MARKET PULSE for the week 07-11 MAY 2012

MARKET PULSE for the week 07-11 May 2012

Currency market

Rupee posted yet another strong rebound from the recent low of 53.92 for close of day at 52.91. We preferred consolidation at 52-54 taking comfort from RBI and possible policy roll-back from the Government; hence advised not to chase weakness into 54. More than RBI’s relaxation of FX rules in FCNR and Export Credit, deferment of GAAR by one year provided the relief to rupee bulls. The end-to-end move within the set weekly range of 52.70-53.60 is almost met. What next? The focus for USD/INR is now at 52.70 followed by extended gains into 52.00 to complete end-to-end move within the set near term range of 52-54. Beyond there, it would depend on sustainability of BRENT Crude below $115 (for preparation of move below $100) and USD Index holding below strong resistance at 80.20-80.70. If all goes well, the focus will then shift for further gains into 51.35-50.75 before getting into consolidation mode at 50-51. RBI can then look to absorb excess dollar supplies to release rupees into the system and to cover their recent “short” positions. For now, let us watch 52.35-53.35 with bias into lower end, not ruling out extended gains into 52.00. The strategy is to trade from “short” side for this move.

EUR/USD fell sharply from 1.3282 to 1.2955 before stabilising above 1.3000. The trigger for this move is largely driven by political losses in the Euro zone and signs of delay in roll-out of QE3 in the US. Now, EUR/USD has moved into a new near term range of 1.2825-1.3175 and immediate term bias is for consolidation with test/break either-way not expected to sustain. However, short term momentum is seen to be down into 1.2625-1.2475 before strong reversal sets in. The strategy for now is to play from “short side” in expectation of test/break of 1.2825 for extended weakness into 1.2625.

USD/JPY lost steam and threatening to move below strong support zone of 79.65-79.50 which could then trigger deep extension into 76.00-75.50. This stance is valid till strong resistance at 81.50-82.00 remains safe. It is possible that the near term range has already shifted to 76-81 with bias into lower end. The strategy for now is to play from “short side” in expectation of test break of 79.65-79.50 zone for 79.15-79.00 first.

EUR/JPY is very weak with combination of downward pressure both on EUR/USD and USD/JPY. The near term range for this pair is now at 102-105 not ruling out extended weakness into psychological big figure support of 100. The strategy is to play from “short” side in expectation of test/break of immediate support at 103.25-102.50.

Interest rate market

Money Market is under pressure with system liquidity deficit around Rs.1 Trillion; RBI’s dollar sales in FX market and week-on-week bond supplies add to pressure. MM rate curve is already up from post-rate cut levels with 3-12M rate curve at 9.25-9.75%. In the meanwhile, 10Y Bond yield has stabilised at 8.60-8.75% and OIS rates in two-way sideways trading mode at 8.0-8.10% (1Y) and 7.50-7.65% (5Y). What next? 10Y bond yield is trading at higher end of set short term range of 8.25-8.75% and we considered good to stay invested at 8.65-8.75% and to stay “short” at 8.35-8.25%. We have already seen one round of end-to-end move from post-policy low of 8.30% to high of 8.74% and now steady around 8.65-8.70%. Let us continue to stay with this strategy till next round of monetary action is sighted. For now, let us watch 10Y bond yield at 8.50-8.75% with test/break either-way not expected to sustain. The strategy is to play end-to-end by buying at 8.71-8.74% for exit at 8.54-8.51%. Bond spread at 115-120 bps looks attractive with 10Y bond yield around 8.70% and 5Y OIS rate around 7.50%....it is too good to ignore.

OIS rates are into consolidation mode given the lack of strong factors to provide directional break-out. However, upside risks are limited on shift into growth supportive monetary stance. It is matter of time before overnight MIBOR eases into the LAF corridor of 7.0-8.0% either through aggressive liquidity injection or through rate cut. For now, let us watch 1Y at 7.95-8.05% and 5Y at 7.45-7.60% and test/break either-way is not expected to sustain. The strategy is to play end-to-end of these ranges with tight stop on conclusive break thereof. Strategic players can look to receive 1Y at 8.05-8.10% and pay 5Y at 7.50-7.45%.

