RBI retains feel-good vibes but suspect on way forward

FM & RBI now seen together to revive growth; markets suspect!

It is tough call for RBI to prefer growth ahead of inflation when strong inflationary pressures have emerged from fuel price hike, uptrend in commodity prices, widening current account deficit and bearish undertone on rupee exchange rate. Yes, there is need to resist (and dilute) the strength of the headwinds to growth through moderate (if not dovish) monetary policy with the need to be seen together with the Government and not letting them walk alone; this is the message RBI had chosen to convey in its January 2013 quarterly policy review. RBI chose to deliver to the gallery (that includes the Finance Ministry) on policy rates and topped it up with pleasant surprise by 25 bps reduction in CRR to pull Banks into rate cut mode!

The significant take-away for the way forward are the following: (a) sharp downward revision in FY13 WPI inflation target to 6.8% (from current 7.5%); (b) moderate downward revision in FY13 GDP growth target to 5.5% (from current 5.8%); (c) signal of availability of limited band-width in monetary policy to support growth and (d) injection of liquidity through CRR cut (and not with OMOs) to resist run-away gains in the Bond market. RBI has also stressed the need to push headline WPI inflation into its comfort zone of 4.0-4.5%. Now that the “bar” on inflation is raised to 6.8% for FY13 (and into 4.0-4.5% in due course), aggressive rate cuts may not be on cards. RBI may choose to retain LAF corridor at 6.50-7.50% with another round of 25 bps cut in March or April 2013 and await dilution in impact on inflation from twin deficits. RBI will now expect Banks to cut the Base Rate (and BPLR); the need arises from delivery of unexpected CRR cut when deposit rates are unlikely to fall till end of March 2013 in the 3-12M tenor despite rate cut. Banks may need to front-load rate cut actions in anticipation of significant downtrend in deposit rates from April 2013 along with another round of 25 bps cut in April 2013.

The asset markets will be back into consolidation mode with focus on Budget FY14 and look for triggers from there for RBI’s policy stance in the mid quarter review in March. 10Y bond yield has now strong resistance at 7.80% while weakness into 7.90-7.95% on pipe-line supplies and absence of OMO purchases will set up good investment opportunity. NIFTY should extend its gains into 6180 with strong base at 6030-6080 support zone. Rupee is now off from the risk of extended weakness into 53.95-54.10 while preparing for gradual appreciation into 53.10-53.35 resistance zone. Over all, it is “feel-good” monetary policy to asset markets and stake holders with great relief to the Government to get RBI’s support to add momentum to their aggressive stance on reforms and fiscal consolidation. The intent provides comfort and confidence while impact on twin deficits is uncertain and suspect!

Moses Harding

Weekly report for 28JAN to 01FEB 2013

MARKET PULSE: Weekly report for 28 January to 01 February 2013

Exchange rate market:

USD/INR was boxed between set intra-week support at 53.10-53.35 and resistance at 53.85-54.10; initial rupee rally from 53.95 held at 53.37 for sharp reversal into 53.89 before close of week at 53.68. The strong bearish set up on rupee is indeed diluted. The major risk factors of downgrade in sovereign rating and high Current Account deficit are not very relevant post serious efforts to address concerns on twin deficits and to attract capital flows; dollar bulls have now revised the worst case (for rupee) to 56 from earlier expectation of 58-60 while rupee bulls have pulled 51 into the radar. MARKET PULSE had set rupee range for 2013 at 51/53-56/58 (51-56 on improvement in macroeconomic fundamentals or 53-58 on policy inaction) and had considered good to sell 3M forward dollars at/above 56.25 and 12M forward dollars at/above 58.50 with intent to cover exports on spot weakness into 55.10-55.60 and urged importers to stay aside to allow correction into 53.60-54.10. Since then, rupee recovered sharply from intra-2013 low of 55.38 to high of 53.37 in January itself; such is the swift reversal in sentiment triggering sharp rally in rupee. The “lows” of rupee seen in 2012 at 55.88-57.32 are seen to be firmly behind in the short/medium term while pulling 2012 high of 51.35 (seen on 7/10/12) into the radar. The near term trading range for USD/INR is seen at 52.60-54.10 for possible short term range play within 51-54. The pressure on spot rupee is gone with accelerated dollar supplies from the forward segment; high FX premium and rupee bullish sentiment will knock out dollar demand in the forward market. It would be an extended rupee bull-run on rate cut action from RBI. For the week, let us watch 52.85/53.10-53.60/53.85 with bias into lower end. The trading range for the week is expected to be at 53.10-53.85/54.10 (on pause mode) and 52.60/52.85-53.60 (on delivery of 25 bps rate cut). The strategy is to retain “short dollar book” and add on spot weakness into 53.85-54.10 (3M at/above 54.60 and 12M at/above 57.00). Strategic traders can retain “short dollar” book entered at 53.95, add at 53.60-53.85 for 52.60-52.85.

EUR/USD held strong above set short term support zone of 1.3200-1.3250 (low at 1.3263) and moved sharply into near term objective at 1.3485-1.3500 (high of 1.3479); after back-and-forth moves between 1.3250-1.3350. MARKET PULSE has set 2013 support zone at 1.2950-1.3150 and looked for intra-2013 rally into 1.43-1.45. Since then, EUR/USD posted low of 1.2997 (on 4/1/13) for 500 pip rally in the first month itself. What next? EUR/USD has now shifted into higher trading range at 1.3250-1.3800/1.4300; tone bullish into higher end. For the week, let us watch 1.3350/1.3400-1.3750/1.3800; bias into higher end. Strategic players can retain “long Euro” book and add at 1.3300-1.3400 (with stop below 1.3250) for 1.38-1.43. It is also good to add on break of 1.3550 which would set up extended bullish run into/above 1.38. 

