 to activate aggressive dollar sales from RBI and follow-on verbal intervention to cut flow of big ticket demand into the market. USD Index after a brief correction from first objective at 80.70 is now on its way into the next objective at 81.75; impact of which would drive rupee into 54.30. This is the risk factor we need to keep in our mind and watch RBI’s actions either to strongly defend rupee or allow to find a new floor above 54.30. The undertone is negative; trend for rupee is bearish and RBI is struggling against strong headwinds, hence it may not be easy to defend 54.30 at this stage when USD is gaining strong grounds against major currencies and global bourses continue to maintain downward pressure. Rupee gains below 53.60-53.30 would need RBI to take operating control of the FX market which then would drive rupee into 52.00, lower end of the set short term range of 52-57.

EUR/USD met its first objective at 1.2750 (low of 1.2752) and on its way to the next objective at 1.2625, not ruling out further extension below 1.25. Strategy is to hold on to “shorts” with trail stop above 1.2800; if stopped sell again at 1.2850-1.2900 (with stop above 1.2925) for 1.2625/1.2475.

USD/JPY is in tight range trade around 80 (between 79.80 and 80.20) while EUR/JPY is holding above strong support at 102.25. While there is clarity is EUR/JPY looking for extended weakness into 101.50-100.50 (for further weakness into 97.00), let us stay neutral in USD/JPY and prefer to play end-to-end of 79.10-80.60 range by selling at 80.40-80.60 and buying at 79.30-79.10 with tight affordable stop.

Interest rate market

The surprise second round of OMO eased pressure in the Bond market to guide 10Y bond yield below 8.50% (low of 8.47% before close at 8.50%) and 5Y OIS rate below 7.45% (low of 7.43% before close at 7.47%). However, shorter end of the curve stayed firm with 1Y OIS around 8.05% and 1Y Bond yield up at 8.35%. As said, RBI’s aggressive stance to defend rupee is at the expense of Money market. The system deficit liquidity is considered structural and RBI cannot afford to pull-out rupees from the system to defend rupee. There is little RBI could do in the FX forward market as B/S swaps and resultant lower FX premium will lead to higher demand for forward dollars. The only option (other than CRR cut) is to conduct OMO operations as frequently as possible. So, there will be comfort to investors till OMO is out of the way bringing supply side pressures into focus. Now, week-on-week (or alternate week) OMO would push 10Y Bond yield to the lower end of set short term range of 8.35-8.65%. This would provide opportunities to traders: to buy ahead of OMO; sell ahead of auction and buy-back on auction. This cycle will provide two-way sideways trading within 8.40-8.50% with extension limited to 8.35-8.55%. The strategy is to play end-to-end of this move by staying long at 8.51-8.54% (with stop at 8.56%) and being “short” at 8.40-8.35%. Strategic investor can cut the duration of the portfolio with near zero dilution in the portfolio yield (replacing 10Y below 8.40% with 1Y above 8.35%) with good chance of getting re-entry at 8.65-8.75% in due course. In line with this expectation in Bond market, we may need to revise range of 5Y OIS rate into 7.40-7.55%. It is possible that RBI will continue its OMO (week-on-week basis) as its operation to defend rupee will be an extended one. If RBI decides to allow rupee to find its own floor, then Bond supplies (without matching OMOs) would kick in sharp reversal into 8.60-8.65%; hence prudent to trade OIS from paid side. Let us continue to watch 1Y at 8.0-8.10% with bias into higher end and two-way sideways trading mode in 5Y at 7.45-7.50% with test/break either-way to attract. Strategic players to stay paid on test/break of lower end (into 7.40%) for spike into 7.60-7.65% tracking 10Y yield into 8.60-8.65% in due course.

FX premium eased into the lower end of 6.75% (3M) and 5% (12M) on exchange rate play driven by higher spot into 53.90-54.10 but spot reversal from there below 53.80 pushed it back for close at 7% and 5.15% respectively. Now, let us watch consolidation at 6.75-7.25% (3M) and 4.90-5.20% (12M); test/break of lower end will set up good paying opportunity for sharp reversal into higher end. Fleet footed traders can play end-to-end of this range with tight stop on break thereof. Strategic players can look to build paid book below 4.9% in 12M (looks good against 12M CD rate of 10% providing LIBOR yield of 5.1%). This scenario will be good to attract NRE flows to release pressure on rupee. RBI can consider allowing NRIs to convert FCNR into NRE on payment of dollar interest for the run-period of deposit, to avoid incurring premature closure cost. This will also enable market to absorb B/S swaps of RBI without exerting downward pressure on FX premium.

Equity market

We had set a tight weekly range of 4825-4975 and have seen back-and-forth moves within low of 4869 and high of 4957 before close at 4942. The sentiment is very weak; economic data from India continue to indicate pressure on growth and elevated inflation. The external environment is bad; Euro zone crisis continues to haunt the investors with little optimism from big brother US economy. DJIA is already below the strong support zone of 12710-12735 (low of 12661/daily close of 12695); daily close below this strong support zone opens up risk of gradual weakness into 12220-12200. With weak domestic cues and lack of support from western bourses, trend into the near term is bearish with immediate objective at 4825-4775. Let us continue to watch consolidation at 4825-5000; initial gains into higher end would attract to prepare momentum for move below 4825. The strategy is to stay “short” at 4975-5025 with stop above 5050 for the set objectives.  

Have a great day ahead..............................Moses Harding