post-policy comments

RBI maintains its conservative stance by not getting into rate cut mode

Indian economy is struck with weak macroeconomic dynamics of high fiscal deficit, high current account deficit, low growth and high inflation coupled with major risk of sovereign rating downgrade pushing the investment status to junk. It is impossible to address all these issues at the same time because of conflicts in play between growth-inflation dynamics. Therefore prioritisation becomes critical. There has been priority for inflation control since March 2009 with tight system liquidity and high cost of liquidity but met with little success. The adverse direct impact on growth and indirect impact on fiscal deficit has been severe. It was thought prudent (of RBI) to dilute its priority on inflation control and turn growth-supportive to prevent move from bad to worse. RBI also recognised strong positive factors (for inflation) from soft commodities and strong rupee. The expectation on inflation is positive for sharp reversal in Q4 of FY13 and H1 of FY14. In recognition of more downside risks to growth (and investments) and improved expectation on inflation (and twin deficits), the expectation from stake holders (from RBI) was for delivery of rate cut to kick-start rate reversal cycle as shift into dovish monetary policy stance.

The delivery of token 25 bps CRR cut is seen cosmetic when deficit system liquidity is more than 1.25% of NDTL. The stance of RBI is seen as conservative and not cautious post recent developments. So, it is back to waiting-time for shift into rate cut mode, expected to be in January-March 2013. 10Y Bond yield will get into consolidation mode at 8.12-8.20% with March 2013 target at 8.02-7.97%. The impact is neutral on rupee exchange rate to extend its consolidation mode at 53.20-54.20. NIFTY will get into consolidation mode at 5630-5580 with more downside risks for extension into 5500.

Moses Harding

Weekly report for 29/10 - 02/11/2012

MARKET PULSE: Weekly report for 29 October – 02 November 2012

Currency market

Rupee traded in consolidation mode between set support at 53.85-54.00 (low of 53.89) and resistance at 53.35-53.20 (high of 53.33) before close of week at 53.55. MARKET PULSE strategy was to sell 1-2Y dollars at 53.85-54.00 and to hedge 7-15 days imports at 53.40-53.30, and considered rupee weakness into 53.60-54.30 as excessive. There are good signals to confirm completion of correction phase from 51.35 at 53.98 but general risk-off mode and resultant strength for the US Dollar would provide consolidation in the immediate term at 53.20-53.80 with extension limited to 53-54. The near/short term bias is for consolidation mode at 51-53 with rupee bullish outlook for extended gains below 51.35 before end 2012. There is no change in hedge/trading strategy and would continue to see 53.60-54.30 not safe to stay “long dollars” for strategic play and stay with set medium/long term rupee range at 49-54.

EUR/USD could not hold on to gains above 1.3070 (high of 1.3083) and fell from set sell zone of 1.3045-1.3070 into set objective at 1.2925-1.2850 (low of 1.2881) before close of week at 1.2945. In the meanwhile USD Index got solid support above 79.40 to meet the first objective at 80.20 before close at 80. What next? USD Index failure above 80.20 provides comfort to Euro bulls but near term “floor” is up from 78.60 to 79.40 not ruling out extended gains into 80.70, and would need improvement in “risk” for sharp reversal from 80.20-80.70 into 79.60-79.40 ahead of 78.60-78.40. Therefore, risk of extended correction into 1.2825-1.2800 is valid while below 1.3045-1.3070. The strategy is to play end-to-end of this near term resistance and support zones.

USD/JPY lost steam ahead of the set near term resistance 80.45-80.60 (high of 80.38) for back into earlier support at 79.40-79.65. The risk now is for extended correction below 79.40 into 78.65-78.50 while 79.95-80.20 stays firm. The strategy is to reinstate “longs” in two lots at 79.05-78.90 and 78.65-78.50 with tight stop for 80.35-80.85 while traders can look to sell at 79.95-80.20 for 78.65-78.50.

Commodity market

NYMEX Crude has now met the first objective at 85.00 (84.94) from the set sell zone of 92.50-93.50 (high of 93.05) and in consolidation mode at 85.0-86.50. MARKET PULSE continues to stay bearish till complete reversal of recent rally from 77.28 to 100.42. Now, let us watch consolidation at 82.50-87.50 before heading into 77.50-82.50 consolidation in the immediate term. The strategy is to sell in two lots at 86.50-87.00 and 89.00-89.50 with stop above 90 for 82.50-77.50.

Gold met its intra-week target at 1700-1695 (low of 1698) from immediate resistance at 1730 and now in consolidation mode at 1710-1720. It is a $100 run from recent high of 1795 into 1695 in rather quick time, hence it would be in order to allow consolidation at 1695-1730 before heading into set near term objective at 1665-1650. The strategy is to sell in two lots at 1715-1720 and 1735-1740 with tight stop for 1695/1665.

Interest rate market

10Y Bond continues to stay in tight consolidation at 8.12-8.15% ahead of RBI’s policy move. OIS rates too struck at 7.57-7.62% (1Y) and 6.97-7.02% (5Y). It is traders’ market playing end-to-end of this range while strategic players hold on to “long” Bonds entered above 8.17% and 5Y OIS received book entered above 7.02%. What next? There will be price-stability in Bond/OIS market post monetary policy. A 25 bps cut in rates and CRR would push 10Y Bond yield into 7.97-8.07% and 5Y OIS into 6.87-6.92 (1Y OIS at 6.47-6.52). CRR cut of 25-50 bps without rate cut will push 10Y Bond yield into 8.12-8.17%; 5Y OIS at 6.97-7.05% and 1Y OIS at 7.60-7.65%. An unchanged stance from RBI will drive the market into bearish mood; 10Y Bond yield at 8.15-8.20% and 5Y OIS at 7.0-7.05%. It will be difficult for RBI to defend an unchanged stance given the excessive liquidity squeeze and meeting the displeasure of the Ministry. For the week, let us watch 10Y Bond at 8.02-8.17% and 5Y OIS at 6.90-7.05% with bias into lower end while move into higher end will be good near/short term investment opportunity.

FX Premium held at higher end of set ranges of 6.25-6.50% (3M) and 5.35-5.60% (12M) and is nicely trending into the lower end. The near/short term undertone is bearish for test/break of lower end into 6% and 5.10% respectively on dovish monetary policy stance. The exchange rate play will provide tailwind to this move as forward market will be flooded with supplies with limited demand for dollars. For the week, let us watch 6.0-6.5% (3M) and 5.10-5.60% (12M). The strategy is to stay received at 6.50-6.65% (3M) and 5.60-5.70% (12M) for set objectives.

Equity market

NIFTY is nicely trading end-to-end of 5630-5730 range (low for the week at 5641 and high at 5721) before close at 5664 above the set immediate term support at 5660-5630. No change in view here as we continue to watch set immediate term support along with near/short term support at 5630-5580 with targets at 5750/5830 in the near term and 6330 before end of FY13. There are no strong cues to drive the market into bearish mode below 5630-5580 at this stage as RBI is expected to shift to pro-growth/pro-investment monetary policy stance and positive political developments for smooth passage of reform bills in the Parliament. For the week, let us continue to watch 5630-5730, extension limited to 5580-5830 with bias into higher end. The strategy is to stay invested at 5630-5580 for 5830-6330.

I am on leave for three weeks till 16^th November 2012; would try to stay in touch through short updates on Twitter.

