Weekly report for 26-30 November 2012

MARKET PULSE: Weekly report for 26-30 November 2012

Political resistance to reforms is big risk factor for the Indian economy and asset markets

There is little optimism at the start of winter session of the Parliament. There is strong resistance to financial reforms cleared by the Government which was expected to sail through smoothly. It is possible that at the end, these bills will go through but the concern will be on the future. The ability of the Government to push other financial and non-financial reforms is in serious doubt. The bottom-line is that conflicts in growth-inflation dynamics is there to stay for extended period of time and the system may need to stay with elevated twin deficits. Given these strong forces in play, shift into growth supportive monetary policy may be delayed. At this stage, external cues stay favourable on hope of revival in growth, downtrend in inflation and shift into favourable monetary policy stance. This favourable tailwind may turn reverse in the absence of political consensus on reforms which will open up risk of downgrade in sovereign rating. The system is at very critical stage in a make-or-break situation and the trigger will be from the outcome from the Parliament. Over all, the future (and well being) of the Indian economy and its asset markets is in the hands of political opposition and the ability of the ruling UPA to reach consensus on economic reforms. There is no clarity on the way forward but the journey is expected to be rough and tough. The asset markets are already weak. 10Y Bond yield is up from above 8.10% into 8.25%; Rupee is down from 51.35 to 55.60 and NIFTY down from below 5830 to above 5580. The bullish expectation on the economy (and its markets) since mid September into October Monetary policy ahead of winter session of Parliament is diluted now with risk of reversal into bearish set up into the future. While Indian assets are seen to be under-valued at current levels, it is not clear whether the worst is yet to come! The financial world (and global investors) considers political risk as major hurdle for its appetite for India and it is high time for UPA and NDA to get this risk factor out of the mind for the well-being of Mother India and revival of Indian economy. The Prime Minister has already pleaded to the Opposition not to punish the country and it would be politically incorrect for the Opposition NDA to stay stubborn to place “self-interest” ahead of “pride of the country”. Let us see how things unfold. What is the impact on Indian asset markets?

Currency market

Rupee has already unwound most of its September/October rally from 56.03 to 51.35 to hit a low of 55.60 before weekly close at 55.54. Rupee would have hit 56.03 (and into historic low of 57.32) but for dollar supplies from RBI and sharp reversal in USD Index from below 81.50 to above 80. The demand for dollars in the off-shore market has stepped up bearish momentum on rupee; 3M NDF dollars which was trading at discount of 20-30 paisa (to domestic OTC/ETF) is now trading at par/premium; i.e., 3M forward premium in NDF market which was at 4.0-4.5% (as against 6.5-7.0% in domestic OTC/ETF) is now at 6.0-6.25% aligning with domestic OTC/ETF. It is seen that while off-shore investors have greater comfort on investments in bonds and equity market, they are seen to hedge resultant exchange rate risk in the NDF market. This risk factor was highlighted in MARKET PULISE looking for outperformance of NIFTY over rupee exchange rate. Since disappointment in October Monetary policy, MARKET PULSE urged importers to stay covered on short term imports. In the intra-week update on the Twitter, it was considered 55.60-56.10 as worst case for rupee and urged importers to unwind short term import cover and exporters to start hedging 12M receivables with the strategy to reinstate import hedge on pull-back into 54.60 or break of 56.20. USD/INR traded high of 55.60 on spot and 58.60 on 12M. What next? Rupee will be under pressure till political risk is out of the way. During this time, rupee’s traction with Euro gains will be diluted while pressure on rupee will be more on reversal in Euro gains; dollar supplies in the forward market will be cut. It will be dollar demand driven mode in the cash/spot market with importers in a hurry to hedge short term imports. Having said these, 12M forward dollars at current level looks good for exporters to cover long term receivables; forward value of 58-60 is seen good to cover long term exports in phases given the expectation of long term spot rupee range at 45-60. For the week, let us watch consolidation at 55.10-55.60; break here will open up swift extension into 54.80-54.60 or 55.90-56.10 for near term consolidation at 54.60-56.10. Rupee weakness into 55.60-56.10 will be stretched and would look for strong arm tactics from RBI and the Government to protect this zone to prevent its adverse impact on the Equity and Bond market. The strategy is not to stay long dollars at 55.60-56.10 and would be prudent to cover short term imports at 55.10-54.60. At this stage, would stay neutral on break-out of 54.60 or 56.10; extended weakness beyond 56.03 into 57.32 will bring gloom and doom on the Indian economy and its asset markets. There is immediate need to establish rupee stability (with bullish undertone) till issues related to trade (and current) account deficit is addressed.