FX premium nicely completed next round of end-to-end trades within the set near term ranges of 7.0-7.75% (3M) and 5.75-6.25% (12M). What next? The interest rate play will continue to provide upward momentum with deregulation in FCNR and Export Credit rates to arrest build-up of downward momentum from exchange rate play. It is important to keep FX premium at elevated levels till rupee woes are out of the way. For now, let us continue to watch 3M at 7.25-7.75% and 12M at 5.75-6.25% with test/break either-way not expected to sustain. We need to watch next round of monetary actions from RBI; it is difficult at this stage for RBI to shift system liquidity from deficit to neutral (or surplus) to drive overnight MIBOR into LAF corridor. This sets up a possibility of next round of rate cut in July policy review. The medium term bias is therefore for test/break of lower end. The trading strategy for now is to play end-to-end moves with tight stop on conclusive break thereof.

Equity market

NIFTY moved below psychological support of 5000 (low of 4988); sharply down from post-monetary policy high of 5342. It started with policy matters regarding anti-avoidance tax (GAAR) and retrospective effect of tax; sending shock waves into off-shore investors. The sharp decline in rupee since release of Budget FY13 by over 10% provided momentum to the fall. The post-budget FY13 “hit” for FIIs is hard; NIFTY and Rupee down by over 10% from the high of 5630 and 48.82 respectively. In the meanwhile DJIA lost steam above the set near term range of 12700-13300 (high of 13338) before gradual reversal into psychological support at 13000. Good sense prevailed and the Government chose to defer GAAR by one year, providing great relief to investors and resultant “shorts squeeze” pushed NIFTY higher for decent close of day at 5114; close above 5080 at this stage is considered bullish. What next? The “sentiment” of off-shore investors has turned neutral now and it would need next round of growth supportive monetary stance and/or roll out of next round of economic reforms to get their interest back on Indian equity market in a big way. The earlier focus at 4531 (from where late December 2011 FII triggered rally pushed NIFTY into pre-budget high of 5630) is not relevant. The domestic fundamentals do not have strength to provide upside momentum (into 5630) without strong support from FIIs who now closely watch key policy decisions of the Government; any negative signals can lead to strong reverse flow which could lead to other woes concerning exchange rate and inflation. So, would believe that positive sentiment will be restored sooner than later. India is not an investment destination by choice and the need is to make it a preferred destination through “pull factors” concerning operating environment and growth supportive economic and monetary policy measures. For now, let us watch strong resistance at 5210 (ahead of 5370) and immediate support at 5080 (ahead of 4950) with no strong bias to provide directional break-out either way. The strategy is to trade the consolidation mode within the “inner ring” of 5080-5210 with overshoot limited to 4950-5370. Strategic investors can stay aside for 4775-4525 for the next round of 1000 pip rally, on or before end July 2012.  In the meanwhile, look for consolidation in DJIA at 12850-13350 with test/break either-way to set up good trading opportunity.

Commodity market

Gold continues to stay in consolidation (and sideways trading) mode within the “inner ring” of 1630-1670 (high of 1671 and low of 1627) with extension expected to stay limited within set near term range of 1615-1685. The short/medium term outlook continues to stay bearish; hence the bias is in favour of test/break of lower end to set up a new short term trading range of 1520-1620 in due course. For now, let us watch 1615-1665 with bias for test/break of lower end into 1565. The strategy is to stay “short” for this move.

NYMEX Crude reversed sharply from key resistance at 105 (high of 106.43) to meet the set short term objective at 95 (low of 95.34). The trending down of short term trading range from 100-110 to 95-105 is now complete. What next? It was often mentioned here that high crude oil is difficult to sustain given its strong negative impact on the global economy; bringing the possibility of G3 intervention, release of supplies from strategic oil reserves and OPEC increasing the supplies. Now, we have moved into a new short term trading range of 90-100 in preparation of further extension into 75 into medium term. For now, let us watch 92-100 with bias for extended weakness into 88.50. The strategy is to stay “short” for this move.

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