Moses Harding

End of day update for 25 October 2012

Currency market

Rupee had bullish undertone within set intraday range of 53.35-53.85; sharply up from 53.83 to 53.47 before close at 53.55. The close below 53.60 despite strong undertone of the US dollar (against global currencies) is great comfort to the bulls. We continue to see the extended weakness into 53.60-54.30 as unreal, hence not to sustain and consider this extended weakness good for exporters to sell 1Y (and beyond) receivables. Let us watch immediate resistance at 53.35-53.20 now.

EUR/USD reversal from 1.2918 is losing steam above 1.3015 (high of 1.3023) but looks heavy for one more look at 1.2925-1.2900 support while 1.3045-1.3070 stays firm. It will be good to trade end-to-end with tight stop on conclusive break thereof.

USD/JPY rally from 79.70 is losing steam at first resistance at 80.20 ahead of set objective at 80.50-80.65. The underlying bullish undertone is valid till it stays above 80, else earlier support at 79.75-79.60 attracts. Let us watch 79.65-80.65 now; test/break either-way not expected to sustain.

Interest rate market

Bonds/OIS continue to stay tightly boxed at 8.12-8.15% (10Y Bond); 7.57-7.62% (1Y OIS) and 6.97-7.02% (5Y OIS) with good interest at both ends ahead of monetary policy. The expectation of lower break-out into 8.02%, 7.47% and 6.87% post-policy remains valid with worst case at 8.17%, 7.62% and 7.02%.

FX premium remained weak; steady at lower end (3M below 6.5%) and weak at longer end (12M down at 5.45%). Continue to watch 6.25-6.5% (3M) and 5.35-5.60% (12M) with bias into lower end. The strategy to receive 3M at 6.50-6.65% and 12M at 5.60-5.70% is valid.

Equity market

NIFTY was in consolidation mode at 5680-5730 (low of 5686 and high of 5719) before close at 5705; close above 5680-5700 provides good comfort for the bulls and strategic investors. The outlook is bullish on build-up of hope from RBI to deliver rate cut to signal shift into effective growth supportive stance. Despite weak DM bourses, liquidity flow to EM will keep NIFTY in bullish mode into near/short/medium term. Let us continue to watch strong support at 5680-5660 for eventual test/break of 5730-5750 into 5800-5830 in the near term.

Commodity market

NYMEX Crude in consolidation mode at 85.50-86.50; makes sense after sharp fall from over 93 to below 85. The intra-day correction into 86.50-87.50 (high of 86.62) did provide opportunity to add to “shorts”. We continue to watch gradual weakness into 82.50-81.50 to unwind short positions (with trail stop above 88). The range to watch for now is 82.50-86.50 with extension limited to 81-88.

Gold is consolidation mode at 1710-1720; makes sense after sharp fall from over 1795 to below 1700. The intra-day correction into 1720 (high of 1717) gave opportunity to reinstate “shorts” for eventual move into 1675-1660. The strategy is to hold “shorts” entered at 1710-1720 and add at 1730-1740 with tight stop for 1670.

Next update on 29th October 2012........................Moses Harding

feeling the pulse of RBI for monetary policy actions

Excessive pressure on growth and investments to drive RBI into rate cut mode

There are good reasons for RBI to delay rate cut action when headline WPI inflation is expected to move above 8% in the immediate term (CPI into double-digit) driving the real interest rate into zero percent. It is also true that inflation could not be tamed despite hawkish monetary policy stance since March 2009. The deficit system liquidity mode and resultant operative policy rate at higher end of LAF corridor is in vogue for extended period of time. It is sensible to conclude that tight system liquidity and high cost of liquidity have not been effective to control inflationary pressures. It is also obvious that these adverse monetary conditions have caused direct impact on growth, investments and fiscal deficit while adding to supply side pressures on inflation with minimal impact on consumer demand. So, should RBI continue to pursue hawkish monetary stance as tool to control inflation? It is not that RBI has not done enough to support growth. RBI has delivered CRR cuts (not taking into account 50 bps rate cut in March 2012 when deposit rates were sharply up into double-digit) to ease pressure on liquidity to maintain deficit within their tolerance level of 1% of NDTL. The monetary action of lowering CRR when system liquidity is in deficit mode cannot be seen as effective growth supportive stance. On the other hand, RBI had concerns on policy paralysis and its adverse impact on fiscal consolidation, sovereign rating and rupee exchange rate. RBI cannot afford to stay in aggressive growth supportive stance when there will be upward pressure on interest rate from high fiscal deficit, high current account deficit, pressure on rupee and investment pull-out by foreign investors if sovereign rating is pushed to junk status.

Now, there is tangible improvement in the market sentiment and confidence; the Government has pulled all its strings to be seen in policy hyper-action and eager to address issues relating to twin deficits to get the risk of sovereign downgrade out of the radar. RBI cannot ignore this stance of the Government and stay prepared to walk in the same direction. The sharp downturn in commodity prices will help to reduce trade gap which is expected to be bridged through more than adequate flows through debt and equity capital market, thus fear of rupee depreciation is significantly diluted. The benefit from lower CRUDE oil price (and strong rupee) will reflect in fiscal deficit and inflation in due course. All these will lead to RBI’s comfort on inflation and shift its attention towards growth and investments. Therefore, the immediate need is to guide interest rates down immediately and get the system into surplus liquidity mode in due course on favourable trending in fiscal deficit and inflation.   

What is the expectation from RBI? The system deficit is over Rs.1 trillion much above RBI’s tolerance level of 1% of NDTL. There will be pressure on liquidity through rest of FY13 as RBI sucks out rupees through week-on-week auctions and tax outflows. A CRR cut of minimum 25 bps is seen as certainty now and do not rule out CRR rate of 3.5% by end of FY13 i.e., 25 bps each in 4 review meetings. But these actions will not shift the system liquidity from deficit to surplus, thus the need is to guide policy rates down to get into pro-growth stance; CRR cut without rate cut will be seen only as balanced approach. It is time for RBI to shift from balanced to pro-growth and pro-investment stance. There seems to be unanimity in expectation of 25 bps cut in CRR and policy rates and provide dovish guidance on the way forward. The other options are to deliver either 25-50 bps CRR cut without rate cut or 25-50 bps rate cut without CRR cut or maintain status-quo. It would be a disappointment in the markets (and its stake holders) if RBI does not opt to cut rates this time despite significant improvement in sentiment and confidence; sharp downturn in commodity prices post QE3 and sharp appreciation in rupee. The steps taken by the Government to attract long-term capital flows, cut unproductive fiscal consumption, ensuring flow of investment and liquidity to core sectors and the eagerness to get rating upgrade will go unrecognised if RBI does not cut policy rates. While Government is addressing on items that have direct impact on inflation, it is expected of RBI to turn monetary system supportive to growth and investments. This act of RBI will be seen as complementary with the Government to get the Indian economy out of its woes. The investors are still in wait-and-watch mode on fear of sovereign rating downgrade and its adverse impact on the Economy and asset markets and it would need joint efforts of the Government and RBI to get the investors into risk-on mode. The expectation therefore is for delivery of 25 bps cut in CRR and policy rates. There will be post-policy price stability in 10Y bond yield at 7.95-8.10% and 1Y OIS rate at 7.45-7.55%.