USD/JPY traded end-to-end of set near term range of 88-91 during the week; held strong at 88.03 for sharp rally into 91.19 before strong close at 90.90. It is an impressive (and strong) rally in USD/JPY since the September 2012 low of 77.11, pulling the 2010 high of 94.98 and 2011 high of 101.45 into the radar. MARKET PULSE has set intra-2013 objective at 92-95 but rally from 2013 low of 86.50 is strong (by 5.5% in less than a month). While it is easy to set targets in this one-way drive, it is tough to set support levels which can overshoot on profit-booking supplies. The near term range is now seen at 88-101 and looks good for another 10 big figures from current. For the week, let us watch 88.00/89.50-93.50/95.00 with bias into higher end. The strategy is to stay with bullish trend unmindful of extended correction and will be good to take monies off the table on move into 95 and allow deeper correction for re-entry.  

Interest rate market:

10Y Bond traded end-to-end of set weekly range of 7.81/7.83-7.88/7.90; down from 7.81 to 7.89 before close of week at 7.88%. MARKET PULSE had set intra-2013 target at 7.65-7.80% with strategy to hold on to “long book” entered at 8.10-8.25% for 50 bps intra-year rally and urged not to chase gains below 7.80% for correction back to 7.88-7.90; 7.93-7.95 and possibly extended weakness into 7.98-8.0%. The correction process has now met the first objective at 7.88-7.90 with the second one at striking distance while RBI’s pause mode on rates can hit the third objective which should hold. Let us watch consolidation at 7.83/7.85-7.93/7.95 into the policy and thereafter into 7.80-7.95/8.0 trading range. There are three options on hand: consolidation at 7.79-7.84 on 25 bps rate cut; 7.90-7.95/8.0 on pause mode and extended gains into 7.65 on surprise 50 bps rate cut. Having ruled out 50 bps rate cut, post policy trading range is seen firm at 7.80-7.95. The trading strategy is to retain “long book” entered at 7.88-7.89%, add in 2 lots at 7.93-7.95 and 7.98-8.0 for 7.80%. Let us review short term strategy post RBI policy but believe 7.60-8.10 will stay good for rest of 2013.

OIS rates in consolidation mode at 7.50/7.53-7.57/7.60 (1Y) and 7.10/7.13-7.17/7.20 (5Y); there is no strong momentum for break either-way. Let us continue to watch consolidation within this trading range into the policy and thereafter into 7.48/7.51-7.62/7.65 (1Y) and 7.08/7.11-7.20/7.23 (5Y); into lower end on 25 bps rate cut and into higher end on pause mode. The strategy is to stay received at 7.57-7.65 and 7.17-7.23 (in 2 lots; one into the policy and the other to add post-policy rally, if any) for lower end. There may not be strong momentum for sharp reversal below 7.48% and 7.08%.

FX Premium traded in sideways mode at 7.25-7.50% (3M) and 6.10-6.40% (12M) on conflicts between interest and exchange rate play and urged to stay paid in 12M on dips into 6.10% while allowing consolidation play in 3M around 7.35%. The tone is now bullish on strong exchange rate play and neutral on interest rate play. For the week, let us continue to watch consolidation at 7.25-7.50% (3M) and 6.10-6.40% (12M) into the policy. The trading range for 3M is retained at 7.25-7.50%; into lower end on 25 bps rate cut and higher end on pause. There is risk of extended rally into 6.60% in 12M on pause mode or not below 6.10% on 25 bps rate cut. The post-policy trading range is seen at 7.25-7.50% in 3M and 6.10-6.60% in 12M. The strategy is to stay paid in 12M into the policy and add at/below 6.10% for 6.60%.

Equity market:

NIFTY traded end-to-end of 6000-6100; initial rally into 6101 met with unwinding on dilution in rate cut hopes but held at 6007 before strong close of week at 6074. MARKET PULSE looked for strong support at 5980-6005 to hold and retained the set near term range of 5980-6180. The intra-January 2013 rally from 2012 close of 5905 into 6101 is sharp (3.3% in less than a month) and it was not a surprise to see good selling interest at 6100. The undertone into near/short term is bullish; FIIs interest is there to stay while domestic investors absorb extended weakness to stay invested for rate cut rally. For the week, let us watch consolidation at 6020/6045-6100/6125 into the policy and thereafter at 6100-6200 on 25 bps rate cut or into 5980-6080 trading range on pause mode. The strategy is to retain “longs” entered below 6050 and add at 6000-5950 if seen for 6175-6200.

Commodity market:

Gold lost steam at the first hurdle at 1695 (ahead of set reversal objective at 1710 for 1625) for sharp pull back to 1655 before close of week at 1658. The near term trading range is firmly in place at 1625-1695; break either-way will be sharp for 1575 or 1755 with mild bearish undertone. For the week, let us watch consolidation at 1625/1640-1680/1695 and stay neutral on break-out direction but do not prefer to stay “long” at higher end. The strategy is to trade end-to-end with tight stop/reverse on break thereof.