USD Index failed at set reversal point of 81.35-81.50 (high at 81.45) to meet its first objective above 80 (low of 80.13) after pass through of strong support at 80.70-80.85. This drove Euro up from lower end to higher end of set 1.2665-1.2915 range. In the intra-week update on the Twitter, we revised the range into 1.2825-1.3175 with immediate objective at 1.30. Since then, Euro has rallied by over 300 pips from 1.2660 to 1.2991. What next? USD Index is set for extended weakness into 79.60 ahead of 79.10-78.60. In the meanwhile, Euro is expected to extend its rally into 1.3140-1.3170 to complete 500 pip rally from 1.2660. It is good for exporters to hedge long term Euro receivables at 1.3140-1.3170, keeping room for adding below 1.34. Euro is set to get into consolidation mode at 1.29-1.34 into the immediate term. For the week, let us watch 1.2915-1.3140 with extension limited to 1.2865-1.3190. The strategy is to hold on to long Euros with trail stop below 1.2915 for 1.3140-1.3190 and switch sides here with tight stop on break above 1.3215 (for reinstatement of longs at 1.2915-1.2865 for 1.3365-1.3390).  

USD/JPY got into consolidation mode after completion of over 350 pip rally from 79.06 to 82.82. We did not wish to chase gains into 82.65-82.90 where we asked to unwind longs and stay short for correction into 82.15-81.65 before up into 83.25. What next? No change in view as we look for consolidation at 82.15-82.75 with extension limited to 81.65-83.25. The near term outlook is for consolidation at 81.75-84.25; while the bias is up, break either-way difficult to sustain.

Interest rate market

10Y Bond has traded back-and-forth between 8.10-8.25% range; fell from 8.23 into 8.11% on run into October Monetary policy; post no rate cut stance of RBI and worries on reforms, yield is now up from 8.11 to 8.23%. OIS rates have tracked bond yield trading back-and-forth between 7.55-7.80% (1Y) and 7.0-7.20% (5Y) and now at the higher end. What next? Cues are mixed on interest rate direction with risk of slippage in fiscal deficit above 5.8% and strong downward pressure on GDP growth below 5.5%. RBI also cannot afford to cut policy rates when rupee exchange rate is under pressure. Here again, political risk (on reforms) comes in the way for RBI to deliver rate cut on or before January 2013 Quarterly review of monetary policy; need to stay neutral on rate cut till financial reform bills are through in the Parliament. On the other hand, system liquidity is comfortable despite over Rs.1 Trillion draw-down from Repo counter with excess SLR holding estimated to be at over 4% NDTL (over Rs.2.5 Trillion). This “gap” is either funded in the CBLO market or out of deposits. The monetary policy action in the near term may be through aggressive OMO Bond purchases. Taking all these together, 10Y Bond yield should stay below 8.25%; so are OIS rates below 7.80% in 1Y and 7.20% in 5Y; trigger of political risk  on the economy will drive bond yields and OIS rates up which we don’t bring into the radar now. For now, we will continue to track 10Y Bond yield at 8.18-8.25%; 1Y OIS rate at 7.72-7.80% and 5Y OIS rate at 7.12-7.20%. While we stay neutral on break-out direction, will not prefer to stay “short” at/above 8.23-8.25% (10Y Bond); 7.78-7.80% (1Y OIS) and 7.18-7.20% (5Y OIS) where risk-reward (for staying short) does not look favourable at this stage. Strategic investors who have traded end-to-end of said short term range can stay invested at these levels with tight stop on conclusive break of set higher ends.