Moses Harding

Commodity market update for 25 October 2012

NYMEX Crude met the set weekly objective at 86.50-85.50 (low of 84.94) and now into consolidation mode at 85.50-86.50. Now, the focus is on the next objective at 82.50-81.50 ahead of 77.50 to complete the recent rally from 77.28 to 100.42. For now, let us watch 81.50-86.50 with bias into lower end. The strategy is to hold on to “shorts” entered at 92.50-93.50 (add at 86.50-87.50) for 82.00.

Gold is now down from 1730 to below 1710 into immediate term objective at 1700 (low of 1698.40) ahead of set weekly objective at 1675-1660. The undertone is bearish, hence hold on to “shorts” entered at 1730; add at 1710-1720 for 1675-1660. For now, let us watch 1665-1715 with bias into lower end.

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

Equity market update for 25 October 2012

NIFTY is tightly boxed at 5680-5710 range and signals are neutral (but not mixed). The underlying bullish undertone is very much intact. There are lot of triggers in pipe-line from the RBI, the Government and the Parliament. Let us continue to watch immediate term support at 5680-5660, near term support at 5660-5630 and short term support at 5630-5580 with near/short/medium term objectives at 5750/5830/6330. For now, let us watch 5680-5730 (extension limited to 5660-5750) with bias into higher end.

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

Interest rate market update for 25 October 2012

Bond/OIS would continue to trade within the set ranges of 8.12-8.15% (10Y Bond); 7.57-7.62% (1Y OIS) and 6.97-7.02% (5Y OIS) and test/break either-way will trigger our trading actions as specified earlier. The near term outlook (post-policy) is bullish for gradual move into the lower end of set short term ranges of 8.02-8.17%, 7.47-7.62% and 6.87-7.02%. Strategic investors to hold on to “longs” entered above 8.17% (and 5Y OIS book above 7.02%) for this move.

FX Premium will continue to stay in consolidation mode at 6.25-6.5% (3M) and 5.35-5.6% (12M); test/break either-way will trigger our trading actions. The strategy is to receive 3M at 6.50-6.65% and 12M at 5.60-5.70% for post-policy move into lower end. There are no strong cues to  suggest break of lower end at this stage.

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

Currency market update for 25 October 2012

EUR/USD has now completed its reversal from 1.3065-1.3090 (high of 1.3083) into 1.2950-1.2900 (low of 1.2918) and now below the earlier support zone of 1.2985-1.3010. The risk environment is not in favour of weak dollar; hence it is possible that Euro unwinds its entire rally from 1.2824 to 1.3139. For now, let us watch resistance at 1.2985-1.3015 to hold for 1.2925-1.2900. USD Index has now settled into higher range at 79.70-80.20 not ruling out extension into 80.70. The strategy is to sell EUR/USD in two lots at 1.2985-1.3010 with tight stop for 1.2915-1.2900 (and thereafter into 1.2835-1.2820) before prospects of strong Euro rally.

Rupee is looking good despite strong dollar against global currencies. There is strong support for rupee at 53.85-54.00 (worst case at 54.15-54.30). These two zones are good to cover 12M exports. Importers did get an opportunity to cover ultra near term payables (up to 30 days) on earlier rupee gains into 53.40-53.30. This zone is considered good to cover 7-15 day payables. Rupee is likely to get into near term consolidation mode at 53.35-53.85 with extension limited to 53.20-54.00.

USD/JPY finds good support at set buy zone of 79.75-79.60 (low of 79.68) but unable to get the desired momentum for break above 80 (high of 79.97). Let us continue to watch set buy zone and sell zone of 80.50-80.65; test/break either-way not expected to sustain.

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

End of day report for 23 October 2012

Currency market

It is a Tom-and-Jerry play between the bulls and the bears! Rupee bulls regained their strength from above 53.80 (low of 53.98) into first objective at 53.40-53.30 (high of 53.34) but the bears flexed their muscles for push back above 53.80 (low of 53.84) before close at 53.73. Continue to believe rupee weakness above 53.30-53.80 is not real and normalcy will be restored by end of this month for revert into rupee bullish trend. There are no strong fundamental reasons to keep rupee weak for extended period of time since recent high of 51.35 punched on 5^th October. It is considered good for exporters to cover 1-2Y receivables on this extended weakness beyond 53.60. The short/medium/long term outlook for rupee continues to stay bullish for consolidation at 50-52 ahead of 49-51 followed by 48-50. The only risk factor is the political risk and now the support from major opposition party to the Government’s stance on reforms provides comfort and dilutes this major risk in play. The bearish set up on commodity prices and rupee stability (with bullish undertone) will do lot of good to dilute risks from fiscal deficit, CAD and inflation. The resultant favourable stance by Global rating agencies will provide momentum to rupee bullish trend into short/medium term.

EUR/USD could not take out strong resistance at 1.3065-1.3090 (high at 1.3083) and reversal from there has moved into strong support at 1.3010-1.2985 (low so far at 1.2999). USD Index too is sharply up from 79.40 to above 79.70. It is important for Euro to stay firm at 1.3010-1.2985, else risk of extension into 1.2950-1.2900 comes into play. This risk factor of strong reversal from 1.3065-1.3090 (or from 1.3145-1.3170) for possible pass through below 1.2985 into 1.2950-1.2900 was flagged yesterday, and this risk remains valid while below 1.3070-1.3085.

The reversal in USD/JPY from 80 held well at set buy zone of 79.75-79.60 (low of 79.72) and now making next attempt to take out 80 which then could extend to 80.50-80.65. Will give up this stance below 79.50 which could then extend into 79.20-78.95 (yesterday’s buy zone from where rally into 80 kicked in) before prospects of sharp up move.   

Interest rate market

10Y Bond completed end-to-end of 8.12-8.15%. OIS rates stayed well bid above 7.57% (1Y) and 6.97% (5Y) for gradual move into higher end of set weekly range of 7.57-7.62% and 6.97-7.02. Our action was to play test/break of either-end and this strategy has worked well. The momentum is for extension into 8.15-8.17%, 7.62-7.65% and 7.02-7.05%, considered good to say “mine” as strategic play into monetary policy review.

FX premium held below receive zone of 6.50-6.65% (3M) and 5.60-5.70% (12M). Continue to watch consolidation at 6.25-6.50% and 5.35-5.60%; test/break either-way will trigger our actions.

Equity market

NIFTY traded end-to-end of 5680-5730 intra-day range (high at 5720 and low at 5681) before close at 5691. Continue to watch immediate term support at 5680-5660 ahead of near term support at 5660-5630 followed by short term support at 5630-5580. We have already seen the first move from above 5630 (low of 5634) into 5730 (high of 5722). The next major triggers for the rally is RBI’s monetary policy, next round of tax reforms and Parliamentary approval of bills cleared by the Cabinet. The undertone continues to stay bullish to take out immediate (but strong) resistance at 5730-5750 for 5800-5830. We have not yet taken the sight away from short/medium term objective at 6330.   

Commodity market

Gold is down from the first sell zone of 1730-1735 (high of, could you believe 1729.99!!) to pass through 1710 (low so far at 1705.60) into set weekly objective at 1675-1660. Now, 1720 should stay firm for this move; watch 1670-1720 with bias into lower end.

NYMEX Crude is now below 88.50 (low so far at 87.27), not far away from the set weekly objective at 86.50-85.50. The undertone is bearish for extension into 82.50-81.50 ahead of 77.50 for complete reversal of recent rally from 77.28 to 100.42. This bearish set up on CRUDE has provided strong tailwinds to dilute pressure on fiscal deficit, CAD and inflation.   

