MARKET PULSE: Weekly report for 4-8 June 2012
Currency market
Rupee has now completed end-to-end of set short term range of 52-57 (sharply down from 52.42 since 30th April to 56.52 in one month flat) for weekly close at 55.54. In the process, extension beyond the set sell zone of 56.10-56.40 could not sustain where we asked to sell 3M/August dollars at 57.00-57.50 (high of 57.45). We also considered it dangerous to stay “long” dollars at 56-57 given the risk of sharp reversal while extended weakness be shallow and not beyond 57.00 in the worst case. During this time, USD Index rallied from 78.60 to 83.50 before close of week below 83.10. The rally in USD Index has mirror effect on the USD/INR on weekly close basis; but for RBI’s support (and measures), the damage would have been severe. What next? There is no support for rupee from macro fundamentals of the economy; downside pressure on GDP growth and deficit system liquidity are not good signals into the future. The market forces are also strongly in favour of the US Dollar; not ruling out extended rally in USD Index into 85.25-85.50 (and EUR/USD into 1.20-1.18) before sharp reversal tracking build-up of roll out of QE3. Despite these strong headwinds against rupee in the near term, there are some factors in support of rupee. There should be genuine dollar supplies at 56.00-56.50 if forward premium stays at elevated levels; 3M forward dollars above 57 and 12M forward dollars above 59 would attract exporters’ interest. These are the levels considered very good to convert 3-5 year rupee liabilities into USD or JPY. RBI has two strong weapons on hand now: one, to supply dollars to OMCs in a discreet manner without opening a special counter and the other is the option of big-ticket USD Bond issuance to glut the market with dollar supplies. This may not hurt exporters as lower spot will be covered through sharp spike in forward premium; in the process making the forward dollar unattractive for importers. The flood of dollars in spot market and shift of forward into supply driven mode will be rupee bullish. It was mentioned in MARKET PULSE that opening a special counter will only accelerate demand for forward dollars to avail the subsidised rate of spot dollar. BRENT Crude below $100 and cut in import from Precious metals and capital goods will reduce pressure on Current Account Deficit into the short term. Over all, there has been tremendous dilution in the bearish set up on rupee and is expected to stay neutral (to bullish) and build momentum for gradual move into its realistic value at 52.50-53.50. For the week, let us watch 54.65-55.95 with bias into lower end and not ruling out further extension into 53.50 in due course. In the meanwhile USD Index is expected to stay in consolidation mode at 82.00-83.50 with test/break either-way to attract. MARKET PULSE continues to see spot weakness into 56.00-56.50 good for exporters to sell 3M/August 2012 dollars while importers stay away for spot reversal into 54.65-54.50 to buy 1-2M dollars at value below 55 keeping enough appetite to buy on extended rupee gains into 53.50-53.00. There is no risk factor at this stage to look for extended rupee weakness beyond 56.50. It is crisis time for the Indian economy and the system cannot afford a highly devalued currency when it struggles to address issues relating to growth, fiscal deficit, inflation, liquidity and interest rates. The short term range for USD/INR is now revised to 53.00-56.00 with extension limited to 52.50-56.50 and it is believed that end-to-end move has already begun from recent low of 56.52.
EUR/USD played end-to-end of set weekly range of 1.2250-1.2625; fell sharply from high of 1.2624 to 1.2286 before close of week above 1.24. This move has more or less completed the chase from above 1.30 to 1.22. The bearish factors out of the Euro zone is now met with weak economic data from the US with expectation build up of QE3 before last quarter of 2012. This expectation should provide strong support to EUR/USD at 1.2250-1.2200 but there may not be momentum for rally beyond 1.2500-1.2550. For the week, let us watch 1.2250-1.2500 with overshoot limited to 1.22-1.2550. The strategy is to sell at 1.2475-1.2525 (with stop above 1.2550) for 1.2250-1.2200. There is no comfort as yet to initiate trade from “long” side as the risk of extended weakness into 1.18 is valid where we look to buy for sharp reversal back to 1.30.
It was bulls-eye hit in EUR/JPY chasing the complete move from 102 to 97 but the extended move into 95.50 (low of 95.57) was surprise and was momentary for weekly close above 97. In the meanwhile, USD/JPY too fell from 80 to the set objective at 78.25-77.75 (low of 77.65). What next? Let us allow for consolidation with upward bias before gaining momentum for reversal to take out 77.65 and 95.57 respectively. For the week, let us watch USD/JPY at 77-79; bias is for eventual test/break of lower end into 76.00-75.50 before reversal. The strategy is to stay “short” for this move. In the meanwhile, watch consolidation in EUR/JPY at 95-98 with bias into lower end for further extension into 90 before reversal. The strategy is to stay “short” for this move. Over all, short term range for USD/JPY is at 75-80 and for EUR/JPY at 90-100. There would be good opportunity to trade end-to-end of this range.
