Interest rate market update

Conflict between low growth and high inflation

It is more or less certain that it is going to be a long haul for Indian economy to get back into shape. The GDP growth is trending into lower end of 5.0-6.0% expectation while inflation will stay above 7% after adjustment of higher MSP and fuel price hike. The pressure on inflation will get aggrevated on uptrend in commodity prices and weak rupee. Rating downgrade will put currency and stock market under pressure. There are no positive take-away at this stage. This sets up strong case for RBI relaxing its grip on monetary policy. The expectation is for compromise formula between Mr.Chidambaram and Dr.Subba Rao based on committment of deliverables linked to addressing issues related to twin deficits and policy reforms.

There is hope for monetary easing in Q3 of FY13 (between October - December 2012). It may be in the form of rate cut or shift of system liquidity from deficit to surplus. It does not mean that it is going to be run-away rally in the Bond market. RBI will resort to SLR cut to keep supply side pressures in tact till inflation worries are out of the way.

10Y Bond (8.15% 2022):

We have already seen end-to-end moves within set short term range of 8.0-8.25% more than once. There is no reason to expect test/break either-way at this stage. However, in the near term (till trigger of monetary actions), trading range will be into the higher end, say 8.10-8.25%. There is concern on escalation in borrowing cost of the Government and it is possible that RBI will keep 8.25% in check through OMOs.

OIS market:

It is kind of stabilitty in OIS rates at 7.60-7.75% in 1Y and 6.90-7.15% in 5Y. We have already seen end-to-end moves within these ranges more than once. There are no strong factors to expect test/break either-way.

FX Premium:

We have already seen end-to-end moves within set short term ranges of 6.75-7.5% in 3M and 5.65-6.15% in 12M. We continue to look for consolidation within these ranges with test/break either-way not expected to sustain.


Moses Harding

Commodity market update

Gold:

The rally from 1565 is losing steam above 1615; unable to extend gains into the set objective at 1635/1640. Watch near term consolidation at 1600-1620; extended gains is not expected to overshoot beyond 1640. Thereafter, prefer unwinding of recent gains into 1585 aehad of 1565. Over all, short term range of 1565-1640 will stay valid.

NYMEX Crude:

The rally fizzled out above 93 given the expected consolidation play at 88-93. Howver, the undertone is bullish in the nearest term for 95.00-95.50 not ruling out a quick touch into 97.50-100 before down. Over all, prefer short term range play at 90-100.


Moses Harding

MARKET PULSE: Currency update

EUR/USD:

The immediate term momentum is strong into the lower end of set short term range of 1.2150-1.2650 while "shorts squeeze" would limit gains at 1.2325-1.2375. However, continue to believe 1.2150-1.2050 as strong base for smart rally into 1.35 by end October. Strategic players who chased the recent run from 1.2050 to 1.2450 can look to buy again at this support window of 1.2150-1.2050 for near term objective at 1.2650

USD/JPY:

USD/JPY is finding it tough to take out strog resistance window at 78.75-79.25. While this zone stays firm, risk is of test/break of strong support at 77.90/77.65 for 76.00/75.50 where BOJ is expected to step in. Strategic players can look to stay short for this move with stop above 79.25. Thereafter, would look to buy at 76.25-75.75 for 80.

USD/INR:

The short term outlook is bullish for rupee for consolidation mode around 54.50. The concern is in the near term where rupee looks fragile driven by weak fundamental factors. Domestic cues are very weak with risk of rating downgrade. The support to rupee will be from external factors that could keep the investors in "risk-on" mode providing support to domestic equity market. There is no concern on FII flows into equity market. The worry is from higher commodity prices that would open up the pressure on Current Account Deficit. The near term range will be at 55.00-56.00 with extension limited to 54.75-56.25. Strategic players can look to buy at 55.00-54.75 and sell at 56.00-56.25

EUR/JPY:

Euro crosses is under pressure now. We expected formation of strong near term resistance at 97.50-98.00 for retest of recent low above 94.00. Over all, will look for formation of strong short term base above 94 for rally into 100.

Moses Harding

Announcement

Dear friends,

Of late, I have not been frequent with detailed updates on the blog and on my pages in REUTERS and BLOOMBERG. However, I have stayed in touch through twitter updates (handle: mosesharding) with short views and trading ideas.

I am now set to take annual leave from 13th August to 7th September and back at desk on 10th September; it is a long one, about a month from today.

I will try and stay in touch with you through twitter updates; may not be so frequent but will try not to miss major twists and turns. For those of you who may wish to stay in touch through queries, please do so through e-mail at moses.harding@indusind.com (blackberry has now become part of our body).

Ciao then, take care and good luck.

Moses Harding