Next update on 25^th October..............................Moses Harding

Mid day report for 23 October 2012

Currency market:  USD Index above 79.70 has driven the Euro into 1.3035-1.3010 and Rupee into higher end of 53.30-53.65. USD Index above 79.70 will lose steam driving Euro back into 1.3070-1.3085 and Rupee into 53.40-53.30. However, at this stage do not rule out extension into 1.3010-1.2985 before up into 1.3085-1.3135 while Rupee should stay close to lower end of 53.65-53.80 before sharp recovery into 53.35-53.20.

NIFTY:  Trades are within very tight range of 5690-5720 within the 5680-5730 intraday range. The undertone continues to stay bullish into 5750 with strong protection at 5680-5660.

Gold: The reversal from first sell window of 1730-1735 has taken out 1720 with immediate target at 1700-1695.

No change in view on other asset classes.

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

Commodity market update for 23 October 2012

NYMEX Crude has now completed one set of action; down from set sell zone of 92.50-93.50 (high at 93.05) to meet the set objective at 88.50-87.50 (low at 88.21) and now in consolidation mode at 88.50-89.00. MARKET PULSE has already shifted the weekly range into 86.50-91.50 and continues to see bearish set up for 86.50-86.00.

Not much of action in Gold as there is not enough momentum to take out strong at 1720-1710 (low of 1713.40) but attracts good selling interest below 1730. MARKET PULSE weekly strategy was to sell in two lots at 1730-1735 and 1750-1755 with tight stop for 1675-1660 on conclusive break of 1715-1710; no change in this view.

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

Interest rate market update for 23 October 2012

No change in view of consolidation play in 10Y Bond yield at 8.12-8.15%; 1Y OIS at 7.57-7.62% and 5Y OIS at 6.97-7.02%. The strategy is (a) to stay “long” at 8.15-8.17%; 7.62-7.65% and 7.02-7.05%; (b) traders to exit earlier “longs” at 8.12-8.10%, 7.57-7.55% and 6.97-6.95% and (c) strategic investors can hold to “long” bonds entered at 8.17-8.20% and 5Y OIS received at 7.02-7.05%. The recovery in rupee from above 54.80 into 52-53 consolidation by 30^th October can lead to RBI’s rate action; 25 bps rate cut along with 25-50 bps CRR cut which would trigger extension of recent rally into 8.05%; 7.50% and 6.90% which should hold.

FX premium held well above set pay zone of 6.25-6.10% (3M) and 5.35-5.25% (12M) and into higher end of 6.25-6.50% and 5.35-5.60%. Watch consolidation play end-to-end and test/break either-way to trigger actions.

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

NIFTY update for 23 October 2012

NIFTY update for 23 October 2012

NIFTY is looking good for 5680-5750 consolidation and should prepare steam for extended gains into 5800-5830 in due course. Continue to hold “long” entered at 5660-5630 and add on dips into 5680-5660; while traders can look to unwind at 5730-5750, strategic investors can hold for 5800-5830.

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

Currency market update for 23 October 2012

EUR/USD is unable to take out strong resistance at 1.3065-1.3090 (high at 1.3083) and in consolidation mode around 1.3050. USD Index too is mixed at 79.40-79.70. It is possible that Euro extends its gains into 1.3145-1.3170 while 1.3010-1.2985 stays firm. The strategy is to play end-to-end between 1.3010-1.3145 with extension limited to 1.2985-1.3170. There are no strong cues to suggest break-out either-way.

USD/JPY has now completed end-to-end of 79-80 range and looks good for extension into 80.50-80.65 to complete recent rally from 77.40. For the day, watch 79.50-80.50 with extension limited to 79.25-80.75. The strategy is to buy at 79.50-79.25 for 80.50-80.75.

USD/INR has met the first objective at 53.40-53.30 (low at 53.34) from the set sell zone of 53.80-54.30 (high so far at 53.98). Ideally, should now get into consolidation at 52.90-53.40 with bias into lower end tracking gains in Euro into 1.3140-1.3170. It would be confirmed that as rupee gains below 52.20 was excessive on bunched up dollar supplies from the forward segment, rupee weakness above 53.30 is also excessive on bunched up dollar demand from PSU entities. Till move into the next round of reforms post winter session and RBI’s shift into growth supportive monetary stance, consolidation in rupee at 52.20-53.30 will be in order. The strategy is to add to “shorts” entered above 53.80 at 53.40-53.65 for next objective at 53.00-52.90.

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

End of day update (22 October 2012)

USD/INR: Rupee had a bullish close at 53.48 (above immediate objective at 53.40-53.30) sharply up from intra-day low of 53.89. The undertone is bullish for extension into 53.00-52.90. The risk factor now is possible reversal in EUR/USD from either 1.3065-1.3090 or 1.3145-1.3170. Continue to hold “short” entered at 53.80 and will review tomorrow.

NIFTY: The intra-day trades were to the script; held well at buy zone of 5660-5630 (low of 5658) for gradual move into immediate resistance at 5700-5730 (high of 5721), and close of day at 5717 provides good comfort to the bulls. No change in weekly outlook for extended gains into 5730-5750 ahead of 5800-5830 while 5680-5660 stays firm.

10Y Bond yield stayed rock solid above 8.12% while OIS rates little changed above 7.59% (1Y) and 6.97% (5Y). No change in view of tight consolidation at 7.57-7.62 and 6.97-7.02; test/break either-way will trigger our trades. No change in view in 10Y Bond looking for consolidation at 8.12-8.15%; test/break either-way will trigger our trade.

FX premium remained bid above set pay zone of 6.25-6.10% (3M) and 5.35-5.25% (12M) before close at 6.4% and 5.5% respectively. Will continue to watch 6.10-6.60% (3M) and 5.35-5.65% (12M); test/break either-way not expected to sustain.

USD/JPY has traded end-to-end of 79-80 (low of 79.23 and high of 79.86) and it would need conclusive break of 80.00 for extended gains into 80.50-80.65. If not, consolidation play at 79-80 will get extended before setting up directional break-out either into 80.50 or 78.00. Strategy is to buy at 79.20-78.95 with tight stop for 79.95/80.45.

EUR/USD recovered nicely from 1.3025-1.3000 support into 1.3065-1.3090; break of which will trigger extension into 1.3140-1.3170 but momentum is not seen to be good for this move although is not ruled out. Even if it does, there is higher probability of strong reversal from 1.3140-1.3170 which could take out 1.3010-1.2985 strong support.

Have a great evening ahead.................................Moses Harding

Intraday (22/10/12) update for USD/INR and NIFTY

Intra-day update for USD/INR; EUR/USD and NIFTY:

NIFTY held at first buy zone of 5660-5630 (low of 5658) for swift move into first resistance at 5700-5730 (high of 5702); it was good trade set-up for day traders. Now, 5680-5660 would generate good buying interest for 5730-5750.

Rupee recovered well into immediate resistance at 53.60 while Euro hit the sell zone at 1.3065-1.2090 (hi at 1.3065). The worry for rupee bulls is the bunched-up dollar demand ahead of month-end which acts as solid barrier to resist rupee gains into 53.40-53.30 and 53.00-52.90 in due course. Hold “shorts” entered at 53.80 with trail stop at cost for 53.40-53.30.

