MARKET PULSE: Friday, the 13th 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 19th July to 31st 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 31st 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 31st 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 14th 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 31st 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 31st 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 19th July to 31st 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 18th July. Intra-day ideas will be available through twitter.
Moses Harding
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