Interest rate market
MARKET PULSE had strong views of RBI’s shift into growth supportive monetary stance sooner than later and accordingly had advised strategic players to stay invested in 1Y Bond at 8.30-8.40% and 10Y Bond at 8.55-8.65% with short term target at 8.0-7.75% (1Y) and 8.35-8.25% (10Y). Similarly it was considered good for strategic players to stay received in 1Y OIS at 8.05-8.10% (for 7.75-7.65) and 5Y OIS at 7.55-7.65% (for 7.35-7.25). These short term objectives were met (ahead of expectation) post poor Q4 GDP data and FY12 GDP growth at 6.5%. Now, most economists have reviewed FY13 GDP forecast to around 6% against ambitious target of 7%. This has build up strong expectations of rate cut on 18th June. Given the crisis situation where growth has to be given priority over inflation, the expectation is now unanimous for combination of rate and CRR cut on 18th June. It is also the need to shift the system liquidity from deficit to surplus for effective price transmission. These expectations were good enough to drive the 10Y yield down from 8.55% (set buy zone of 8.53-8.58) to 8.33% before close of week at 8.36% and 1Y Bond yield down to 8% (from recent high of 8.35%). OIS rates are also sharply down at 7.68% (1Y) and 7.30% (5Y). What next? Now, combination of 50 bps rate cut and 100 bps CRR cut will drive the operative policy rate to 6.5% (and overnight MIBOR at 6.75% from current 8.25%). The shorter end of the MM rate curve will be sharply down from current elevated levels of 9.75-10.0% across 3-12M tenor. It is possible that we see a quick shift in 3-12M CD rates to 8.0-9.0%. RBI will prefer to deliver this in two phases; 50 bps CRR cut and 25 bps rate cut on 18th June and similar action on July quarterly review. MARKET PULSE will look for 50 bps CRR cut and 25 bps rate cut on 18th June and similar action in July to drive operative policy rate to 6.5% by August-September ahead of shift into busy season. For the week, let us watch 10Y bond yield at 8.25-8.40% with test/break either-way to attract while 5Y OIS rate stays in consolidation mode at 7.25-7.40%. There are no strong cues at this stage to look for extended rally beyond the lower end given the huge pipe-line supplies. It is also possible that RBI will stop its OMO bond purchases on rupee stability. It is good to invest “long” and borrow “short” as momentum picks up in rate reversal cycle. It is good to maintain longer duration in bond portfolio till September and await fresh cues for direction beyond there.
FX premium eased on RBI’s dollar sales and good supplies in the forward market to absorb weak rupee; reversal in 12M was sharp from high of 5.60-5.70% to 4.90% and then into consolidation mode at 4.90-5.15% before close of week at 5%. In the meanwhile, not much of action in the shorter end of the curve with 3M steady at 6.75-7% before close of week at 6.8%. What next? The signals are neutral and mixed; interest rate play will exert downward pressure and lower USD/INR will provide strong support with upward momentum. For the week, let us watch consolidation in 3M at 6.5-7.0% and 12M at 4.75-5.25%. It is important for RBI to maintain premium at elevated levels to cut demand for forward dollars and the risk of move below 4.75% will be on extended weakness in rupee beyond 56.50-57.00, considered as very low probability at this stage. The strategy is to pay 12M at 4.90-4.75% (with stop below 4.65%) for 5.25-5.40% while spike in 3M above 7% is good to “receive” to fund FC uses through rupee sources. RBI may need to open up access to off-shore liquidity to maintain premium at elevated levels and for realistic reflection of interest differential to cut arbitrage play which builds up short term USD liability pressure on the system.
Equity market
NIFTY could not extend its gains into set sell zone of 5075-5100 and reversed from high of 5020 to 4831 before close of week at 4841; thus trading end-to-end of set weekly range of 4825-5075. In the meanwhile, the expected relief rally in DJIA into 12550-12700 failed at 12611 but reversal from there was sharp (post weak economic data) to crash through strong support at 12220-12200 (low of 12158) before close of week below 12200 which is bearish into the near term. What next? The global bourses will be weak with DJIA set for further weakness into 11875 ahead of 11525 while 12650 stays firm. However, support for NIFTY will be from RBI’s shift into accommodative monetary stance. The shift into surplus liquidity and low interest rate regime will attract investments into equity assets. It is also expected that the Government will act to prevent crisis in the Indian economy. Given these expectations, immediate weakness into 4500 will attract investor appetite. For the week, let us watch NIFTY at 4650-4950 and the focus is back to near term consolidation at 4500-5000. The strategy is to stay invested on immediate weakness into 4700/4550 (with stop below 4500) for eventual test/break of 5000 into 5600 in the short term. The market looks good for providing a 1000 point reward on a risk of less than 100 points.
Commodity market
NYMEX Crude met the short term objective at 83 (low of 82.56); thus completing the chase from 110 providing 25% return in 3 months time since the high of 110.55 seen on 1st March. Now, it opens up the next target at 75 seen in October 2011. There are no strong cues to look for bullish reversal given the weak global economy, dilution in tensions between Iran and the West and not enough demand to meet supplies. The only bullish factor is the support from QE3 expectation. For the week, let us watch 75-88 with bias into lower end. The strategy is to sell on correction into 85.5-87.5 (with stop at 88.5) for 75.50-75.00.
It was a beautiful rally in Gold from the set support/buy zone of 1535-1525 (low of 1531.5) into the resistance/take-profit zone of 1615-1625 (high of 1626.60) for a bullish weekly close above 1620. The extended rally in USD Index (feeling of over valuation for dollar assets) and QE3 expectations (post weak US Economic data) provided this rally. MARKET PULSE was in preparedness for sharp reversal from 1525-1485 to 1620 and beyond and the rally began from 1527. What next? The ability to take out immediate resistance at 1640 will be critical for quick extended rally into 1670-1680 ahead of 1715-1725 while 1560 stays firm. For the week, let us watch 1560-1680 with test/break either-way to attract. Strategic investors can look to buy back on correction into 1560-1535 (with stop below 1520) for 1680-1715.
I will be away on leave from 2-17th June. Next update on 18th June. Till then, will try to stay in touch through twitter@mosesharding
Have a great week ahead..................................Moses Harding
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