Presidential elections out of the way....

There is no surprise in Pranabda's election as 13th President with decent majority. But, post election events are not comforting. There is clear resistance from SP (Mulayam Singh) and TC (Mamta Banerjee) on FDI expansion. NCP (Sharad Pawar) is also now flexing its muscles. So, positive news on FDI - Retails is out of the radar; if it comes it would be a pleasant surprise.

There is no clarity on tax related issues - unwinding of retrospectiv tax; dilution in GAAR and cut in withholding tax. Governemnt needs to deliver these to avoid set up of disappointment.

The most crucial thing is price hike in diesel, kerosene and cooking gas. Crude oil price is already up and rupee is down. The impact on fiscal deficit is on the rise. Petrol prices are being hiked to reflect market moves. The benefit is marginal and it would need significant cost pass-through (in diesel, kerosene and LPG) to get meaningful impact on fiscal deficit (and consolidation). Will the FM bite the bullet despite resistance from within and outside UPA? There will be hue and cry; there will be demonstration by opposition parties who like to get mileage from this.

RBI may not be happy with this situation ahead of its quarterly policy review on 31st July. There will be upward pressure on headline inflation and effective retrun on money will be low. RBI does not consider current market dynamics as risk to growth but view this as major risk to investment and savings. With these guidance from RBI, it may not be prudent (and fair) for the Industry (mainly the borrowers) to expecct either rate cut or CRR cut from RBI on 31st July.

What is important will be the guidance on the way forward. Will RBI continue to stay hawkish or get comfort from expectation of consolidation in headline inflation at 6-7% in H2 and shift focus to growth to prevent sustainability below 6% in GDP growth. A combination of no monetary action and neutral stance on guidance will provide price stability post monetary policy.

Taking all these together, it would be in order to look for consolidation in 10Y Bond yield at 8.05-8.15%; 1Y OIS rate at 7.55-7.70% and 5Y OIS rate at 6.85-7.0%; range break-out, if any will be on higher side on risk of bullsih commodity and bearish currency.


Moses Harding

MARKET PULSE: nearterm perspective

MARKET PULSE: near term perspective (next report after 5^th August 2012)

Exchange rate market

USD/INR is getting into kind of stability. It was the worst period from July 2011 to June 2012 when rupee was pushed down from 43.85 to 57.33. Since then, USD/INR pair has posted lower highs at 56.07 and 55.55. On the other hand, the “base” is sharply up with posting of higher low’s at 54.77, 54.17 and 52.17. The behaviour of Rupee is to the expectations (H1/FY13 range of 52-57) and swift move into 57 was delight for exporters for higher sales realisation. What next? The concerns on Current Account Deficit (and Balance of Payment) continue to stay valid. The sharp spike in BRENT Crude from recent low of 88.50 to over 108.50 (by over 22%) is a serious worry. Exports are also on decline and it is not clear at this stage the impact of poor monsoon on trade gap. There are comforts as well: loose monetary policy in the Western World (and resultant shift into risk-on mode) will divert off-shore liquidity into Indian asset markets; higher forward premium will continue to keep forward market in supply driven mode and more importantly policy reforms can set up strong bullish momentum for the Indian economy. USD Index is also under pressure with weak US economic performance and the need to roll-out QE3 soon, possibly ahead of US Presidential election in November.  Taking all these together, there are no strong signal to get into either bullish or bearish expectation on rupee. The best way is to stay neutral and to manage exchange rate exposures prudently without taking undue risks that could hurt the Balance Sheet and the business. The near term outlook is for stability within 54.77 and 55.55. There is possibility of break-out either-way which should hold at 54.17 and 56.07. The strategy is rather straight forward: to cover 3-12M exports at 55.55-56.07 and to hedge up to 3M imports at 54.77-54.17. This expectation is based on delivery of expectations by the Government on issues related to twin deficit (and policy reforms) and RBI’s “pause mode” on 31^st July quarterly monetary policy review. (Intra-week/day trading ideas are now available on www.twitter.com/mosesharding).

EUR/USD met our short term objective at 1.22-1.18 (low so far at 1.2160). MARKET PULSE chased this zone from the highs of 1.4939/1.3283/1.2692. The outlook was based on weak Euro zone; relatively stronger US Zone; Global investors into “risk-off” mode and safe-haven status for the USD. During this period, USD Index rallied from 72.69 to 83.83. What next? The strong financial stimulus support in the Euro zone and G4 (US/UK/Germany/France) intervention has diluted the fears on disintegration of the Euro zone. The next round of financial support in the US (in the form of QE3 or any other form) will continue to retain the current “risk-on” investor sentiment. This should dilute the safe-haven status for the US Dollar to guide relief rally in global currencies which are down and out of late. EUR/USD has strong support at 1.2100-1.2150 which should ideally hold for gradual reversal into 1.2650-1.2700. This expectation sets up target for USD Index around 80 while 83.83 (EUR/USD around 1.2125) stays firm. MARKET PULSE will throw in the towel on clear break below 1.2100 which then could provide extended reversal into 1.1950-1.1875 which should hold. The strategy therefore is to cover 1-3 imports at 1.2150-1.2100 and 3-12M imports at 1.1950-1.1875. It would be good for strategic traders to stay long above 1.2150 (for 1.2650) with stop reverse at 1.2075 (for 1.1875). This is considered as safe trade strategy as the rally from above 1.2150 will be worth 400-500 pips and break below 1.2100 (into 1.1875) will be worth 100 pips after adjustment of stop on “longs”.