NYMEX Crude extended its bullish undertone into set objective at 97.00-97.50 (high at 96.92) while holding above set support at 94.50-95.00 (low at 94.95) before close of week at 96.10. The tone is bullish for possible extension into 99.50-100.50 before sharply down while above 93.00-94.50. For the week, let us watch 93.00/94.50-99.00/100.50 with immediate bias into higher end. The strategy is to unwind “longs” at higher end and switch sides there with tight stop for sharp correction into 90; near term trading range now seen at 90-100 with test/break either-way not to sustain.

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

Will RBI deliver to the gallery or yet another surprise?

RBI seen supportive to growth but suspect on delivery of rate cut

There is better clarity on macroeconomic environment since October 2012 Quarterly review. RBI had set certain benchmarks for shift into rate reversal cycle. There should be definitive signs of reversal in headline inflation; real interest rates should remain attractive to boost domestic savings; moderation in twin-deficits should lead (and pave way for) shift into moderate monetary policy; resolution to supply side bottlenecks to ease pressure on CPI inflation and dilution in strong headwinds from external sector on growth-inflation dynamics. RBI also considered low real interest rates as not major risk to growth. RBI is seen firm in its stance that loose fiscal and monetary policies cannot co-exist and derives comfort from tight monetary policy when fiscal policy is loose!

There has been lot of work done by the Government since then, having shown strong intent to address twin-deficits and accelerate off-shore flows into Indian debt and equity markets. The strong measures to contain fiscal deficit and to cut Current Account deficit will have beneficial impact on headline inflation over medium to long term. The intent to remove fuel subsidy, discourage non-essential imports, reduce consumption of essential imports, provide greater comfort to off-shore investors, preparation of road map for reforms in land, tax, legal to lift underperforming core sectors etc are some of the measures that would give good comfort (and confidence) to RBI who is seen to be prepared for moderation in monetary policy to support growth but there are minor irritants that RBI may not wish to ignore!

Policy rates: huge expectation build-up for 25 bps rate cut, will RBI deliver?

The market is seen to be very confident of rate action on 29^th January post weak November 2012IIP data and encouraging December 2012 WPI headline number despite retail CPI inflation print edged up into double-digit! The headline WPI inflation print at lower end of RBI’s tolerance zone of 7.0-7.5% and weak IIP numbers has built near consensus expectation of rate cut this time. However, concerns are from spike in retail CPI inflation print at above 10% and further pressure (in the near/short term) from fuel price hike and higher commodity prices. The headline inflation numbers are not going to trend into RBI’s comfort zone in a hurry. RBI is also seen comfortable with current interest rates; opening up of dollar swap window (and resultant elevated FX premium) will arrest sharp downtrend in 3-12M money market rates; rate cut at this juncture will only build steepness in the rate curve with downward shift in the near end tenors of overnight to 1 month. The benefit will accrue to those who run negative structural liquidity gaps (in the 1-28 day time buckets) while hurting those who provide liquidity in the shorter end. Taking these signals into account, stake holders have already given up expectation of 50 bps cut in policy rates with many in favour of 25 bps rate cut while some (minority, of course!) fear a pause from RBI. There is merit in RBI taking a wait-and-watch stance on the last quarter review of FY13 to get more clarity from Budget FY14 on growth and fiscal deficit estimates while staying fingers crossed on inflation and Current Account deficit. RBI cannot ignore the “price heat” on the ground for majority of the population and the need to maintain interest rates high till supply side bottle-necks are removed. It is a tough call to choose between 25 bps rate cut and pause mode. RBI has never delivered to the gallery and prefers a path which is best suited for the economy (priority over inflation control for long term beneficial impact on growth) rather than the markets. There are signs that FM is prepared to wait till moderation in fiscal position is sighted. The “aam aadhmi” factor and insignificant impact on short/medium term rates may warrant pause stance this time and defer rate cut to March/April with option to deliver one-shot 50 bps if irritant factors are out of the way. MARKET PULSE stay neutral unable to choose between the two while ruling out 50 bps rate cut, with gut feel expectation of pause!

Liquidity: no change stance on CRR

The reporting fortnight average Rs.75-80K Crore drawdown from LAF counter may not be a worry for RBI when system excess SLR is to the tune of Rs.5 Trillion. The concern for RBI will be on how to pull this excess into its books and divert the cash for on-lending to productive sectors. RBI would need cash (in its balance sheet) to fund its OMO Bond purchases and USD purchases to shore up its FC reserve position. RBI may prefer to deliver CRR cut in March mid-quarter review to cover tax outflows rather than now when the need is limited. It will be good for the Bond market if RBI prefers OMOs instead of CRR cut for liquidity injection. With most banks posting higher NIMs, the benefit from 25 bps CRR cut is insignificant at this stage. MARKET PULSE expects an unchanged stance in CRR.

Other agenda: concern on credit growth and divert liquidity to productive sectors

RBI’s is expected to address flow of credit (and liquidity) to productive sectors and development of vibrant corporate bond market. The current deposit and Credit growth is reflective of economic growth trend, deposit growth at 2.5 times and Credit growth at 3 times of the GDP growth. The concern is from excess SLR being funded out of deposits and not entirely from the Repo counter. There is general risk-aversion and good quality credit is at very low premium to sovereign yield, hence the pile up of excess SLR ahead of rate reversal cycle. The need is to make use of these funds through intermediaries (with better credit risk profile) with SLR status (if covered under sovereign risk). The development of corporate bond market needs active participation from commercial banks. Banks would need access to longer tenor source of funds being already under pressure funding SLR and longer tenor loan book with longer tenor deposits/liabilities. MARKET PULSE will look for some actions in these critical areas.