FX premium was driven largely by exchange rate play with very little play from interest rate. The volatility in exchange rate from 56.03 to 51.35 to 55.60 provided back-and-forth move between 6.15-7.15% (3M) and 5.35-6.15% (12M) and is now at the lower end tracking bearish set up on rupee. What next? Given the firm interest rate outlook in the near term and seeing 55.60-56.10 as worst case for rupee, MARKET PULSE advised to unwind received book at 6.15-6.0% (3M) and 5.40-5.25% (12M) and switch sides there to open up “paid book”. For now, we watch 6.0-6.5% in 3M and 5.35-5.60% in 12M; bias is for test/break of higher end in the immediate term. The strategy is to retain the “paid book” (enjoying decent carry of 7.5%); will exit paid book on rupee weakness beyond 56.10 or spot rupee gains into 54.60.

Equity market

NIFTY traded in consolidation mode between sell zone of 5640-5670 (high of 5643) and strong support at 5580-5530 (low of 5549) before comfortable weekly close at 5626. Despite strong bearish set up on Bond and Rupee exchange market, NIFTY held well on FII support and increase in investment limit for LIC, largest domestic institutional investor in the market. What next? There are no strong bullish cues at this stage. There is risk of withdrawal of FII support for equity market. If the investors have to choose from Fixed Income and Equity assets, there is good chance of double-digit return in Bonds and significant downside risks in equity assets. There are lot of risk factors in play such as political consensus on reforms, sovereign rating downgrade, slippage in growth, overshoot in fiscal deficit, elevated trade deficit, high dependence on external liquidity, elevated inflation, possible delay in shift into growth supportive monetary stance etc. For now, we will watch 5550-5670 and stay neutral on break-out direction; break either-way will be good for 150 points either into 5400 or 5820. The strategy is to trade end-to-end of 5550-5670 with stop/double reverse for 5400 or 5820. Strategic investor can look to reinstate investment by buying the first lot (of the three) at 5580-5550 and watch momentum around 5670.

Commodity market

Gold has now completed the first round of rally from 1705-1690 into 1750-1765 (high of 1754) and looks good for extension into 1790-1805 in the immediate term while 1735-1720 stays firm. The demand for Gold is there to stay into near/short term with medium term objective for revisit to recent high of 1920. For now, we watch 1735-1790 with extension limited to 1720-1805 with bias into higher end. The strategy is to hold to “long” position with trail stop below 1735 for 1790.

NYMEX Crude traded end-to-end of 85-90; up from 85.02 to 89.80; down into 86.17 before close of week at 88.28. The moves were driven by sharp reversal in USD Index and news out of West Asia. The cues for the immediate term are mixed; weak dollar should provide support while resolutions in the West Asia crisis will exert downward pressure. For now, will continue to watch strong resistance at 89.50-90.00 while 86.50-85.00 staying firm. The near term outlook is mixed either for shift into 88-93 consolidation or revert to bearish trend into 82.50-80.0. It will be good risk-reward to sell in two lots at 89.50-90.0 and 92.50-93.0 with tight stop for 82.50-77.50.

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

Weekly report for 19-23 November 2012

MARKET PULSE: Weekly report for 19-23 November 2012

Gloom and doom in global asset markets on serious concerns over growth and fiscal deficit

There is Tsunami kind of headwinds on growth in most of the global economies with signs of recession and stagflation. Western bourses are weak; DJIA is already down from October 2012 peak of 13622 to 12471, sharply down by over 8.7% at an alarming annualised rate. The worst is yet to come; trend is bearish for further extension into 12035 ahead of November 2011 low of 11232. The investment appetite on western bourses is weak as investors seek to stay invested in safe-haven assets of sovereign bonds and Precious and Base metals. There is flow of investments from the West to the East, into select Emerging markets. India is not seen to be a favoured destination in the BRICS bloc. There is risk of India being displaced from this bloc and replaced by other smaller economies which have better growth prospects without huge downside risks on fiscal deficit, inflation and Balance of Payment. Indian economy is facing strong headwinds across all fronts. The political strength is weak and fragile; monetary environment is not supportive to address issues relating to growth and fiscal deficit; macroeconomic fundamentals are weak with high risk of GDP growth below 5.5% and fiscal deficit above 5.8%; inflation is stubbornly high at 7.5% despite over 3 years of hawkish monetary policy stance. There is serious concern on high Trade/Current Account deficit with risk of move above 4% of GDP by end of FY13. The market has already taken note of these negative factors; NIFTY is down below 5580 from recent high of 5815 and rupee down from recent high of 51.35 into 55.20. Exchange rate and Equity market reflects the health of the economy; strong bearish set up on Indian exchange rate and equity market is not good for the Indian economy and will trigger pull-out of investments from India to other better destinations. This is the major cause of worry for the Indian economy and markets at this stage.