USD/JPY is in predictable trading range at 75-80; reversal from recent high of 80.09 has met the first objective at 78.50 and looks good for extension to 77.75. If US Bond yields continue its downward journey post the next financial stimulus, the focus will be at 76.25-75.50. MARKET PULSE is running short dollar positions entered above 80 for the set objectives. The trail stop for this short position is at 79.25. For now, let us watch 77.75-79.25 with bias into lower end. It would be in order to get into consolidation mode at 77.50-78.25 before gaining momentum for extended run into 76.25-75.50 where we unwind shorts and switch sides for the next run into 80.00. 

Interest rate market

There is significant improvement in system liquidity; demand at LAF counter is down from over Rs.1.5 Trillion to below Rs.0.5 Trillion. The shorter end of the MM rate curve is comfortable at 9.10-9.60% across 3-12M tenor. Bond yield and OIS rates have been volatile driven by swings in expectations from RBI but stayed within expected ranges of 8.0-8.20% (10Y Bond); 7.60-7.85% (1Y OIS) and 6.90-7.15% (5Y OIS). There was unsustainable extended rally below the said lower end on “pressure” on RBI to set up growth supportive monetary policy. Now, the message is loud and clear (from RBI) that enough has been done on monetary policy (125 bps CRR cut and 50 bps rate cut) and it is time for the Government to fix issues related to fiscal deficit, current account deficit, capital account inflows and so-called policy paralysis. Till emergence of comforting signals from the Government, RBI is expected to maintain deficit system liquidity above 1% of NDTL and operative policy rate at Repo rate, current at 8%. Having set new benchmarks of headline inflation (which is high) and inflation adjusted rate of return on investments (which is low), it would be a surprise if RBI delivers either a rate cut or CRR cut on 31^st July. If it does, it will mean that RBI is not walking the talk and thereby sending contradicting signals into the market. Let us stay put with the set near term ranges (as mentioned above). The bias will be into the higher end on higher supply of bonds and liquidity squeeze in the coming months. For now, let us watch 10Y Bond at 8.05-8.15%; 1Y OIS rate at 7.65-7.80% and 5Y OIS rate at 6.95-7.10%. Strategic players who are now “short” in 10Y Bond at 8.05-8.0% and paid in 1Y OIS at 7.60% and 5Y OIS at 6.90% can hold for 8.15-8.20%; 7.75-7.80% and 7.05-7.10% respectively. It would need RBI to continue with its OMO bond purchases to prevent extended weakness beyond the higher end; need to have a close watch on this.

FX premium held well at the pay levels of 6.75% (3M) and 5.65% (12M) and has inched its way over 7% and 6% respectively. The interest rate play is exerting upward pressure while exchange rate play is neutral on good supplies in the forward market to lock in attractive premium. Given the comfort on rupee getting into stability in the short/medium term, there is no interest from importers to pay premium beyond 1-2 months. However, sustainability of overnight MIBOR above 8% will provide strong support while reversal in USD/INR below 54.80 will add to momentum for spike higher. For now, let us track 6.75-7.50% (3M) and 5.85-6.35% (12M) with bias into higher end. The strategy is to stay paid on correction into lower end and to exit paid book on run into higher end.

Equity market

NIFTY is unable to retain its momentum that triggered the 5095-5348 rally and since then posting lower highs at 5257/5238. There is comfort that worst is behind in the domestic sector with the Government set to act soon. This will be followed by RBI’s growth supportive and favourable monetary environment. The cues from external sector are not negative at this stage. Global investors are back into “risk-on” mode and expected to stay invested into Q4 of 2012. There will be good appetite for Indian stocks from FIIs. Taking all these together, downside risk seem to be limited with good chance of 10% rally into 5630. The market has already priced-in concrete actions from the Government and RBI’s pause mode on 31^st July. The expectation into the near term is for build-up of strong base at 5200-5100. If the Government delivers to expectations, a smart rally into 5350 will be seen and delivery beyond expectations will get the focus at 5600. It is important that the Government avoid sending disappointing signals which would generate sell-off below 5100 into 4770. For now, let us watch 5100-5350 and would prefer bullish extension into 5600 in due course. The strategy is to stay invested in two lots at 5200-5175 and 5100-5075 with stop below 5050 for 5350/5600.

Commodity market

NYMEX Crude extended its rally beyond 90 (high of 92.94) up by over 20% from 77.28 since end of June. MARKET PULSE chased the reversal from 110.55 and identified 78-75 as strong short term base for correction into 90; extension beyond 90 is bit of surprise. The current relief rally is driven by general weakness in the USD; excessive system liquidity; very low interest rates; shift into risk-on mode and commodity assets emerging as alternate safe-haven to the USD. The reversal momentum would have been sharper but for the general slackness in the global economy. Now, the focus is on immediate resistance below 94 ahead of 97.75-98.00. It is important to get the focus below 90 (and more importantly below 85) to cut the current bullish momentum. For now, let us watch 90-94 with risk of extended rally into 98 while correction into 85 will set up near term buying opportunity. The strategy is to play end-to-end of the move by buying at 85-87 and selling at 97-99 with tight affordable stop.

