MARKET PULSE: near term perspective (next report after 5th 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 31st 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 31st 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 31st 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
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