What is wrong in India? The Parliament, Government and RBI are in different directions. All stake holders are aware of the issues relating to growth, twin deficits and inflation. The peers do not have issues relating to twin deficits and inflation. The ability to address growth through loose monetary policy provides strong support to their asset markets to dilute the impact from headwinds. Governments and Monetary Authorities are together in fighting growth pressure and restoring investor and consumer confidence. The negative real interest rates in most economies are not seen as risk to inflation. But, India is different and seen as outlier, struck in serious conflict between growth and inflation dynamics. The political and monetary environments are not seen capable to revive weak macroeconomic dynamics. The solutions to get back into shape are simple and straight forward. When things are complex, the best is the common-sense approach. It would need combined strengths of the Government, Parliament and Monetary Authority to get the Economy back on track; revive investor and consumer confidence and get the asset markets into bullish mode. The immediate need is to mobilise one-off revenues to maintain fiscal deficit at lower end of 5.3-5.8% tolerance zone; shift into dovish monetary policy stance to prevent slippage in growth momentum below acceptable zone of 5.5-6.0%; remove supply-side bottlenecks by reviving domestic investment appetite; extend liquidity support to core sectors of the economy and open up investment opportunities for off-shore investors to drive rupee into lower end of 45-60 range. The priority on inflation control for extended period of time has inflicted severe damage on growth and fiscal deficit; shift of priority to growth is long overdue which would remove strong downward pressure on rupee exchange rate and equity market. It is easier said than done at this stage, given the absence of unanimity in implementation and execution. “Together to move forward” is the mantra that the Indian economy and asset markets need at this time. Let us study the impact on asset markets in the near term?

Currency market

Rupee is already down by 7.5% from recent high of 51.35 on weak domestic cues. Rupee lost traction with gains in the Euro while weak Euro weighed heavy on the Rupee which is now seen as the most underperforming currency. MARKET PULSE highlighted the risk of extended weakness beyond 55.10-55.20 into 55.60-56.10. The intra-week update urged importers to cover near/short term imports on rupee correction into 54.80-54.60 (intra-week high of 54.62) and looked for RBI’s support at 55.10-55.20 (low of 55.19) and supplies from exporters to sell 12M dollar receivables at 58.05-58.20 (spot at 55.10-55.20). While weekly close below 55.20 (at 55.17) is comfort but close above 54.80 is bearish into the immediate term. It took 20 trading days for rupee gains from 56.03 to 51.35 post Government action on fuel price hike and other reforms while unwind of more than 80% of this gain has taken 27 trading days; such is the volatility in rupee exchange rate which should be a serious concern for RBI. The outlook for the week is not in favour of rupee. The immediate focus is at 55.60 while Euro stays above 1.2650; extension into 1.2500 will bring the focus into 56.10. The greenback will find strong support at 55.10-54.80 window where importers will be seen in hurry to cover near/short term dollar payables. On the other side, there will be supplies from exporters to cover 12M dollar receivables around 58.50 (spot at 55.60). It makes sense to cover 12M exports at 58-60, higher end of long term spot rupee range of 45-60. It is impossible to catch the tail or head for large amounts; hence it is prudent to phase out hedging activity. There is also added pressure on rupee from NDF market with higher demand for forward dollars in the off-shore market, squeezing the spread in 3M dollars from above 25 paisa to below 10 paisa. For the week, let us watch 55.10-55.60 with extension limited to 54.80-56.10. It would need strong support from RBI to get the focus back into 54.60. Strong signals from the Parliament to support the Government on reforms will get the focus back into 53.20; short term range is seen at 53-56 at this stage.