Gold is in consolidation range at 1550-1600. MARKET PULSE highlighted formation of strong short term base at 1535-1485; since then Gold has rallied from low of 1527 to high of 1640 and in consolidation mode at the middle of the 1525-1640 range (around 1580). The near term outlook is bullish; shift of safe-haven from USD to Gold as FED prepares for QE3 to revive US economy. The economic data from the US are not encouraging being pulled down by the Euro zone. Let us retain the near/short term bullish outlook on Gold and set a trading range of 1550-1615 with extension limited to 1525-1640. The strategy is to stay “long” for bullish extension into 1615-1640 in due course.

Moses Harding

fix twin deficit for accomodative monetary policy

Fix twin-deficit for growth supportive monetary policy

The message seems to be loud and clear; all ex-Central Bankers have joined the Governor (of RBI) to send clear signals to the Government to fix issues related to fiscal deficit and Balance of Payment to get RBI into growth supportive rescue act through accommodative monetary policy. It is obvious that high fiscal deficit and weak (and volatile) exchange rate are the main causes for conflicts in growth-inflation dynamics. RBI has now made its stance very clear that it may not be in the interest of the economy (over medium/long term) to take accommodative monetary policy stance when headline inflation is high and inflation adjusted effective interest rate is low. It may be harmful to trigger demand push inflation when supply side concerns persist. It may also lead to low savings (and investments) and emerge as major risk to growth.  The take-away is that the economy should be prepared for moderation in growth momentum (at below 6%) while efforts are taken to guide headline inflation into RBI’s comfort level of below 5%.

The near term outlook on inflation and exchange rate is bearish. The roll-out of higher Minimum Support Price (for agriculture produce) and not-so-good monsoon will exert upward pressure on food price inflation. The pass-through of cost subsidisation in diesel, kerosene and cooking gas will have its impact on fuel price inflation. The weak USD against major currencies has provided sharp reversal in Crude Oil prices; it is already up by over 15% from its recent low. Rupee is also unable to hold on to its gains below 54.30 and has seen sharp reversal from 54.17 to above 55.30. There is also risk of widening Current Account Deficit due to uptrend in commodity prices; reduced exports and impact from poor monsoon with the need to cut export of food grains and import other essential food items. Taking all these together, it is easy to conclude that inflationary expectations will remain weak into the near/short term and it may be impossible for RBI to get into accommodative monetary policy stance soon.

There will be no surprise in the Presidential election but what is relevant for the stake holders is the time to act in addressing pipe-line issues and resolutions thereof. The market has already priced-in roll-back of contentious tax related issues, fuel price hike and FDI expansion. It is important for the Government to cut the lag time between election of new President and delivery of these expectations; time-delay beyond 31^st July will be bad for asset markets. It will be disappointment for RBI if nothing is done by the Government before its Quarterly policy review on 31^st July. So, the attention is on the Prime Minister (and his Government) to get directional guidance for asset markets.

What is the way forward? There is now consensus that RBI may not get into rate cut action till inflationary expectations turn positive and actions from the Government to fix twin deficit. Given this stance, RBI will also maintain system liquidity at deficit mode above its tolerance level of 1% of NDTL to arrest impact of liquidity on interest rates. Therefore, operative policy rate will be maintained at 8% for now. There may not be significant impact on Money Markets on this move as delivery to expectations will maintain price stability with 10Y Bond yield in consolidation mode at 8.0-8.15%. There will be need for OMOs to prevent weakness beyond 8.15% when net supply of bonds will be at its peak in August-September with severe pressure on liquidity during this period. There will be upward pressure on shorter end of the curve with stability in the medium/longer end, thus causing expansion in inversion of the tenor spread. The impact on interest rate from exchange rate stands diluted now. The worst for rupee is seen to be behind; strong headwinds from external cues may turn supportive to provide momentum for rupee gains. At this stage, it is safe to assume that India Sovereign rating is not at risk and outlook may turn positive soon. The weak Euro and US zone and resultant loose monetary policy will drive off-shore liquidity into India’s debt and equity capital market to bridge Current Account deficit and keep Balance of Payment positive. While it is in order to look for rupee stability at 53-56, chances of move into 53 is high which will keep forward market in supply driven mode to cut FX impact on rupee interest rates. Over all, there may not be excessive and undue volatility in both interest and exchange rate market. Given these expectations in Money and Foreign Exchange market and support from off-shore investors, Indian Stock market will stay neutral to mildly bullish into near/short term. The range to look for NIFTY is at 5100-5600 with bias into higher end while weakness below 5100 will be good value buying for strategic investors. The recent relief rally triggered by build-up of “hope” is losing steam and it is time to deliver and act decisively to convert relief rally into bullish trend.