Post policy impact on markets:

The near term trading range is firmly in place; asset markets rallied in anticipation of 25-50 bps rate cut and has already unwound part of the gains on fear of RBI not delivering to expectations.

·       10Y Bond yield is expected to trade at 7.80-7.95%; into lower end on 25 bps cut and into higher end on pause. The tone of the policy will provide signals for directional break-out. While 7.80% is expected to stay firm, there is risk of extended weakness into 8% if investors choose to trim excess SLR for realisation of profit for FY13.

·       USD/INR trading range is seen at 53.10-54.10; into lower end on 25 bps cut and into higher end on pause. While bearish expectation on rupee is diluted on aggressive measures to cut Current Account deficit and to bridge the gap from capital account flows, risk of intra-2013 weakness to 56 will provide solid support to the dollar at 52.60-53.10. On the other side, weakness to 53.85-54.35 will look good for exporters to cover 3-12M dollar receivables.

·       NIFTY trading range is seen at 5980-6180; into higher end on 25 bps cut and into lower end on pause. The bullish undertone with intra-2013 target at 6400, weakness will find solid support at 5980-6005.

Let us see what RBI does; deliver to the gallery or spring yet another surprise!

Moses Harding

good times ahead for the Indian economy and markets

FM on over-drive to remove downside risks on the Indian economy and markets

The recent developments from the Finance Ministry are very encouraging, and have helped to remove the fear factor (and downside risks on the economy) from much talked about issues of policy paralysis, twin-deficits and growth. The Finance Minister has indeed taken the bull by its horns in the absence of RBI support. He had the worry that Government had to walk alone, which has now turned into a sprint to cut lag time. The efforts towards addressing top priority items are commendable. The immediate focus is on attracting long term off-shore investments while keeping the FII interest in tact; drastic reduction in fiscal deficit and squeeze the current account deficit gap; all these will help to contain inflationary pressures and prepare RBI for aggressive growth-supportive monetary stance. The move to link bulk fuel purchases to market rates and gradual price hike over 18 months period on retail purchases provides great comfort on fiscal consolidation over medium to long term. The international road-show of the Finance Minister post the deferral of GARR will help better bonding with the foreign investors to attract sufficient off-shore funds into debt & equity capital market to bridge the Current Account deficit. While the fuel price hike will cut consumption of essential import, the move to tax non-essential imports will help bridging the gap in Current Account deficit on its own. It is also seen that political consensus is reached on fiscal deficit; political resistance was not visible post the announcement of this strategic plan to remove fuel subsidy from the expense item of the Government’s balance sheet. If this consensus can extend to policy reforms, there is great story ahead for the Indian economy and markets.

The need of this aggression to address fiscal concerns emanate from limited bandwidth to extend monetary support to growth. The vicious cycle of growth-inflation dynamics and high dependence of one on the other is seen to be cut. The strategy now is seen to be clear; set the fiscal position in order to remove supply side bottlenecks and cut inflationary pressures on the system and demand favourable monetary policy from RBI, who has made it clear that loose monetary and fiscal policies cannot co-exist. The system may need to be prepared for a slow but steady shift into growth supportive monetary policy stance; however, timing of the shift is not clear but seen to be not later than April 2013. The high headline CPI inflation print and impact of cut in fuel subsidy on prices of essential items may push RBI to delay the shift into rate cut cycle. The Finance Ministry may see prudence in the approach for long term beneficial impact. Despite this disappointment from this short delay, there are lot of positive take-away from recent developments. There is significant dilution in the fear of sovereign rating downgrade; bearish set up on rupee exchange rate is diluted; signs of strong tailwinds from monetary and fiscal policies to growth momentum in the medium term and all these factors driving the investor (and consumer) confidence strongly up for capacity expansion of the Indian economy. There are strong signals that good times are not far away!

Moses Harding

Weekly report for 21-25 January 2013

MARKET PULSE: Weekly report for 21-25 January 2013

RBI’s dilemma on rates: over-drive on fiscal consolidation vs “aam aadhmi” headwinds

The build-up of strong hope (and expectation) of 25-50 bps rate cut on 29^th January post weak November IIP data, good December WPI inflation print and Governments’ aggressive stance on fiscal consolidation triggered strong gains in all asset classes from the lows’ of August-November 2012 driving NIFTY above 6050, Rupee below 53.85 and 10Y Bond yield into 7.80%. The response of the Government to dilute economic risks from inaction in policy reforms and high fiscal deficit is laudable. The implementation of fuel price hike, linking bulk purchases to market rates and gradual increase (over 18 months) for retail consumption is seen as innovative. The road-map for fiscal deficit into short/medium term provides great comfort that fuel subsidy will not be an expense item in the books of the Government post run-down of pipe-line fuel price hikes. The deferral of GAAR implementation beyond 2014 will be relief for off-shore investors. In short, the Finance Minister is seen to have delivered beyond expectations of the stake holders, including the RBI. The concern however is from elevated headline CPI inflation at over 10%, high (and unaffordable) prices of essential items at the ground for the majority of the population, and impact of fuel price hikes on primary articles which will add to burden on the Middle Class, Lower Income Group and the Poor, the “aam aadhmi”. RBI may want (and wish) to delay rate cut action till supply side concerns are addressed to control prices of food and other essential items; lower interest rates and resultant higher demand (and consumption) will lead to price pressure. RBI is also seen suspect on its ability to manage huge Current Account deficit, adding to downside risks on inflation and exchange rate. Having said these, RBI is indeed in preparedness for rate reversal cycle but seen to be not sure of the timing; it is better late than being early, if it could help the majority of the population! So, it is a 50:50 chance (on 29^th January) between delivery of 25 bps cut in policy rates and sticking to the pause stance till March/April policy reviews. RBI would also get more clarity by then, from FY14 Budget estimates on macroeconomic indicators and can afford to deliver larger dosage of rate cut if twin-deficits trend into right direction. It would be a big disappointment to stake holders if 25 bps rate cut is not delivered, most having already given up 50 bps expectation. But, RBI’s pause mode may not be bearish on markets when sentiment (and confidence) has improved significantly bringing the investors (and consumers) into risk-on mode.