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

Interest rate market update for 22 October 2012

Interest rate market

Not much of action expected in Interest rate market. There is severe strain in system liquidity with LAF draw-down above Rs.1 Trillion. It is mixed signals on expectation of 50 bps CRR cut and OMO bond purchases. There is dilution in rate cut expectation on strong pressure on rupee; weakness above 54.30 will definitely rule out rate cut action. Watch stability in 10Y Bond yield at 8.12-8.15%; test/break either-way not expected to sustain. The strategy is to buy at 8.15-8.17% and unwind “long” at 8.12-8.10%

OIS rates will stay in tight range at 7.57-7.62% (1Y) and 6.97-7.02% (5Y); test/break either-way difficult to sustain. The strategy is to receive at 7.62-7.65% and 7.02-7.05% and unwind “received” book at 7.57-7.55% and 6.97-6.95%

FX premium is steady at 6.25% (3M); 5.4% (12M) and October/September at 267. It is not prudent for strategic players to chase the sharp fall from recent high of 7.15%, 6.10% and 285 and hence would suggest to book profit at current and possibly into 6.10% and 5.25%. It is good ALM play to initiate paid book at 6.25-6.10% (3M) and 5.35-5.25% (12M) for interest cost advantage by shifting rupee liabilities into dollars. The strategy for traders is to pay 12M at 5.35-5.25% and receive 5.50-5.65% with tight stop.

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

Currency market update for 22 October 2012

Currency market update for 22 October 2012

USD/INR: Rupee recovered from strong support zone of 53.80-54.30 and trading above immediate resistance at 53.60-53.70. The undertone is neutral but would look for bullish cues for ultimate test/break of 53.60-53.70 resistance into 53.00. The strategy to sell USD/INR in 3 lots at 53.80/54.00/54.20 with stop at 54.40 holds good. Ultra-short term imports may be covered at 53.70-53.60 given the risk of rupee weakness into 54.00-54.30 on bunched up dollar demand and limited band-width available with RBI to defend rupee. The USD Index has turned bullish into the immediate term.

EUR/USD: USD Index has held well below 79.70 (and EUR/USD above 1.3000). The intra-day outlook is mixed as current price action (and momentum) does not favour conclusive break of immediate resistance at 1.3070-1.3085 for possible extended weakness into 1.2950-1.2900. The strategy is to sell EUR/USD at 1.3065-1.3090 with stop at 1.3110 for 1.2965-1.2950 not ruling out extension into 1.2915-1.2900. In the meanwhile USD Index will get into consolidation mode at 79.20-79.90

USD/JPY: The near term consolidation has now shifted to 79-80. This currency pair is looking bid and set for extension of recent rally from 77.40 into 80.60. The strategy is to buy dips into 79.10-78.85 with stop below 78.60 for 79.95/80.45

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

Weekly report for 22-26 October 2012

MARKET PULSE: Weekly report for 22-26 October 2012

Conflicts in play for FM and RBI to walk in the same direction

The guidance from Finance Ministry (to RBI) is loud and clear for low interest rate regime, surplus system liquidity and strong rupee. Obviously, these are minimum essentials to attract domestic and foreign investments for capacity expansion and increase domestic consumption to achieve set budgetary goals on growth and fiscal deficit. The monetary dynamics are otherwise with deficit system liquidity of more than 1% of NDTL, high interest rates with overnight rate at higher end of LAF corridor and sudden bearish set up on rupee down by over 5% from recent high of 51.35 to 54.00. It is also obvious that resolutions to supply side constraints and high fiscal deficit are essential to guide headline inflation into set target. The conflicts in play between growth and inflation dynamics are seen to get stronger (despite downtrend in BRENT Crude and Gold prices) and unless the system comes out of this vicious cycle, it may be difficult for RBI to follow FM in the same direction. The confidence post roll-out of reforms in mid September is on the decline. It is true that there is political intent to get the economy out of its woes but there is serious doubt on implementation and execution. The time to delivery between clearance of reform bills by the cabinet and approval in the winter session of the Parliament has pushed the market into bearish set up unwinding recent gains, and Rupee has been the worst performer despite weak undertone of the dollar against global currencies.

The major hurdle ahead is the political risk. Can the UPA manage support from Opposition parties for implementation of the reforms? If this is not done, sovereign rating downgrade will be matter of time citing policy paralysis and resultant limited band-width to address issues related to growth and fiscal consolidation. It will be disaster for the Indian economy and its asset markets which will lead into a medium/long term economic crisis. As a patriotic Indian, there is need to believe that good sense will prevail to avoid this kind of calamity on the Indian economy. Having said these, road map for addressing issues raised by Global rating agencies will be an extended one, but the comfort is that the journey has begun which would result in improvement in rating outlook from negative to stable. There will be hope that if the momentum of the journey can be maintained; there is good possibility of rating upgrade during the course of FY14. RBI’s immediate concern may be on the political risk. RBI continues to stay focussed on elevated inflation and resultant low real interest rates. It is felt that current low real interest rate is not seen as risk to growth and that higher inflation is not due to demand-push but from supply-side bottlenecks. On the other hand, Government is keen to have accommodative monetary policy and strong rupee exchange rate to spur growth, control inflation and attract foreign investments. The other stake holders of the system are in wait to get resolution to these conflicts between FM and RBI as both walking in the same direction is essential to get the Indian economy out of its woes and remove the fear of sovereign rating downgrade. There is no alternate option at this stage and the best (and only) option would be for RBI to address issues related to growth while FM work overtime to address issues related to twin deficits and inflation. There is immediate need for role-change to walk in the same direction!

Interest rate market is already in bullish undertone in expectation of dovish monetary policy stance. Despite elevated overnight interest rate above 8%, 182 days T-Bill yield is below 8.10% and 10Y Bond yield below 8.15%. The expectation therefore is for sharp fall in overnight rate from current above 8% into 7% during the course of rest of FY13. The deficit system liquidity at the end of fortnightly reporting cycle is at 1.5% of NDTL, thus making it difficult to push overnight rate below 8% through infusion of liquidity. In the last couple of days, RBI’s action to defend rupee has caused further squeeze in the system liquidity. The expectation of CRR cut on 30^th October is high and the debate is on 25 or 50 bps. But, this action of CRR cut is not going to change interest rate dynamics; overnight rate will continue to stay above 8%. There will be “pressure” on RBI to cut rates by minimum 25 bps to signal actual shift into dovish monetary policy stance by significant ease in the shorter end of the rate curve. Can RBI cut interest rate when rupee is under pressure? This is the new dimension to the story, of late. The reversal in rupee fortunes from 51.35 into 54.00 is threatening to revert into its earlier bearish trend. It may not be fair for FM to expect RBI to cut policy rates when rupee is weak. The criticality of exchange rate stability (with bullish undertone) is immense when the system is struggling with poor macroeconomic, tight monetary dynamics and high inflation. The recent underperformance of rupee against other EM currencies will be displeasure to foreign investors. Till exchange rate stability is achieved, RBI may stay hold on policy rates and instead deliver 50 bps CRR cut. If rupee gets into stability below 53 by the policy day, then there will be hope for delivery of 25 bps rate cut.