Moses Harding

Head – ALCO and Economic & Market Research

IndusInd Bank, Mumbai

Report for Friday, the 13th July 2012

MARKET PULSE: Friday, the 13^th July 2012

Exchange rate market

It is two-way volatility in USD/INR pair; up from 56.07 to 55.26 and back again to 55.95 and now trading around 55.60. MARKET PULSE looked for consolidation and two-way volatility within 54.80-56.00; identified 55.30-54.80 (in the intra-week update) as good to cover 1-2M imports and 55.70-55.95 as good for exporters to cover 3-12M dollar receivables. There were good dollar supplies from exporters and FIIs above 55.70 to dilute the impact of strong dollar rally against major currencies (with USD Index firmly above 83.50); else rupee would have been down and out around 56.50 by now. What next? As said, the risk factor for rupee is the sustainability of strong dollar against global currencies which has prevented extended rupee rally below 54 and instead has got the focus back into 56-57. While the short term outlook is good for rupee to get into consolidation mode around 54 (preferred range at 52-54), near term outlook is neutral to bearish. Rupee bulls need to see strong reversal in USD Index below 83.50; longer it stays above here will set the tone for extended gains into 84.75-85.50 which could trigger extended rupee weakness into 56.00-56.50. Importers need to keep this risk factor in mind. For now, let us watch consolidation at 55.30-55.95 and closely track USD Index (and EUR/USD) for directional guidance. It is not prudent to chase weakness beyond 56.10 (into 56.60) as the reversal from there into 54.80-54.30 shall be swift. Importers who have already covered (near/short term payables) on earlier run into 54.30-54.00 and on recent move below 55.30 can stay aside and leave the street to exporters to cover 3-12M receivables on extended weakness into 55.95-56.10. It is also good to convert rupee liabilities into USD on extended weakness above 56.10. This level is considered good for those who missed this opportunity on earlier move over 57.00.

EUR/USD reversed from the set sell zone of 1.2325-1.2350 (high of 1.2333) for immediate objective at 1.2150-1.2125 (low at 1.2165). MARKET PULSE identified 1.22-1.18 as short term objective when starting the chase from 1.35. So, it is time to end the chase at this zone. What is the reversal point for back into 1.35? The first reversal point is the immediate support zone at 1.2150-1.2100; beyond there we have the two-year low at 1.1875 which is expected to stay safe. We have the QE3 warm in the pipe-line which could trigger the rally from 1.22-1.19 into the set short term objective at 1.35. It is a good opportunity for importers to cover import liabilities. For now, let us watch consolidation at 1.21-1.23, test/break either-way difficult to sustain. It is also possible that EUR/USD extends its weakness into 1.1875 while 1.2250-1.2325 resistance zone stays firm. Based on this view, we could also trade 1.1875-1.2325 range. Stay tuned to intra-day updates for this.

USD/JPY traded end-to-end of set support at 79.10 and resistance at 80.10. There is no directional bias here as extension is limited to 78.60-80.60. In the meanwhile EUR/JPY met its first objective at 96.25-95.50, down from 99 and looks good for extension into 95.75-95.50 which is expected to hold for bounce back to 100. The risk factor for extended weakness below 95.50-95.00 will be on EUR/USD move below 1.21 and USD/JPY below 78.60, considered low probability at this stage. For now, let us watch USD/JPY at 78.60-80.10 and EUR/JPY at 95-98. The strategy is to play from “short side” for initial move into the lower end and switch sides with tight stop on break thereof.    