What is the impact on markets?

Interest rate market

10Y Bond could not retain gains into 7.80%; weakness from intra-week low of 7.79% was sharp into 7.89% before close of week at 7.87%. What next? It would be a period of consolidation ahead of RBI’s rate decision on 29^th January. Till then, 7.80-7.83% will limit gains while not ruling out extended weakness beyond 7.87-7.90 into 7.95%. MARKET PULSE strategy to “unlock” investments at/below 7.80-7.83%  is now seen as prudent (and sensible) move post the long chase from 8.23-8.28%; it was considered high risk-low reward trade strategy to stay invested at/below 7.80% in the absence of clarity on 50 bps rate cut on 29^th January. The huge excess-SLR investments in the system to the tune of Rs.5 Trillion and pipe-line bond supplies from RBI (for rest of FY13 and into FY14) carries higher risk of sharp correction (and unwinding of excessive gains) in the absence of aggressive rate cut on 29^th January. For the week, let us watch consolidation at 7.81/7.83-7.88/7.90 not ruling out extended weakness into 7.93-7.95% which should hold. The trading range thereafter is seen at 7.80-7.90% on delivery of 25 bps rate cut or into higher range of 7.85-8.0% on pause mode; however, rate cut expectation in March/April 2013 will limit weakness beyond 8%. The strategy is to reinstate investment book in 2 lots at 7.88-7.90% and 7.93-7.95%; need to keep good appetite for extended weakness into/above 8%.

OIS rates traded perfect to the script; end-to-end of set weekly range of 7.50-7.60% (1Y) and 7.10-7.20% (5Y) before close of week at 7.55% and 7.15% respectively. It would be period of consolidation till RBI’s rate decision is out of the way. For the week, let us continue to watch the set ranges of 7.50-7.60% (1Y) and 7.10-7.20% (5Y); bias into higher end not ruling out extended rally into 7.63% and 7.23% which should hold. The trading range thereafter is seen at 7.45-7.55% (1Y) and 7.05-7.15% (5Y) on delivery of 25 bps rate cut or into higher range of 7.55-7.70% (1Y) and 7.15-7.25% (5Y) on pause mode; rate cut expectation in March/April 2013 will arrest rally beyond 7.70% (1Y) and 7.25% (5Y). The strategy is to stay fleet-footed trading end-to-end of set weekly range and stay “light” into the policy.

It was 3X12 play in FX premium; 3M stayed steady below strong resistance at 7.35% while 12M rallied into 6.25-6.40%. MARKET PULSE revised the trading range of 12M at 6.0/6.10-6.30/6.40% post RBI’s dollar support window to Banks for export finance. It is seen as great move to achieve two objectives: one, to cut demand for forward dollars (from importers) and to shift forward market into supply driven mode (by leading supplies from exporters) to provide relief to spot rupee and the other, is to cut the arbitrage between FX and MM rate curve through upward pressure on short term money market rate curve. This signal was seen as RBI’s lack of comfort on rate move; 25 bps rate cut will not push shorter end of the rate curve down significantly or pause mode on rate will not be bearish on spot rupee. For the week, let us watch consolidation at 7.25-7.50% (3M) and 6.25-6.50% (12M); bias into higher end on strong momentum from both interest and exchange rate play. The strategy is to trade end-to-end and await more cues to build strategic book.

Exchange rate market

What a move in USD/INR? It was sharp turnaround from 55.10-55.60 to 53.60-54.10. MARKET PULSE revised the trading range (post WPI data intra-week report) to 53.60/53.85-54.85/55.10 (sell zone) with set up of relief rally in rupee into lower end. Rupee rallied sharply from intra-week low of 54.89 to 53.70 for strong weekly close at 53.71. The strategy for exporters to stay fully hedged (3M at/above 56.25 and 12M at/above 58.50) and importers to stay away for 53.60-53.85 has worked well; 3M dollar is now sharply down at 54.70 and 12M  at 57.10 (from the recent high of 56.30 and 58.53). What next? The undertone for rupee is indeed bullish but the extent (and speed) of rally from now on is not clear. The risk from huge Current Account Deficit is diluted on shift of forward market into supply driven mode but many analysts continue to retain risks of slippage into 58-60. MARKET PULSE has set USD/INR range for 2013 at 51.35-55.88/56.43, hence the recommendation to sell 3M above 56.25 and 12M above 58.50. While the current forward rate of 3-6M may not look attractive for exporters, shorter end (3M at 54.70) will attract importers’ interest having seen spot rupee at 55.38 in early January; however, exporters will have comfort to sell 12M dollars at/above 57.50. The flows in the forward market will be mixed with combination of demand up to 3M and supplies in 12M and beyond. RBI also has the need to build its dollar reserves and does not get too many opportunities like this; ability of RBI to defend rupee weakness is limited given the low dollar reserves and deficit rupee system liquidity. Now is the good time to build dollar reserves and cut draw down from LAF counter. What next? It would be period of consolidation with mild bullish undertone for rupee. The first sign of extension of rupee bull-run will be on test/break of 53.60 for 53.15-53.30 and 52.90-53.05 while 54.10-54.25 stays firm and reversal beyond 54.35-54.50 will scare the rupee bulls. For the week, let us watch consolidation at 52.90/53.30-54.10/54.25. The trading range thereafter is for consolidation at 51.35/52.60-53.60 on delivery of 25 bps rate cut or into higher range of 53.60-54.35/54.85 on pause mode; shift into growth supportive monetary stance in March/April 2013 will limit rupee weakness beyond 54.85-55.35. The strategy for exporters is to retain “short dollar book” with trail stop above 54.25/54.35 while importers to cover 3M dollar liabilities at spot at/below 53 (3M forward rate at/below 54; mid rate of 2013 range of 51.35-56.43). Traders who chased the move from 54.85-55.35 into 53.60-53.85 can reinstate “short dollar book” at 53.95-54.20 for 53.00-53.25.