Currency market

The initial intra-week recovery in rupee from 53.15 to 52.65 (met with strong demand to buy up to 1M dollar at forward value below 52.90) could not sustain for sharp reversal into 53.98 before close of week at 53.85. Such a sharp fall in rupee despite weak dollar (USD Index down from 80.20 to 78.95) exposed rupee’s vulnerability to bunched up dollar demand from PSU entities and the resultant hold back of dollar supplies by private entities. The lead-lag play between dollar demand and supply pushed rupee beyond strong support at 53.30-53.60 into 54.00-54.30. RBI did try to prevent this “run” on rupee but could do very little when domestic system is short of rupees and limited dollars in RBI’s balance sheet. While it is easy for RBI to arrest excessive rupee appreciation, it will be very difficult to defend excessive rupee weakness. RBI will be in a better position to defend rupee only when the system gets into surplus mode in Current account and low inflation, resolution to these structural issues is a long-drawn process. What next? The immediate support for rupee is at 54.25-54.35 followed by 54.95-55.05. The market seems to be in strong dollar demand driven mode with no bunched up supplies in pipe-line. The supplies in forward market are cut on extended rupee weakness beyond 53.60 and it will be worse on above 54.30. The global cues are turning dollar positive. Global investors are seen to get into risk-off mode on weak bond, equity and commodity assets. A strong USD Index back into 80.20 and bunched up dollar demand on a short week (with only 3 trading days) will keep rupee in bearish undertone into the week. The immediate resistance for rupee is at 53.70-53.60 (earlier support) ahead of 53.15-53.00. For the week, let us watch 53.60-54.30 and stay neutral on break-out direction into either 53 or 55. It would need strong arm tactics and confidence boosters from the Government to push rupee into 53.00-52.50 to get RBI into rate cut mode. Intra-week review and hedging/trading views will be uploaded on the blog and twitter.

EUR/USD held well at set strong support at 1.2825-1.2800 (USD Index at 80.10-80.20) for rally into set weekly objective at 1.3075-1.3175 (high at 1.3139). The expected intra-week reversal from below 1.3155-1.3170 found support at 1.3015-1.2890 (low of 1.3011). What next? USD is seen to be out of its recent bearish mode on low investor appetite. Gold is also seen to have lost its shine shifting the safe-haven to the US Dollar. It is important for EUR/USD to hold above 1.2985-1.2950 to retain its immediate term bullish mode; else deeper correction into 1.2825 will come into play not ruling out extended run into 1.2725-1.2700 before strong reversal into 1.3170. USD Index has held below 79.70 but risk in the immediate term is for extended gains into 80.20-80.70. Intra-week trade ideas will be uploaded on the blog and twitter.

USD/JPY held well above 78.25-78.00 for sharp rally above 79.25. This pair is seen to get into consolidation mode post the recent sharp rally from 77.40 to 79.45. The rally in USD Index above 79.70 into 80.20 will provide consolidation play in USD/JPY at 78.50-79.50. The near term undertone however is bullish for extended gains above 80 into 80.50-80.75. The strategy is to buy in two lots at 79.00 and 78.75 with stop below 78.50; watch price action at 79.50-79.65 for extended bull-run above 80.

Interest rate market

Bond/OIS market traded to the script and stayed bullish into the week; 10Y Bond yield down from above 8.17% to 8.12%; 1Y OIS rate down from above 7.62% to 7.58% and 5Y OIS rate down from above 7.02% to 6.96%. It was to traders delight trading end-to-end of 8.17-8.12%, 7.02-6.95% and 7.62-7.55%. What next? The draw-down from LAF counter at 1.5% of NDTL on reporting Friday has triggered expectation of OMO bond purchases by RBI. On the other hand, strong bearish set up on rupee has diluted rate cut expectation on 30^th October but higher than expected cut in CRR will be to Bank’s delight. Short term rates are already down in anticipation of shift into growth-supportive monetary stance and 50 bps CRR cut will exert downward pressure on lending rates. The impact on Bond/OIS market will be neutral but near/short term bullish undertone is strong. For the week, let us watch tight consolidation at 8.10-8.17% (10Y Bond); 7.57-7.65% (1Y OIS) and 6.95-7.05% (5Y OIS). Let us reinstate “long” bonds at 8.15-8.17% and received book in 5Y OIS at 7.02-7.05%. The draw-down from LAF counter at start of new reporting fortnight is expected to be high at Rs.1.0-1.5 Trillion; hence the initial bias will be into higher end of set ranges.

FX premium sharply down for weekly close at 6.25% (3M) and 5.40% (12M) from recent high of 7.15% and 6.1% respectively. Our strategy to stay received in Oct/Sept at 282-285 has yielded quick results; sharply down from 285 to 267. What next? Signals are mixed at this stage; interest rate play will exert upward pressure while pressure on rupee will resist up move. It will be consolidation play at 6.0-6.5% in 3M and 5.25-5.60% in 12M, test/break either-way difficult to sustain. Let us stay aside and await move into either end to initiate fresh trades; it may not be prudent to staying “received” at current levels and on dips into lower end.

Equity market

NIFTY was in tight consolidation mode at 5630-5730 before close of week at 5684. The ability to hold above strong short term base at 5630-5580 provides good comfort but there is no strong momentum to take out immediate resistance at 5730-5750. Western bourses are weak and uncertainty in domestic cues (with weak rupee) is keeping investor confidence low. The preference seems to be staying light ahead of RBI monetary policy and winter session of the Parliament. Let us continue to watch strong short term support at 5630-5580 and resistance at 5730-5750 not ruling out extension into 5800-5830 on dilution in bearish set up on rupee which would revive hope for rate cut on 30^th October. The strategy remains unchanged to buy in two lots at 5660-5630 and 5610-5580 with tight stop for 5800-5830.

Commodity market

NYMEX Crude traded back-and-forth between set resistance/sell zone at 92.50-93.50 and support/buy zone at 89.50-88.50 before close of week at 90. The undertone is bearish (unwinding its recent rally from 77.28 to 100.42) for 88.85 and 86.15. For the week, let us watch consolidation at 86.50-91.50 with test/break either-way to attract. The strategy is to sell at 91.5-92.5 for 86.5-85.5 ahead of near term objective at 82.25.

Gold lost steam ahead of 1755 resistance (high of 1753) for sharp reversal into strong near/short term support at 1720 (low of 1716) before close of week at 1720. The undertone has become weak on risk-aversion to get the focus into next support at 1675 on conclusive break below 1720; resistance at 1755 will stay safe for this move. The near term focus has now shifted to 1675-1660. For the week, let us watch 1690-1735 with bias into lower end. The strategy is to sell in two lots at 1730-1735 and 1750-1755 with tight stop for 1675-1660.

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

Take away from Joseph Stigilitz, Economist & Nobel Price Winner

Can Indian economy revive without favourable monetary dynamics and exchange rate?

I was reading the interview of Joseph Stiglitz and there was clear answer to this question. Emerging markets can afford to live with moderate inflation but not at the expense of tight liquidity, high interest rates and weak exchange rate. The reasons are obvious, these conditions will keep investor sentiments low and will remain as strong headwind to growth momentum. Now that there are clear signals of RBI easing its grip on firm monetary policy stance through rate cut now and shift into surplus system liquidity in due course (not later than first half of FY14), let us analyse the performance of rupee against the USD Index which gives clarity on rupee performance vis-a-vis the dollar and the peers. Let us not go a long way and look at rupee behaviour since July 2011.

1. USD Index was up from 73.42 to 84.10 (July 2011 to July 2012) post fiancial crisis in the Euro zone. The shift of investors to risk-off mode drove the dollar up by 14.5%. During this period, rupee was down from 43.85 to 57.32, down by over 30.5%.

2. Since July 2012 to September 2012, USD Index fell from 84.10 to 78.60, down by 6.5%. During this time rupee gained from 57.32 to 51.35, up by over 10%.