Interest rate market

Bond market maintained its bullish undertone; 10Y 8.15% 2022 Bond rallied from set buy zone of 8.16-8.19% to meet the set objective at 8.10%. OIS rates fell; 1Y trading end-to-end of 7.60-7.75% and 5Y fell sharply from 7.16% to 7.0% maintain 1X5 spread around 60 bps. The surprise was from OIS market as close at 7.58% (1Y) and 6.98% (5Y) is excessive, hence bit nervous. MARKET PULSE highlighted this bullish undertone driven by easy liquidity (and downtrend in MM rates) and positive (and favourable) expectations from monetary policy. The pipe-line IIP data or inflation numbers may not provide shock or awe feeling; trend is more or less well established; marginal uptrend in headline inflation and significant downward pressure on growth. These expectations have already built consolidation play in the Bond Market with 10Y Bond yield at 8.0-8.20%. We have already seen completion of one move from below 8.0% to 8.20% and now the reversal cycle is on towards 8%. Similarly 1Y OIS rate is down sharply from recent high of 7.85% to 7.60% and 5Y rate from 7.25% to 7.0% (with 60 bps 1X5 spread intact). Over all, there were no surprises in the behaviour and trades were more or less to the script. What next? We are into very crucial stage where lot of actions are expected from 19^th July to 31^st July. The Government is expected to act post Presidential elections and resultant comfort should enable RBI to loosen its grips on monetary policy. The delivery of measures to expectations or otherwise will determine the next trend. MARKET PULSE will prefer to take a neutral stance that there may not be any pleasant or unpleasant surprises. The expectations from the stake holders are genuine and fair and seen deliverable by the powers that be. There will be roll-out of measures on FDIs; fuel price hike and most importantly, roll back of contentious tax related issues. On the other hand, RBI will like to ease monetary policy through liquidity rather than rate actions. Having set benchmarks of headline inflation and inflation adjusted cost of borrowing, getting into rate cut action on 31^st July may be contradictory to the strong guidance given in mid June; hence expectation build-up is on injection of liquidity through CRR cuts and OMOs with the objective to shift system liquidity from deficit to surplus mode and push overnight rate to lower end of LAF corridor at 7% before end of September ahead of shift into busy season. The other option is that of RBI maintaining deficit system liquidity till inflation expectations turn favourable and choose to deliver baby step rate cut of 25 bps each on 31^st July and mid September for shift in LAF corridor to 6.5-7.5%. There are two options on the way forward: downtrend on overnight rate to 7.05-7.15% with shift in operative policy rate from Repo rate to Reverse Repo rate through aggressive liquidity infusion or stability in overnight rate at 7.60-7.75% through maintaining deficit system liquidity above 1% of NDTL and 50 bps rate cut in one-shot or in two phases. With these expectations, Money/Bond market will retain its current bullish mode. Given the RBI’s tough stance, it is not prudent to expect sharp adjustment in overnight rate by 1%, hence the chances of baby steps approach with 25 bps cut both in CRR and policy rates are high. The shift into new reporting fortnight starting 14^th July will push LAF draw-down to Rs.75-100K Crores, hence delivery of CRR cut may be in order. The excessive softening stance in Bond yields can lead RBI to stop OMO bond purchases and resort to CRR cut for liquidity infusion. For now, let us watch 1Y OIS rate at 7.45-7.70%; 5Y OIS rate at 6.90-7.15% and 10Y Bond yield at 8.0-8.15% with bias into lower end while any disappointment from the Government and/or RBI will be bearish for test/break of higher end. The strategy is to stay invested in 10Y Bond at 8.10-8.15% (for 8.0-7.95%) and stay received in 1Y OIS at 7.65-7.60 (for 7.50-7.45%) and 5Y OIS at 7.10-7.15% (for 6.95-6.90%). 5Y Bond spread is now at 125 bps which would provide strong support in 5Y OIS at below 7%; need to be fleet-footed there as spike into 7.15% will be swift. For corporate entities that are funding long term assets with shorter end liabilities, 5Y hedge below 7% will be good for the Balance sheet giving decent positive “carry” with limited risk of call money rate going below 7% in the medium term. 

FX premium got into consolidation mode around 7.0% in 3M and 5.75% in 12M with no strong momentum either-way. The interest rate play will continue to exert downward pressure while exchange rate is expected to exert upward pressure when sharp sustainable recovery in rupee is sighted. The strategy was to stay received in 3M on recent spike above 7.5% while playing end-to-end of 5.65-5.95 in 12M. There is no change in strategy as we look for consolidation in 3M at 6.75-7.25% and 5.50-6.0% in 12M. The strategy is to unwind received book in 3M at 6.75%; pay 12M at 5.65-5.5% and receive 12M at 5.95-6.10%.

Equity market

The rally in NIFTY from below 5100 lost momentum at 5350 and now in consolidation mode around 5250. The close below 5250 (at 5235) is negative. The lag time since the start of the rally and delivery of expectations (post Presidential elections and 31^st July quarterly review of monetary policy) has caused bit of “long” squeeze. The possibility of better entry level while earning for time will continue to maintain selling pressure. On the other hand, the rally in the global bourses since EU Summit is losing momentum on not-so-good economic data from the US and high sovereign yields in the Euro zone. While the trend is up, we may need to allow bit of consolidation on run up to Presidential elections. Beyond there, it is important for the Government to deliver on expectations much before 31^st July to give enough time for RBI to take firm view on release of its grip on the monetary policy. The next direction will be set between 19^th July to 31^st July and it would be in order to look for consolidation till then. For now, let us watch NIFTY at 5100-5300 with test/break either-way to attract. The preference thereafter is for regaining bullish undertone for extended gains into 5450/5625. Having chased the move from 5100 to 5350, let us build “longs” in two lots at 5200-5175 and 5100-5075 with stop below 5050.

Commodity market

The “correction” process in Gold halted right at the door step of set resistance at 1600 (high of 1600.90) and reversal from there is stalling at immediate support at 1665-1660. The sustainability of strong dollar into the immediate term will extend losses into 1535-1485 where a strong short term base is expected to be formed to prepare for the next round of rally. For now, let us watch 1535-1585 with bias into lower end, not ruling out extended weakness into 1500-1485. The strategy is to unwind “shorts” entered around 1600 at 1535-1525 and thereafter look to enter into strategic long position at 1525-1475; rally from there could extend all the way to 1790-1800.

NYMEX Crude traded around 85 (tight range of 83.5-86.50) and the bias is for extended weakness into 80-78 into the near/short term. The short term consolidation play within 80-90 is valid while test/break either-way not likely to sustain. For now, let us watch 82-87 with bias into lower end, not ruling out an extension into 80-78 before reversal. The strategy is to hold “shorts” entered at 88.50; add at 87-88 with stop above 90 for 80-78.