USD Index found good support above 80.85-80.70 support zone (low of 80.90) to hit the set objective at 81.35-81.50 (high of 81.45) before close of week at 81.19. In the meanwhile Euro rallied from 1.2665-1.2635 (low of 1.2660) to meet set objective at 1.2790-1.2820 (high of 1.2801); thereafter expected 100 pip correction from here into 1.2710-1.2685 held at 1.2688 before close of week at 1.2745. What next? Euro is seen set at 1.2650-1.2800 range; break either-way will trigger 150 pip rally into 1.2500 or 1.2950. The bullish undertone in the USD Index and USD/JPY looking heavy at 81.50-82.00 could trigger test/break of 1.2650. On the other hand, extension of gains in USD/JPY into 84 will trigger test/break of 1.2800. While staying neutral on the break-out direction, slight bias is in favour of extended Euro gains into 1.2935-1.2950 shifting the short term focus into 1.34. The strategy is to trade end-to-end of 1.2650-1.2800 with stop/double reverse on conclusive break thereof.

USD/JPY traded perfect to the script; the rally from 79.15-78.90 buy zone hit the 81.45-81.70 target; expected correction from there held at 80.90-80.65 support (low of 80.87) before close of week at 81.30. USD/JPY is at mid-point of the 79-84 short term range and the bias is clearly into the higher end while 80.90-80.65 stays firm. While conclusive break above 81.45-81.60 will get the focus into 84.00, there is risk of sideways trading at 80.65-81.65 before moving up. The strategy is to hold “long” entered at 80.90 with stop below 80.65 for 82.00. We will watch price action at 81.65-82.00 to get firm grip on the next direction.

Interest rate market

10Y Bond found solid support above 8.22% (at our buy zone of 8.22-8.25%) and reversal from there met with good resistance above 8.17% (ahead of sell zone of 8.17-8.15%). The cues into the near term are mixed; good buying interest at 8.22-8.25% on rate cut hopes on or before January 2013 while pipe-line bond supplies, overshoot in market borrowing and threat of cut in HTM limit from 25% to 23% (in alignment with SLR) would halt run-away rally in the Bond market. There is also hope of OMOs from RBI on spike in 10Y yield above 8.22%. For the week, we continue to watch 8.17-8.22%; test/break either-way difficult to sustain. The strategy is to stay invested at 8.22-8.25%; while traders can look to book profit at 8.18-8.15%, strategic investors can hold for March 2013 target at 8.05-8.0% which should hold.

OIS rates were in tight trading range of 7.70-7.75% (1Y) and 7.10-7.15% (5Y). While we look for consolidation within the said range in the immediate term, near term bias is for break of lower end into 7.55% and 7.0% respectively. For the week, let us continue to watch 7.70-7.75% in 1Y and 7.10-7.15% in 5Y. The strategy is to stay received at/above 7.75% and 7.15% for the set objectives.

FX premium eased from higher end into lower end of set ranges of 6.15-6.65% (3M) and 5.4-5.7% (12M). In the intra-week update, we reviewed the range into 6.0-6.5% and 5.25-5.5% respectively and suggested to unwind received book at lower end and initiate paid book for the ALM play. The combined impact from interest and exchange rate play will exert downward pressure on the premium in the immediate term and await reversal in exchange rate play for bounce from lower end. For the week, let us watch 6.0-6.5% in 3M and 5.25-5.5% in 12M. The strategy is to trade end-to-end; test/break either-way not expected to sustain.

Equity market

NIFTY fell sharply from intra-week resistance window of 5750-5780 (high of 5752) to hit set buy zone of 5610-5580 for further extension into 5559 before close of week at 5574. MARKET PULSE considered 5610-5580 as good re-entry point (for the first lot) after chasing 150 point rally from 5630-5580 into 5780-5830. What next? The immediate term outlook is weak as weekly close below 5580 will take bulls out of the street. The global bourses also do not provide support driven by uncertainties in the US and Euro zones. The domestic cues are worse, hence may need to allow deeper correction for better value buying. It is important for NIFTY to get back into familiar trading range of 5580-5780 to knock out bearish momentum. The immediate support is at 5568-5559; test/break here will quickly extend weakness into 5510-5475 where it is good for strategic players to buy the second lot holding the final lot for 5415-5400 with stop on break here. There are strong resistances at 5610/5640/5670 which should hold to retain bearish undertone into 5400. For the week, let us watch 5510-5610 with extension limited to 5475-5640. The strategy for traders is to sell at 5610-5640 and buy at 5510-5475 with tight stop on break thereof.