EUR/USD was in nice trading range at 1.3250-1.3400 (down from 1.3403 to 1.3256, up again at 1.3401 before close of week at 1.3317) between set buy zone of 1.3245-1.3270 and sell zone of 1.3385-1.3410. What next? Repeated failure of EUR/USD at 1.3380-1.3405 resistance zone is a serious concern into the near term despite smart rally from 1.2997. There is build-up of risk for reversal into 1.3150-1.3250 while 1.3400-1.3500 stays firm. The favourable interest rate play and the need for much stronger Euro to retain bearish undertone on the USD Index (which is firmly supported by much weaker JPY) are factors that provide comfort to Euro bulls. For the week, let us watch 1.3150/1.3250-1.3400/1.3500. The strategy is to trade end-to-end with no clarity on break-out direction as yet.

USD/JPY posted smart rally from support/buy zone of 87.25-87.75 (low of 87.77) to meet the objective at 89.65-90.15 (high at 90.18) before close of week at 90.05; weekly close above psychological resistance at 90 is bullish bringing 94.98 into the radar. For the week, let us watch support at 89.25-89.60 to hold for 91.10-91.40 and prepare for extended rally into 94. The near term range is now shifted to 89-94.

Equity market

NIFTY posted smart rally from 5965-5980 support/buy zone (intra-week low at 5962) to pass through immediate resistance at 6045-6060 (high at 6083) before strong weekly close at 6064. The bullish trigger was from deferral of GARR beyond 2015, aggressive positioning of the Government to cut fuel subsidy to zero in 18 months and strong headline WPI inflation data building expectation of 25-50 bps rate cut on 29^th January. While these factors brought cheer to FIIs to pump in more monies, domestic investors are seen to shift investments from fixed income into equity. The bullish undertone is firm with focus at 2011 high of 6181 and thereafter into 2010 high of 6338. The only risk factor at this stage is delay in rate cut action from RBI but correction, if any will be shallow not beyond 5960-6000 on expectation of big-bang cuts in March/April 2013. For the week, let us watch 6020/6050-6150/6180 with bias into higher end. The trading range thereafter will be for consolidation at 6100-6350 on delivery of 25 bps rate cut or shift into lower range consolidation at 5950-6100 on pause mode; expectation of shift into aggressive rate action in March/April 2013 will limit weakness not below 5900. Strategic investors can stay invested at 5950-6050 (with stop below 2012 close of 5905) for 6300-6350 into near/short term.

Commodity market

Gold posted smart rally from 1625 to hit 1695-1710 objective (high at 1695.50) before close of week at 1683.30. The undertone is mildly bullish for extension into 1710-1735 while 1660 stays firm. For the week, let us watch 1660/1675-1710/1725 with bias into higher end but not above 1735. The strategy is to buy dips into 1660-1675 for 1720-1735 and switch side there for sharp correction into 1625 in the near term.

NYMEX Crude traded end-to-end of set weekly range of 92/93-96/97 with intra-week rally from low of 92.95 into 96.04 before close of week at 95.49. The undertone is firm and carries the risk of 100% unwinding of recent reversal from 100.42 to 84.05. For the week, let us watch 93/94.50-97.5/99 with bias into higher end but not above 100.50. The strategy is to buy dips into 93.00-94.50 for 99-100.50 and switch side there for sharp correction into 88 in the near term.

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

take-away from WPI data

Surprise package from WPI data; expect 25 bps rate cut on or before 29^th January 2012

It is a story of having the cake and eat it too...December 2012 headline inflation print came at 7.18% (down from November 2012 print at 7.24%) against analysts estimate of 7.40-7.60%; another surprise was from downward revision in October 2012 print to 7.32% (from provisional 7.42%). The positive take-away is the sequential improvement since October 2012 despite bullish undertone in commodity market and weak Rupee. The concern for RBI will be on uptrend in retail CPI inflation into double-digit! While there is no case for 50 bps rate cut on 29^th January quarterly monetary policy review, it would be difficult for RBI to explain status-quo stance this time; best option would be to deliver 25 bps rate hike when the headline wholesale print is steadily progressing into the lower end of set tolerance zone of 7.0-7.5%; there is greater comfort now that it would indeed move below 7% by March 2013.