Next update is on 18^th July. Intra-day ideas will be available through twitter.

Moses Harding   

Weekly report for 9-13 July 2012

MARKET PULSE: Weekly report for 9-13 July 2012

Currency market

It was volatile week with good two-way swings but traded perfect to the script within the set sell zone of 55.65-55.90 and buy zone of 54.30-54.00 (Watch out for intra-week/intra-day trade ideas and review of Weekly report on twitter @ mosesharding). The initial weakness into 55.91 provided good selling opportunity where MARKET PULSE asked exporters to sell September 2012 dollars at forward value of 56.65-56.90 (high of 56.89) for spot USD/INR reversal into 54.30-54.00 (low of 54.17) to cover 2-3M imports at forward value below 55). The sharp reversal from above 54 to over 55.50 and inability to hold on to rupee gains will put rupee bulls on back foot. The close of week at 55.40 close to higher end of set weekly range of 54.00-55.50 is a serious concern. It was also thought fit not to stay “short” dollars at 54.50-54.00 (to cover up to 3M imports) as was considered not prudent to stay “long” dollars at 57.00-57.50 (to cover 3-12M exports and to shift 3-10Y rupee liability to dollar). The swift move between these two zones gave good opportunity for both importers and exporters to close exchange rate risks in their Balance sheet. What next? The risk factor for rupee is from the strong US Dollar. USD Index rallied from low of 81.53 taking out strong resistance at 82.60 without much effort and extended its run into the formidable 83.50 resistance. On the other hand, sentiment on domestic cues is neutral and is yet to turn positive as delivery of expectations is still in work in progress. USD/INR above 55.50 will attract FII investors who have got allotment in recent Gilt/Corporate Bond auction.  The short/medium term outlook for Rupee is bullish for getting into consolidation mode around 54 with extension limited to 53-55. The concern is on the near term outlook which is bearish at this stage driven by strong USD against major currencies. Can USD Index hold on to gains above 83.50? The answer to this question will set the directional trend for rupee in the immediate term. At this stage, USD Index is looking good for extending its gains into 84.75-85.50 short term resistance area. This move will drive USD/INR above 55.90 into 56.50 but the momentum will stay diluted from strong supplies in the forward market and flow of dollars from FIIs for investments in Gilts/Corporate Bonds. Over all, it is not the time to get worried on rupee weakness in the immediate term but would consider it good for exporters who missed the earlier run into 57.32. For the week, let us watch 54.80-56.00 with extension limited to 54.30-56.50. The initial bias will obviously into higher end but not expected to sustain for gradual reversal into lower end. It is important for RBI to get rupee value below 55 in quick time and given the improved liquidity position, can afford to sell dollars to arrest weakness beyond 55.50. The strategy is to cover 3-12M exports on extended weakness into 56.00-56.50 while importers stay away till reversal into 54.80-54.30.

We reviewed the weekly range for EUR/USD to 1.2250-1.2750 with bias into lower end (see intra-week updates on twitter). EUR/USD fell from intra-week high of 1.2672 to 1.2258 before close of week at 1.2287. The post ECB rate action moves were one-way, triggering stops below 1.25. In the meanwhile, EUR/JPY reversed strongly from set resistance at 101.30 (high of 101.28) to 97.60 before close of week at 97.88, driven by weak EUR/USD while USD/JPY stayed in consolidation mode within 79.50-80. What next? Now, EUR/USD is almost at the reversal point at 1.22-1.18 (since the start of the chase from 1.35); this zone is considered good for importers to cover their short term Euro liabilities. The downside risks in EUR/USD will be shallow but sharp reversal can be expected only after confirmation on roll-out of QE3 by the FED. The immediate term momentum is seen towards 1.1875 to completely unwind Euro rally since June 2010 low of 1.1875 to May 2011 high of 1.4939; it is kind of one year up-down cycle. For the week, let us watch consolidation in EUR/USD at 1.21-1.24 with bias for extension into 1.1875 before sharp reversal. It is good for importers to cover 1-12M Euro payables/liabilities on extended weakness into 1.21-1.19 in anticipation of short/medium term recovery into 1.35. Fleet footed traders can stay “short” for 1.2150-1.20.

USD/JPY is finding it hard to take out strong resistance at 80.10 but there is good buying interest on dips into 79.10. The inability of taking out the strong resistance at 80 brings the risk of extended weakness below 79.10 into 78.50. For the week, let us continue to watch consolidation at 79.10-80.10. The break-out direction is mixed but would be good to stay “short” with stop above 80.60 for 79.10/78.50 while test/break of 80.60 will trigger sharp move into 81.50-82.00. EUR/JPY is dragged down along with Euro with next target at 97.25-97.00 ahead of 95.75-95.50. For the week, let us watch 96-99 with test/break either-way to attract. The strategy is to trade from “short” side for immediate target below 97.