3. If we see end-to-end move from July 2012 till now; USD Index from 73.42 to current 79.10 and Rupee from 43.85 to 53, you can see that while USD Index is up by 7.75%, rupee is down by 21% i.e., fair value of rupee vis-a-vis dollar performance is some where around 47

4. Even if we take out the impact of domestic cues post FY13 Budget when rupee fell from 54.30 to 57.32, fair value of rupee is seen to be around 50.

It is also obvious that investors will not like to stay invested on a currency which underperforms against the dollar. The need therefore is to provide stability if not out-performance.

It is not rocket-science to understand that without bullish expectations on growth and domestic currency, it is impossible to have favourable macroeconomic environment to spur investments and capcity build-up to address supply-side bottlenecks, which is essential for moderate inflation. The need is to address inflationary issues through supply-pull and not by cutting demand-push.

The immediate need for the Indian economy is to move operative policy rate from current 8.0% into 7%; control rupee stability at 47-50 and gradually shift system liquidity from deficit 1% of NDTL to surplus 1% of NDTL. If all these can be achieved in the next 3-6 months, there is strong story ahead for the Indian economy.


Moses Harding

What will attract NRI flows into India?

What will attract NRI flows into India? definitely, bullish outlook on rupee

There are stories around that NRI flows have drained because of rupee appreciation from above 57 to below 53. They go on to say that weak rupee will definitely attract NRI flows into India.

NRIs do not look at spot value of rupee when they bring in funds; whether it is 40 or 60 it does not matter for them. What does matter is the exchange rate trend. Where will rupee be at the end of 1Y or 3Y or 5Y? Will the expected future value of rupee cover the interest differential and provide attractive yield arbitrage to shift investments from foreign currency to rupee?

So, it is important to retain bullish undertone on rupee to pull NRIs and not the spot value of rupee. NRIs also look at prevailing forward premium to lock-in higher dollar yield on fully hedged basis. If FX forward premium is low (say, 1Y below 4% when 1Y rupee return is say 9%), NRI flows come in on leveraged basis (by borrowing dollars off-shore and shipping them into India).

What is essential to attract NRI flows is Rupee exchange rate stability and low FX premium.

Moses Harding

Weekly report for 15-20 October 2012

MARKET PULSE: Weekly report for 15-19 October 2012

(Intra-week/day updates on Twitter handle: mosesharding)

Exchange rate stability is critical to get Indian economy out of its woes

It is good to hear from the Finance Minister that ensuring Rupee exchange rate stability will be the top agenda while the Government and RBI focus on critical issues relating to fiscal deficit, growth, inflation and Balance of Payment. It is obvious that volatile rupee exchange rate (with bearish undertone) will be a strong headwind to dilute the impact of measures taken to address macroeconomic stability. The Indian foreign exchange market is already facing current account deficit (CAD) of $15-18 Billion per month. The reason for widening CAD is largely due to higher Crude Oil and Gold Price and reduced demand for India’s goods and services from the US and Euro zones. There is nothing Indian authorities could do to resist these forces except to cut non-essential imports; build domestic capacity for essential imports and higher wallet share of exports to the Eastern World. In this context, it is important that we maintain steady inflows through Capital account from non-resident Indian community and foreign investors to bridge deficit in Current Account. It is difficult to attract sustainable off-shore inflows without exchange rate stability. If the risk on exchange rate is seen to be higher than the interest rate differential or expected return on the underlying asset, no prudent foreign investor will look at India, and without surplus Balance of Payment, rupee will get into bearish undertone. When Rupee gets into bearish undertone, the impact from forward market comes into play. Exporters will hold-back dollar receivables while importers front-load future dollar payables into the spot market. The resultant “run” on Rupee can be very severe to hurt macroeconomic fundamentals. How? A weak Rupee exchange rate is inflationary and exerts upward pressure on interest rates while borrowers tend to borrow in rupees to cause liquidity strain on the system. On the other hand, tight liquidity and high interest rates will cut domestic savings and investments. In the absence of investments from both external and domestic sector, supply side bottlenecks will trigger inflationary pressures. These factors will obviously exert downward pressure on growth momentum. Such is the strong bonding of exchange rate with growth-inflation dynamics; and without higher growth momentum, it is impossible to cut fiscal deficit or have deep pockets to support the vote bank. In the current Indian context, there is need to drive headline inflation down to shift monetary policy to be enabler for growth; and strong rupee is the immediate solution which will result in cut in subsidy without effecting price hike.

Rightly so, Government and RBI have done lots to attract NRI flows and to open up Indian debt and capital market to off-shore investors. The objective is to ensure sustainable flows into Capital account till Current account is turned into neutral. In the longer term, it is important that we turn surplus in Current Account to stop export of capital from India through trade deficit. If the Indian system gets into low inflation and surplus current account mode, it will be easy for the Central Bank to manage excessive moves in exchange rate. RBI could do very little when rupee fell by over 30% (from 43.85 to 57.32) in less than a year. RBI did not have enough dollar resources in its balance sheet or enough money in the domestic system. Now, it is difficult for RBI to arrest excessive rupee gains when the need is to maintain deficit system liquidity till inflationary fears are completely out of the way. Government has shifted into higher gears to maintain surplus Balance of Payment through pulling off-shore flows into Capital account till CAD issues are resolved. It is the first step towards ensuring exchange Rate stability. There are series of measures towards fiscal deficit control and removal of supply side bottlenecks through capacity expansion in core sectors. These measures are towards inflation control to enable shift into pro-growth monetary stance. A combination of favourable political and monetary dynamics is essential to get into robust macroeconomic dynamics. The immediate impact of current (and pipe-line) measures would only lead to change in sentiment and perception. While trending into set economic objectives will be visible in the short term, realisation of tangible results at the ground level will extend into medium/long term. Till then, it is important to keep strong headwinds away. A weak rupee at this stage is definitely a very strong headwind and therefore, Rupee has to get into bullish undertone to stay as catalyst to the efforts taken by the Government. On the other hand, confirmation of bullish undertone on rupee will front-load dollar supplies (from future receivables) into spot market for RBI to shore up its dollar balance sheet and release rupee liquidity in the system. The resultant ease of pressure on liquidity and interest rates will spur growth and pull in domestic savings and investments. RBI is seen to appreciate the pressure on growth while having greater comfort on easing of inflation in the short/medium term. The threat of rating downgrade is still in the air. It is the right time to send confidence boosters on rupee exchange rate to pull inflows from external sector; bring lead-lag factor into play in the forward market and provide comfort to borrowers to shift rupee liability into foreign currency of their choice. The current vicious cycle concerning conflict in play between growth-inflation dynamics and its adverse impact on fiscal deficit and growth has to be broken with bullish undertone on rupee exchange rate.