It would be great relief for Indian asset markets that the long over-due rate cut action is just round the corner. NIFTY should extend its gains above recent high of 6042 into 6100-6200 and Rupee should prepare for relief rally into 54.00-54.10 while 10Y Bond extends gains into lower end of 7.60-7.85% in anticipation of follow-on 25 bps rate cut in mid March policy  review.

It is not yet start of bullish trend. It is only bit of relief to shed weakness and get into consolidation mode till fresh cues emerge on macroeconomic dynamics. The concerns on twin-deficits are solid with no quick-fix solutions despite support to growth from rate reversal cycle. Can this trigger the investment cycle for capacity expansion and also add momentum to shift gears in domestic consumption? The sentiment (and confidence) has turned better and the system is seen to be in work-in-process for bullish revival!

Moses Harding

Weekly report for 14-18 January 2013

Bullish undertone in Bond market against complex macroeconomic dynamics

Bond market has been in bullish undertone since August-November 2012 in anticipation of shift in RBI’s monetary policy stone from hawkish to dovish; it is felt necessary and over-due as hawkish stance is seen as bit stretched since March 2009. 10Y Bond yield is already down from the high of 8.28% since August 2012 (and 8.24% since November 2012) to 7.85% providing annualised return of over 18% on August 2012 investments (over 30% on November 2012 investments). Given this kind of attractive return against sovereign risk (without capital charge), huge build up of 7% excess-SLR is not a surprise when credit risk is not at attractive premium! During this time, Bond Swap spread (funding Bonds from CBLO/Repo counter with OIS hedge for similar maturity) is down from 1.2% to current 0.65% (driven by sharp fall in Bond yield from 8.28 to 7.85% and marginal spike in 5Y OIS rate from 7.0% to 7.20%). MARKET PULSE urged in August-November reports to lock-in to the high spreads (by staying “long bonds” with “paid 5Y OIS” for sharp reversal into short term that would cover both price appreciation on the Bonds and positive “carry” on the OIS book against high overnight MIBOR. What next? Is it the time to unwind or run the profit?

Bond yields (at current level) has already factored in 25 bps rate cut (shift in operating policy rate from 8% to 7.75%) while 50 bps rate cut (driving the operating policy rate to 7.5%) will extend the bull-run to drive 10Y Bond yield into 7.65% (cutting the Bond Swap spread to 45 bps). This is seen as the best case scenario into short/medium term. There are strong risk factors on the way. The excess SLR holding is already to the tune of Rs.4.5-5.0 Trillion, which is 1 year of market borrowing. The task for RBI will be a tough balancing act to retain the demand appetite intact and divert funds from sovereign credit to corporate (and productive) credit. On the other hand, macroeconomic dynamics are complex. The pressures on fiscal deficit, Current Account deficit and Rupee exchange rate are highly inflationary. But without sharp turnaround in Growth momentum (leading to higher revenues), making both ends meet will be difficult given the huge burden from high interest cost, huge subsidy cost and elevated administrative cost. It may not be easy to bridge the huge gap in Trade Account (at over $18 Billion a month) through sustainable flows from remittances and Capital account flows. Over all, concerns on twin-deficits (and resultant impact on exchange rate) are there to stay for long; there seems to be strong “will” to get out of this vicious cycle but concrete “ways” are not seen to be at sight. Given these strong headwinds in force against twin-deficits and inflation, RBI’s ability to shift into aggressive growth-supportive monetary stance (like prevalent in Western and emerging economies) is in doubt. So, at best it would be limited monetary support (to growth) in the near/short term and extension of support into medium/long term will be dependent on significant improvement in fiscal deficit (into 4.5-5.0% of GDP), current account deficit (into 3.0-3.5% of GDP) and headline WPI inflation (into 6.0-6.5%). It is also seen that despite tight system liquidity and elevated interest rates, domestic consumption is good. The worry however is on the investments which would be driven by turnaround in macroeconomic dynamics and not through dovish monetary stance. Taking all these factors, operating policy rate is not expected to ease below 7.5% in the short term (till September 2013). This expectation sets up strong base for 10Y Bond yield at 7.65% with pressure into 7.80-7.90% and beyond to cover pipe-line bond supplies, and RBI would need to shift gear on its OMO bond purchases to cut build up excess SLR to over 10%. The trading range in the short term is seen at 7.65-7.90%; range break-out if any will be on the higher side into 8.0-8.10% on deterioration in macroeconomic fundamentals bringing the risk of sovereign rating downgrade into play. The strategy therefore is to “unwind” investments at 7.65-7.80% (Bond swap spread at 45-60 bps); need to retain good “appetite” to absorb weakness into 7.90-8.10% during H1/FY2014.

Interest rate market

The trading range for 10Y Bond will be set post the headline WPI data release on 14^th January (Monday, at start of the week). The guidance (for rate cut action) will be from print of December 2012 number at lower end of 7.0-7.5% tolerance zone and revised November 2012 number staying below 7.5%; disappointment on either of these may delay rate cut action while both the number into the lower end will trigger expectation of one-shot 50 bps rate cut on 29^th January. There are three options on hand: bullish extension into 7.65-7.80% on good data print (building 50 bps rate cut); sharp reversal into 7.90-8.05% on weak data (unwinding build-up of 25 bps rate cut expectation) and consolidation at 7.80-7.95% on neutral data print (lack of clarity on RBI’s rate action with fear of delay in rate cut action). While there is little confidence on getting a strong number (which would be a very pleasant surprise), it would be a toss-up between neutral and weak data (at 7.25-7.5% for December 2012), thus setting up a wide trading range at 7.80-8.05% post data release. Fingers crossed!

