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