Currency market

Rupee unwound its strong gains since second week of September from 56.03 to 51.35. The unwinding process extended to 53.18 before close of week at 52.81 against previous week close of 51.85. The reversal in rupee fortunes from recent low of 57.32 into 51.35 did surprise many; if not the directional trend, the speed of recovery was indeed a surprise to all. Hence, the reversal from 51.35 to 53.18 is seen to be in order and may be seen as good for exporters to hedge uncovered future dollar receivables. Now, there is debate; whether the move from 51.35 to 53.18 is a counter-trend move as correction process  (of the bull move from 57.32 to 51.35) or reversal of very short rupee bullish trend back into earlier bearish phase (from 48.60 to 57.32). For reasons discussed above, MARKET PULSE considers this move as a correction process, hence recommended (in the intra-week update) not to chase rupee weakness into 53.00-53.25. Spot rupee at above 53 and Rs.3 premium for 12M dollars is too good to ignore. What next? Rupee is seen to have settled into short term range play at 50.25-53.25 and expected to get into consolidation mode at 50-51 by end of 2012. Beyond there, if implementation of reforms is executed well to improve macroeconomic fundamentals, rupee could get into 48-51 consolidation in January-March 2013. The risk factor to this expectation is obviously political; inability of the UPA Government to get Parliamentary approval on bills cleared by the Cabinet and lack of political support for follow-on economic/financial reforms. At this stage, possible delay in RBI’s shift into pro-growth monetary policy stance is not seen as risk. The political risk to drive rupee into bearish undertone is seen low, hence bullish expectation on rupee. The next couple of weeks will be a period of consolidation within 52.20-52.90; extension limited to 51.90-53.20. The strategy is straight-forward; to cover 6-12M exports at 52.90-53.20 and await 52.20-51.90 to cover 1-3M imports.

It is mixed signals in G3 currencies. Bond and Equity markets are in sideways trading mode with no directional clarity. Investors are unable to take a clear view on the risk; aggressive players are seen to stay risk-on while conservative investors continue to stay in risk-off mode. USD Index is in consolidation mode at 79.40-80.20 and EUR/USD at 1.2825-1.3050. This has been a nice trading range for traders; weekly close at 79.60 and 1.2950 is bearish for the dollar. For now, EUR/USD is likely to get into consolidation mode at 1.2875-1.3075 with initial bias into higher end; failure around 1.3075 will be negative for the Euro for strong correction below 1.2875 into 1.2825, thus bringing the focus into 1.2750-1.2700. On the other hand, decisive break of 1.3075 will trigger a quick move into 1.3175 and bring the focus into 1.3475-1.3550. This will complete end-to-end move of set short term range of 1.20-1.35. The failure of USD Index above 80 adds credence to strong Euro in the immediate term to drive USD index below 79.60-79.40 support for consolidation at 78.60-79.10. The strategy therefore is to buy Euro on dips into 1.2925-1.2850 for 1.3075-1.3175.

USD/JPY traded end-to-end of 78.00-78.75 range with weekly close at 78.45; inability to take out 78.60-78.75 for 79.25 is concern and more the delay, chances of extension into 77.40-77.15 will come into play. For now, let us continue to watch 78.00-78.75 and stay neutral on break-out direction. The strategy is to trade end-to-end with tight stop while strategic players could stay aside for either 77.40-77.15 or 79.00-79.25 to initiate action.

Interest rate market

It was steady undertone in Bond/OIS market. 10Y Bond found good support above 8.17% while weekly auctions resisted gains below 8.15%. OIS rates nicely traded end-to-end of 7.55-7.62% (1Y) and 6.95-7.02% (5Y). What next? Money market conditions have turned favourable; average liquidity deficit for the reporting fortnight is down below 1% of NDTL; 3-12M rate curve is sharply down and 91-182D T-Bill cut of yield is at 8.10%. There are also signs of role change between the Government and RBI. Government is now seen addressing issues related to inflation and it is expected from RBI to turn pro-growth. It is in order for RBI to shift operative policy rate to minimum 7.75% when 182 days T-Bill yield is at 8.10%; almost flat at overnight call money rate. As said before, RBI may need to deliver either 50-75 bps CRR cut or 25 bps rate cut to drive operative policy rate below 8%. The recent economic data of headline CPI and IP are into favourable trending for RBI to act on policy rate instead of cosmetic 25 bps CRR cut. MARKET PULSE already initiated buy recommendations in 10Y Bond yield above 8.17% and receive OIS at 7.62% in 1Y and 7.02% in 5Y on expectation of 25 bps rate cut on 30^th October. RBI has the option to maintain deficit system liquidity below 1% of NDTL through OMO Bond purchases in Money Market and dollar purchases in the FX market. For now, let us watch 10Y Bond yield at 8.12-8.17%; 1Y OIS at 7.55-7.62% and 5Y OIS at 6.95-7.02% with bias into lower end. The near term objective post monetary policy is at 7.95%; 7.45% and 6.90% respectively. The strategy is to hold on to “longs” entered at/above 8.17% (10Y Bond); 7.62% (1Y OIS) and 7.02% (5Y OIS) and add at 8.17-8.20%; 7.62-7.65% and 7.02-7.05% respectively for the set near term objectives.

Equity market

It was period of profit-booking driving NIFTY from below set near term objective at 5830 (high of 5815) to strong short term support at 5630 (low of 5637) before close of week at 5676. This 200 point correction (as counter trend move) is seen as good post 1000 point rally from 4770 since first week of June. FII flows which drove the market up from 5200 post QE3 and domestic reforms are seen to be in wait-and-watch mode till current correction process is out of the way. It would need combination of off-shore and domestic investors to drive NIFTY above 5830 into set short term target at 6330. The major trigger for this move will be on Parliamentary approval, rate cut from RBI and confirmation of rupee bullish trend into 50-51. The risk factor for move below 5630-5580 is from inability of UPA to get Parliamentary approval on reform bills cleared by the cabinet; failure there is seen as very low risk at this stage. Let us now watch strong short term support zone at 5660-5580 and near term resistance at 5750-5830. The strategy is to hold on to “longs” entered at 5660-5630 and add at 5610-5580 if seen for near term objective at 5800-5830. Beyond there, RBI’s shift into growth supportive monetary stance and dilution in sovereign rating downgrade risk will trigger extended gains beyond 5830 into 5950/6175/6325.

Commodity market

Gold is boxed within set near term support at 1750-1765 (low of 1752) and resistance at 1790-1805 (high of 1795) for close around 1770. The consolidation in USD Index at 79.40-80.20 is holding Gold within the set support and resistance zones providing good two-way trading opportunity. What next? The directional bias for USD Index is for test/break below 79.40 for 79.10-78.60. This will set up bullish bias in Gold for 1790-1805 but would need weak dollar below 78.60 to drive Gold into short term target at 1835-1860 ahead of September 2011 high of 1920. On the other hand, if investor risk-aversion drives USD Index above 80.20 into 80.70, Gold will get into extended correction phase into 1730. For now, let us watch consolidation at 1750-1800; test/break either-way is not expected to sustain. Strategic investors can absorb extended correction into 1730 with tight affordable stop for 200 dollar rally into 1920.

NYMEX Crude continues to stay in consolidation mode within the now familiar 88.50-93.50 range (low of 88.21 and high of 93.66) before close below 92.00. NYMEX crude is seen to have already hit a medium/long term “top” at 100.42 (post QE3 high on 14^th September) and in the process of unwinding its rally from 77.28 to 100.42. The expected rally post QE3 has not materialised. The bearish expectation on early turnaround in Global economic growth and indigenous production of alternate fuel by most countries dependent on imported fuel will cut demand-push support for the crude. If USD Index can hold on to its short term support at 78.60, there are no factors to turn bullish on Crude. The short/medium term bias is therefore for gradual reversal below near term support at 87.50-86.50 ahead of 83.50. For now, let us continue to watch consolidation at 88.50-93.50 with bias into 87.00. It is a good risk-reward for strategic investors to stay “short” in NYMEX Crude in two lots at 93-94 and 99-100 with stop above 101 for 78-83.

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