Commodity market

Stability in USD Index (within 80.85-81.50) pushed Gold into sideways trading mode between set resistance at 1735-1750 (high of 1737) and support at 1710-1695 (low of 1704) before close of week at 1713. We continue to watch sideways trading mode in the immediate term with bullish near term outlook into 1765-1790. The lack of confidence in the recovery in global economy will keep commodities firm, precious metals outperforming others. For the week, let us watch 1695-1745 with initial bias into lower end which should hold for swift rally into higher end, not ruling out extended gains into 1765-1790. The strategy is to buy dips into 1705-1690 with stop below 1680 for set objective.

NYMEX crude is struck in tight trading range of 84.50-87.50 (low of 84.57 and high of 87.01); despite tensions in the Middle East and bullish USD Index, stability in Crude signals strong bearish undertone into near/short term. We continue to stay with short term range of 75-90 with strategy to stay short at 86.50-89.50 with stop above 90 for 82.50/77.50/75.00. For the week, we watch 85-88; test/break of higher end is not expected to sustain while break of 84.50 will open up quick run into 82.5-77.5 in the near term.

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

  

intra-week and intra-day updates on twitter

The intra-week and intra-day reviews are uploaded on Twitter (handle: mosesharding). For better results, it is important to take note of views and ideas posted there which gives better idea on sudden twists, wild swings of the market.

It would make sense to read weekly report along with daily updates on the Twitter for better results. As you know, markets are dynamic impacted by sudden twists and turns in political, economic and monetary environment. Such events get reflected in the intra-week report on the Twitter.

Moses Harding 

correction on the date of weekly report

The uploaded report is for the week 12-16 November 2012 and not 19-23 November 2012 as mentioned.

Moses Harding

Weekly report for 19-23 November 2012

Global economies in fiscal crisis.......extended delay in growth recovery to haunt markets

It is fiscal crisis in developed economies (especially in the US and Euro zones) and some of the emerging economies (especially in India). It is difficult to make both ends meet when growth momentum is under pressure; revenues will be squeezed while it is difficult to cuts costs, thereby widening the fiscal gap. It is also difficult to bridge revenue gap through higher taxes while cutting unproductive expenses will not be populist. It may not be prudent to cut productive expenditures or investments when growth is under pressure; cut in public investments will also push private investors into risk-off mode. It is a vicious trap which US and Euro zones are unable to get out of it. The western economies are already in very loose monetary policy to spur consumption and investments but its beneficial impact on growth and employment is not yet felt despite low inflation, negative real interest rates and the Governments and Monetary authorities walking in the same direction. On the domestic front, the crisis is worse with elevated inflation generating conflict of interest between the Government and RBI. After series of action from the Government towards addressing fiscal crisis, there was expectation of rate cut action from RBI. Though, the market was seen to be divided in rate cut expectation, the post-policy reaction do not suggest this. The 10Y Bond yield was up sharply from 8.11% to 8.22%, 1Y OIS rate up from 7.55% to 7.80% and 5Y OIS rate up from 6.95 to 7.15%. So, most market participants if not all, expected or positioned for rate cut action. The impact on rupee is severe; down from 53.75 to 54.80 on a deep correction from recent high of 51.35. The equity market fared better; initial weakness into 5580 was followed by rally into 5780 on value buying from off-shore investors but momentum could not be held for correction into 5680. The consolation is from clear signals of rate cut action in January-March 2013 and thereafter prepare for shift of system liquidity from deficit to surplus in July-December 2013.