Interest rate market

There has been good improvement in the liquidity position in the money market post utilisation of enhanced Export Finance refinance limit; LAF draw down is now into RBI’s tolerance level of within 1% of NDTL with appreciable downtrend in money market rates. The release of pressure on liquidity pushed OIS rates down from the set receive zone of 7.81-7.86% in 1Y (high of 7.85%) and 7.25-7.28% in 5Y (high of 7.27%) into the lower end of set weekly range of 7.70-7.85% (1Y) and 7.15-7.25% (5Y) before close of week at 7.72% and 7.17% respectively. In the meanwhile 10Y Bond yield played end-to-end within 8.15-8.20% on mixed cues before close of week at 8.16% with 8.15% 2022 Bond trading end-to-end of 99.65-100.00. What next? The market will be in consolidation mode till Presidential elections and 31^st July Quarterly Monetary Policy review is out of the way. There is build-up of huge expectations from the Government and RBI. While increase in Export Finance Refinance Limit has helped in release of pressure on liquidity, next round of CRR cut may not be needed at this stage as RBI has to keep OMO option for liquidity injection to arrest sharp spike in bond yields. The expectation now stands shifted to rate actions. It is obvious that RBI may not act till the Government starts delivering on commitments to address issues related to fiscal deficit and Balance of Payment. Let us stay neutral on rate action at this stage and review on run up to monetary policy. As of now, given the elevated headline inflation and low inflation adjusted borrowing cost; RBI may not have reason to cut rates despite pressures. While cues are neutral in the near term, short/medium term outlook looks good for Fixed Income asset class and the strategy is to stay invested on weakness for sharp recovery ahead of shift into H2 of FY13. For the week, let us watch consolidation in 10Y Bond yield at 8.12-8.17% and stay invested on weakness into 8.16-8.19% for short term objective at 8.0% to complete next round of end-to-end move within 8.0-8.20%. OIS rates will stay soft as we move into end of reporting fortnight cycle with possibility of trigger of Reverse Repo rate, sending overnight MIBOR into 7.25%. The strategy is to hold on to received book entered at 7.82-7.85% for short term objective into 7.65-7.50%. On the 5Y, we have seen end-to-end moves between set receive zone of 7.25-7.28% and t/p zone of 7.19-7.16%. The shift of overnight MIBOR from higher end to lower end of LAF corridor will result in build-up of time value to the rate curve; while the trend is down, the action will be on the spread squeeze between 1X5 from current 55 bps for consolidation at 45-50 bps. For the week, let us watch 1Y OIS rate at 7.60-7.75% (short term objective at 7.45%) and 5Y at 7.10-7.20% with bias into lower end. There is no clarity at this stage to look for sustainability of 5Y rate below 7.14%, hence not to stay received below 7.10%.

FX premium reversed sharply from 7.65% (3M) and 6.10% (12M) into 7.25% and 5.5% before close of week at 7.35% and 5.7% respectively; thus setting up a 60 bps trade from the receiving side in 12M from 6.10% to 5.5%. The short term signals are mixed; interest rate play favours strong downtrend while expectation of rupee stability around 54 provides solid support. The risk of sharp reversal into 6.5% (3M) and 4.5% (12M) is valid on rupee weakness back into 56.50-57.00; based on this MARKET PULSE asked to play end-to-end of 5.5-5.75% in 12M (see intra-day updates on twitter). The strategy is to stay “received” for extended reversal below 5.4% in 12M for short term target at 4.75%. For the week, let us watch 3M at 6.75-7.5% and 12M at 5.25-5.75% with bias into lower end. The strategy is to stay received at 5.65-5.75% (12M) for near term target at 5.25% ahead of 4.75%. Those who received 3M at 7.65-7.80% can look to unwind at 6.90-6.75%.

Equity market

The undertone was positive in Global bourses but momentum was weak with baby-step gains into the week. The global cues turned out better; fears on disintegration of EU zone is diluted; EU system is in heavy stimulus to remove pressure on its financial system; rate cut action from ECB will spur consumption and demand; improvement in US economic data and hope of QE3 in some form or other. All these positive global cues extended gains in DJIA into 13000 (high of 12961) but closed the week down at 12772 after posting intra-week low of 12702. The short term momentum looks good for 100% unwind of sharp fall in May 2012 from 13338 to 12035. The immediate bias is for gradual gains into 13325-13350 which should hold till emergence of fresh cues. The domestic cues have also been supportive to equity assets. The expectations of actions post Presidential election and subsequent shift into growth supportive monetary stance have turned the short term outlook to bullish. The rally from 5100 is decent but the pace is slow at this stage; disappointment has shifted into hope and market is in wait for its realisation to get into aggressive bullish mode. For the week, let us watch 5250-5450. The initial bias into lower end should attract for gradual gains into upper end in due course. The strategy is to hold on to “long” entered at 5100 and add on dips into 5285-5260 with stop below 5250 for 5450 with short term objective at 5625 where we would turn square and await fresh cues. This move will complete 100% unwind of recent losses from pre-budget high of 5630 to low of 4770.

