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