The markets will remain choppy and weak till resolutions to fiscal crisis are out of the way. The Obama administration has tough task ahead to avert fiscal cliff; not clear at this stage, how he is going to achieve without tax hikes and cut in unproductive expenses. The same is the case in the Euro zone; PIIGS countries can give shock while Germany and France are under severe growth pressure. The comfort is from the efforts to hold the Euro zone together.  On the domestic side, soft commodity prices would help but weak rupee stays spoil-sport. There is not much of pressure on the revenue side so far but addressing cost side with limited political support is an issue. The market will watch closely on the ability to raise money through disinvestments and other one-off items from sale of unproductive assets. It seems India is better positioned in addressing fiscal crisis than the developed economies. The major concern is from elevated inflation and possible delay in RBI’s shift to growth supportive monetary stance; need is to maintain operative policy rate at the lower end of LAF corridor, the Reverse Repo rate to spur growth, consumption, investments and remove supply-side bottlenecks. Over all, near term uncertainties continue to remain valid with no confirmation on sighting the light at the end of the tunnel. It is difficult at this stage to take short/medium term bullish outlook on lack of confidence on fixing fiscal issues and limited ability to get growth momentum back on track. What is the impact on asset markets?

Currency market

Rupee is sharply down from 5^th October 2012 high of 51.35 (into 54.80) wiping out 58% of its recovery from historic low of 57.32 (punched on 22^nd June 2012). During this period USD Index is up from 78.60 to 81.00 i.e., while the dollar is up by 3%, rupee is down by 6.7%. So, rupee woes are from combination of domestic and external cues. The domestic woes from issues relating to twin deficits and conflict in growth-inflation dynamics remain valid with risk of delay in resolutions till the Government and RBI walk in the same direction. Rupee is now seen as the most underperforming currency against its peers; it is not good for the pride of the Indian economy. What next? The dilution in bearish set-up on rupee will be from further downtrend in commodity prices, sustainable off-shore liquidity flow into debt and equity capital market and favourable monetary conditions triggered by downtrend in headline inflation. These conditions will lead to rupee outperformance against peers and dilute dollar bullish impact on rupee. It is also essential for USD Index to fail ahead of key resistance at 81.35 to remove pressure on rupee. What is in our control is to roll-out investor friendly policies and swift shift into growth supportive monetary environment. For now, let us watch next solid support for rupee at 55.00-55.10, risk of extended rally in USD Index into 82.00 will bring rupee focus into 55.60 ahead of 56.00-56.10. It is also important for rupee to take out immediate resistance at 54.30 for extension into 53.40-53.65. Despite the need to maintain stability in rupee exchange rate with bullish undertone to attract off-shore inflows and contain inflationary pressures, excessive weakness in rupee will delay improvement in macroeconomic stability; will look up to RBI for ensuring this. For the week, let us watch 54.30-55.10 and stay neutral on extension into 53.60 or 55.60-56.00; will have close watch on price action in USD Index at 81.35 and 80.20 for this directional breakout. The strategy is to trade end-to-end of 54.30-55.10 with stop/double reverse on break thereof.

Euro is down into lower end of set strong short term base at 1.2650-1.2750 (low so far at 1.2691). It is important for Euro to hold above 1.2650 to retain its short term bullish undertone; else, extended weakness into 1.2475-1.2500 will come into play. The immediate resistance at 1.2785-1.2800 has to be taken out to bring Euro bulls into street for further extension into 1.2875-1.2900. While ECB maintained “no rate cut” stance, there is build up of 25 bps rate cut which is keeping Euro under pressure. The “fiscal cliff” in the US has retained investors’ risk-off mode to add strength to the US Dollar. There is no clarity either-way at this stage but will keep the bias open for reversal in recent sharp fall in the Euro from 1.3169 to 1.2689. For the week, let us watch 1.2650-1.2900 with bias into higher end. The strategy is to trade end-to-end with stop/double reverse on break thereof. The earlier outlook for Euro strength into 1.3070-1.3170 stays valid.

USD/JPY traded perfect to the script; rally from 77.40 met the set objective at 80.65 and reversal from there met its target at 79.40-79.15. What next? USD/JPY has to hold above 78.85 to retain its bullish undertone for extension beyond 80.65; else deeper correction into 78.00-77.85 will come into play. For the week, let us watch consolidation at 78.85-80.65 and stay neutral on break-out direction. The strategy is to trade end-to-end with stop/double reverse on break thereof.