Commodity market

Gold traded back-and-forth between strong support at 1585 and resistance at 1635 (up from 1587 to 1624 post EU summit and down to 1576 post ECB rate cut) for weekly close at 1582. While positive cues from EU summit provided stability for the dollar, rate cut from ECB followed by positive economic data provided momentum to dollar rally with USD Index firmly above strong resistance at 82.60 and looks good for extended gains above 83.50. Given the signs of extension of dollar strength into the near term, we may need to allow correction below 1585-1565 support zone into 1535-1525. For the week, let us watch 1535-1600 with immediate bias into lower end. However, would continue to favour 1535-1485 as strong short term base for resumption of rally into 1635-1670. The strategy is to trade from “short” side with stop above 1600 for 1535-1525 and be a cautious “buyer” at 1525-1490 with stop below 1480.

The expected rally in NYMEX/WTI Crude from intra-week low of 82.10 lost steam at the set sell zone of 88.50-90.50 (high of 88.98) for gradual reversal into 84.02 before close of week at 84.45. The initial rally was on shift into “risk-on” mode post EU summit and reversal from there was driven by strong dollar rally post ECB rate action. What next? Let us continue to look for consolidation at 75-90 into the near/short term. The cues are mixed at this stage; global investor sentiment has improved which should provide strong support at 75-78 while rally beyond 89-91 may not sustain given the support from G3/IMF with resolve not to let commodity prices impact global economy. This is a very big comfort for the bears. For the week, let us watch consolidation at 80-88 with test/break either-way to attract. The trade strategy is to hold on to shorts entered at 88.50; add at 87-88 with stop above 90 for 80-78.

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

  

intra-day updates on twitter

I invite your attention to intra-day updates on my twitter account (@mosesharding) where the Weekly report is reviewed and if need be strategies are revised. Case in point this week is the review of EUR/USD outlook where weekly range was reviewed to 1.2250-1.2750 with bias into lower end. There was also trading recommendation in USD/INR to sell at 55.65-55.90 (posted at start of week) for exit at 54.30-54.00 where we saw sharp appreciation of rupee from 55.90 to 54.17 before giving away most of gains for revisit to 55.65.

For best results, act on the weekly report taking into account intra-week updates on the twitter account.

Good luck...............Moses Harding

outlook on rupee and NIFTY

It is time to deliver to retain bullish undertone in rupee and stock market

Rupee has now recovered more than 100% of its decline from pre-June 2012 mid quarter monetary policy review high of 54.92 to recent low of 57.32 and more than 30% from pre-Budget FY13 high of 48.60. During this time, NIFTY has recovered most of its post-Budget fall from 5630 to 4770. It is all about “sentiments” and “expectations”. The sentiment has shifted from “negative” to “positive” post Dr. Singh taking charge of the Finance Ministry, with build-up of very high expectations. The critical issues on the agenda are unwinding of contentious tax related issues in the Budget (including removal of withholding tax), significant hike in fuel prices to release pressure on fiscal deficit, removal of policy bottlenecks in attracting FDI flows and early  shift into growth supportive monetary policy stance. It is important to deliver these expectations post Presidential elections and enable RBI to deliver next round of CRR and rate cuts in July 2012 monetary policy review. These are very essential to retain current rally in rupee and domestic stock market.  

There are three options on the immediate way forward: if the delivery is to expectations, rupee will get into consolidation mode around 54; if delivery is beyond expectations, rupee will extend its bull run into 51-52 and if it is short of expectations leading to yet another disappointment, rupee will be back at 57.00-58.50 to post a new all-time low above 57.32. It is a crisis and make or break kind of situation and it is time to act decisively and deliver to expectations. It is difficult to address issues related to growth and fiscal deficit without bringing resolutions in Current Account Deficit and Balance of Payment position. The external factors have turned favourable with stability in commodity prices and easy availability of external liquidity till 2014-2015. This is the time to pull these flows into India for shift into favourable monetary conditions to spur domestic investments for capacity expansion. It is also important to set the road map for permanent solutions to balance Current Account and usage of fiscal deficit for investments (into core sectors) rather than consumption (cost subsidisation).   

What is the expectation? It may be wishful to look for delivery beyond expectations at this stage. The choice is between delivery to expectations or facing yet another disappointment. So, the chance of extended rupee gains into 50-52 is low at this stage. It is either for stability around 54 or decline back to 57.00-58.50. Rupee stability around 54 into the short/medium term (say 3-6 months) is good for the system to retain export competitiveness and to cut non-essential imports. It is also felt that rupee is seen to be at fair valuation around 54. The outlook into the short term therefore is to look for consolidation around 54 (short term range at 53-55). There will be demand for forward dollars on extended rupee gains into 53 to cover up to 3M payables at forward value below 54 and good supplies on weakness into 55 to sell 12M receivables at forward value above 58. In the meanwhile, the possibility of extended gains in NIFTY into pre-Budget high of 5630 is good but would prefer to stay neutral on extension beyond there.  If all goes well on domestic macro fundamentals, and resultant sovereign rating upgrade can bring the focus to November 2010 high of 6338. It is the time for corporate entities to evaluate market risks in their Balance Sheets and stay mostly covered on exchange rate exposure. Over all, it is time to “realise” the “hope” to retain the bullish undertone in the asset markets.

Moses Harding

Head – ALCO and Economic & Market Research

IndusInd Bank, Mumbai