MARKET PULSE: report for 11th May 2012
Currency market
RBI delivered yet another FX measure (operating strictures in EEFC account) to halt rupee’s slide over 54 (and to prevent extended weakness beyond all-time low of 54.30). The timing of the announcement was perfect when rupee opened higher at 53.90 to provide sharp correction to 52.95 before close of day at 53.45. Normally, EEFC is an account product meant for companies who have both imports and exports to manage “lead-lag” between export realisation and import payout; it is not considered prudent for corporate treasurers to park export realisation in EEFC account at 0% by foregoing rupee yield of over 10% for speculative purpose. This would make sense only on expectation of sharp depreciation in rupee, which was never the case. Hence, most of available EEFC balances may be supply neutral as companies will now sell the dollars in cash market and buy dollars in the forward market to hedge pending import obligation to remove exchange rate risk. On the other hand, sharp reversal in rupee into 52.95 made forward dollars look cheap (July dollars at 53.80, below the day’s high on the spot) generating higher demand from importers. Over all, RBI’s action resulted in dilution of bearish sentiment to provide marginal correction and delay the inevitable. What next? Rupee is now into consolidation mode at 53-54; short term base for USD/INR is now firmly at 52.80 (and 52 on the best case) with short term (up to September 2012) trading range at 52-57. The bias is clearly towards 57 subject to spike in USD Index to over 82.00 (EUR/USD into 1.2650-1.2500), gradual slide in NIFTY into 4500-4350 and trending down in BRENT Crude into $100. Given this expectation, current value of forward dollars (across all tenors) looks cheap to acquire with target for 12M forward dollar at 58.50-59.00 (current 56.35). For the day, let us watch 53.15-53.95 with extension limited to 52.80-54.30. The strategy is rather straight-forward; stay long dollars across all tenors (on spot move into 53.15-52.80). It will be high risk-low reward to initiate “short dollar” trades at this stage. RBI will be indeed looking for other options that could lead supplies and lag demand but resultant impact may not be significant given the fundamental (and structural) deficiencies that has cut the inflows into capital account and pushed forward market into demand driven mode. It may be prudent to allow rupee to find its own “floor” where forward market will shift into supply-driven mode and high spot dollars look attractive to trigger lumpy inflows from FIIs.
EUR/USD lost steam ahead of sell zone of 1.3075-1.3125 (high of 1.3065) but held well at the set buy zone of 1.2925-1.2900 (low of 1.2910) before getting into consolidation mode around 1.2950. What next? The momentum is weak for the EUR/USD as USD Index is set to extend its gains into 80.60 for eventual move into 81.50-82.00. This would set up EUR/USD target at 1.2650-1.2500. For now, let us watch consolidation at 1.2850-1.3050 with bias into lower end; not ruling out further extension into 1.2725. The strategy is to hold on to “shorts” and add on test/break of 1.2900 for immediate objectives at 1.2850/1.2725.
USD/JPY is now in consolidation mode at 79.35-80.20 and no clear signals to fix break-out direction. The strategy is to play end-to-end of this range (buy at 79.40-79.15 with stop below 78.95 and sell at 80.15-80.40 with stop at 80.65); test/break either-way will be good for minimum 100 pips, hence stop/reverse is suggested. In the meanwhile EUR/JPY fell from higher end of set range of 103-105 (high of 104.44) into the lower end (low of 102.96). The immediate term outlook is weak for extended weakness into 100 on clear break of immediate support at 102.50. The strategy is to hold on to “shorts” for this move.
Interest rate market
10Y bond traded in consolidation mode at 8.55-8.60% before close at 8.56%. In the meanwhile OIS rates stayed bid with 1Y rate spike into 8.10% (close at 8.08%) and 5Y testing the higher end at 7.60% (close at 7.58%). In the process provided exit to 5Y OIS paid below 7.50%. There is no change in view in the Bond market as we look for two-way consolidation in 10Y bond at 8.50-8.65% and watch 1Y OIS rate at 8.0-8.10% and 5Y OIS at 7.50-7.60% with bias into lower end. The strategy is to buy 10Y bond at 8.62-8.65% and sell at 8.53-8.50%; hold on to 1Y OIS received at 8.05-8.10%; reinstate 5Y OIS pay at 7.50-7.45% and receive 5Y OIS above 7.65%
FX premium met its first objectives at 7% in 3M and 5.5% in 12M before close at 7.10% and 5.3% respectively. The shorter end of the curve will stay bid on interest rate play and demand for dollars while longer end is in the firm grip of exchange rate play. It is also important to track liquidity squeeze in cash dollar market due to aggressive dollar sales from RBI. The trend is down till spot rupee finds its own base. For now, let us watch 3M at 6.75-7.25% and 12M at 5.0-5.5% with bias into lower end.
Equity market
NIFTY could not manage to hold on to its gains above 5025 (high of 5039) for sharp reversal into 4950 before close at 4965. The lack of follow through buying from 4950 into 5080 is not good sign for the bulls. There is no change in outlook of looking for conclusive break of 4950 for extension into 4775/4525/4350 before sharp reversal. For now, let us continue to watch 4775-5025 with bias into lower end. I will give up this bearish outlook on test/break of 5080 which then could extend the rally into 5300 before sharp reversal. Over all, short term range for NIFTY is seen to be at 4300-5300.
Have a great day ahead............Moses Harding
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