Equity market

The smart rally in NIFTY from set short term base at 5580 lost steam at 5780 ahead of set objective at 5800-5830; correction from there found support at 5680 for weekly close at 5686. The monetary policy jitters could not do much harm to equity market on good appetite from foreign investors. It would need strong domestic cues for extended bullish undertone beyond 5780-5830 while 5630-5580 stays firm. There is good value buying seen at 5630-5580 to retain bullish undertone into short term. For the week, let us watch 5630-5780 with extension limited to 5580-5830. It is traders market and considered good to buy at 5630-5580 and sell at 5780-5830 with tight stop on break thereof. There is no change in expectation of extended rally into 5980 on signals of monetary easing from RBI.

Commodity market

Gold has traded to the script; up from set buy zone of 1680-1665 (low of 1672) to meet set objective at 1735-1750 (high at 1738). What next? The growth concerns on the Global economy will add strength to Gold in the near term; thereafter possible resolution to the “fiscal cliff” and resultant shift into risk-on mode will extend rally in Gold. It is possible that Gold has already seen a near/short term base at 1672 for bull-run into immediate objective at 1790-1800. For the week, let us watch 1715-1765 with bias into higher end, and prepare momentum for extended gains into 1790-1800. The strategy is to buy dips into 1720-1695 with tight stop for set objectives at 1765-1790.

The reversal target in NYMEX Crude from above $100 (high of 100.42) is just short of final objective at 82.50-77.50 (low so far at 84.04). The bulls are already down and out on lower demand and efforts to be less dependent on imported CRUDE. The next objective is at 82.25 ahead of 77.30 not ruling out further extension into 75. This expectation is valid till 88-90 stays firm to set up near term trading range of 75-90 with bias into lower end. For the week, let us watch 77.50-87.50; strategy is to sell in two lots at 86.50-87.50 and 89-90 with tight stop for 77.50-75.00.

Interest rate market

10Y Bond yield traded end-to-end of set “inner ring” of 8.17-8.22 (within the “outer ring” of 8.15-8.25%) before close of week at 8.22%. The undertone into near term is bearish driven by week-on-week auction supplies, risk of overshoot in market borrowing and fear of cut in HTM limit from 25% to 23%. On the other hand, rate cut expectation in January-March 2013 provides support. There is strong debate on the need to have HTM retention limit at 25% while SLR limit is 23% with availability of refinance from RBI Repo counter for over 23%. RBI may “time” the cut in HTM limit along with rate cut actions to prevent extended weakness in 10Y Bond yield above 8.25% and arrest excessive gains below 8.10% to build time value between overnight rate and 10Y Bond yield; overnight rate at 7.50% and 10Y Bond yield at 8.10% will look alright. This sets up short term range play at 8.10-8.25%. For the week, let us watch 8.17-8.25% with bias into higher end. The strategy is to stay invested at 8.23-8.25% for 8.18-8.17%. It is possible that RBI would open its OMO window on extended weakness beyond 8.25%. It is also good time for Banks to fill shortfall in HTM for good yield pick-up.

OIS rates too traded end-to-end of set range of 7.72-7.80% (1Y) and 7.07-7.15% (5Y). It was also considered not safe to stay “paid” on test/break of higher end; test/break there could not sustain for close at 7.77% and 7.14% respectively. Now, focus will shift into 1X5 play; while 1Y is expected to stay below 7.80%, there is risk of extension in 5Y into 7.20% to cut 1X5 spread to 55-50 bps (from current 63-65 bps) into near term. For the week, let us watch 1Y at 7.70-7.80% and 5Y at 7.10-7.20%. The strategy is to stay received in 1Y at 7.80% (for gradual move into 7.70%) and pay 5Y at 7.12-7.10% (for 7.18-7.20%).

FX premium has nicely settled into trading range within 6.25-6.75% (3M) and 5.35-5.75% (12M); bullish momentum into higher end is arrested by strong exchange rate play while there is strong support on the lower end from interest rate play. The risk of test/break of higher end will be on sharp reversal in USD/INR from 54.80-55.10; break here (into 55.60-56.10) will trigger test/break of lower end. For the week, let us watch 6.15-6.65% (3M) and 5.4-5.7% (12M). The strategy is to trade end-to-end with tight stop on break thereof. It will be good to stay paid on test/break of lower end for ALM play and interest arbitrage for importers.

Wish you all a very happy Diwali and prosperous year ahead........................Moses Harding