It was extension of 1X5 play in OIS rates; 1Y OIS rate is down from recent high of 7.68% to 7.53% while 5Y rate is up from recent low of 7.08% to 7.20% (1X5 discount down from over 60 bps to below 45 bps building steepness in the tenor curve). Taking the above-said three options on hand, the best case for 1Y OIS rate is seen at 7.45% with worst case at 7.70% while neutral stance will provide consolidation at 7.50-7.60% (preferred scenario). 5Y OIS rate will stay bid but upside is seen limited on trigger of unwinding of Bond Swap trades. The trading range for the week is seen at 7.50-7.60% (1Y) and 7.13/7.15-7.23/7.25% (5Y). The strategy is to trade end-to-end as break either-way is not expected to sustain.

FX premium tracked exchanged rate moves, down initially into 6.6% (3M) and 5.6% (12M) on start-of-the week rupee weakness into 55.38 but recovered sharply into 7.1% (3M) and 6.1% (12M) on rupee strength from 55.38 to 54.40. Over all, FX premium is boxed in consolidation mode within set near term ranges of 6.60-7.1% (3M) and 5.60-6.1% (12M). Interest rate play is now neutral factoring in 25-50 bps rate cut and break-out of this range is dependent on break-out of spot rupee range from 54.35-55.35. Given the higher possibility of break-up in spot USD/INR (very low probability of break-down below 54.35-54.10), it is not prudent to stay “paid” above 7.1% in 3M and 6.1% in 12M. For the week, let us continue to track 6.60-7.1% (3M) and 5.60-6.1% (12M) with bias into lower end. The strategy is to trade end-to-end as there are no strong cues to suggest break-out either-way.

Currency market

USD/INR traded to the script trading end-to-end of 54.35-55.35 range (initial high at 55.38, sharply down at 54.39 before close of week at 54.76); in the process triggered first “sell” at 55.35 and “buy” levels at 54.65/54.40. The forward dollar moved end-to-end within the set trading range for 3M at 55.25/55.50-56.25/56.50 (high at 56.30; low at 55.35 before close at 55.72) and for 12M at 57.60/57.75-58.50/58.65 (high at 58.53; low at 57.66 before close of week at 58.02). What next? The undertone of rupee is weak driven largely by the concerns on widening (and highly elevated) trade/current account deficit and lack of confidence on sustainability of FII’s appetite on over-valued Indian equity market. Over all, despite solid support from external cues (availability of sufficient liquidity to emerging markets and bullish Euro against US Dollar), domestic cues are fragile, suspect, weak and vulnerable to huge downside risks with limited upside gains. Taking all these fundamental factors into play, MARKET PULSE preferred short term range trade for USD/INR at 54-56 till February/March 2013 and await fresh cues (post Budget FY14) to take a firm view on range break-out. RBI (and the Finance Ministry) should be concerned with this strong bearish set up on rupee with Rupee seen as the worst performing currency! Rupee unable to get the benefit of USD weakness (against global currencies) while over-reacting to USD strength is serious worry for the rupee bulls (who are seen to have given up!). However, need to take note of Governments’ aggressive stance to address fiscal consolidation to get RBI into growth supportive monetary stance to revive growth momentum. For the week, let us watch consolidation in USD/INR at 54.10/54.35-55.10/55.35 (3M at 55.10/55.30-56.10/56.30 and 12M at 57.40/57.60-58.30/58.50). Strategic players can trade end-to-end by selling in 3 lots at 54.85/55.10/55.35 and buy in 3 lots at 54.60/54.35/54.10 with tight stop. We will review (and reassess the strategy) when 54.10-55.35 range break-out comes into focus while staying with 54.10-55.60/56.10 short term range.

EUR/USD rallied sharply from 1.2990-1.3015 support (recent low at 1.2997) into 1.3350 (high at 1.3365) before close of week at 1.3341. MARKET PULSE considered 1.3150 as strong intra-2013 support driven by strong interest rate play in favour of the Euro. The expectation of 25 bps rate cut triggered the sell-off below 1.3150 but no-change stance of ECB on policy rates (with hawkish stance on the way forward) brought the bullish Euro undertone back into play. What next? Euro should extend its bullish move into 1.3485/1.3550 while 1.3310-1.3250 stays firm. 1.3250 is very critical to stay intact to prevent revisit below 1.3150 into 1.3000. For the week, let us watch 1.3260/1.3310-1.3490/1.3540; bias is for move into higher end and thereafter prepare momentum for bullish extension into 1.3800-1.3850.

USD/JPY held at strong support/buy zone of 86.75-87.25 (low of 86.81) and extended its bullish run into 90 (high so far at 89.44) before close of week at 89.17. The focus now is at May 2010 high at 94.98 while 88.00-88.50 stays firm. Over all, USD/JPY has shifted into higher range trade at 88-91 with bias into higher end. For the week, let us watch 88.40/88.80-90.50/91.00 with bias into higher end.

Equity market

NIFTY traded end-to-end of set weekly range of 5940-6040 (high at 6042 and low at 5940) before close of week at 5951. The cues into near term are mixed. There is investor appetite in anticipation of cut in policy rates and deriving bit of comfort from the Government to get the growth momentum back on track. It is also believed that worst is behind (on macroeconomic fundamentals) and build up of strong base is work-in-process for gradual recovery into short/medium term. So, there is no need to get bearish at this stage. On the other hand, excessive gain seen in 2012 is being unwound; hence unable to extend gains beyond 6040. It is possible that NIFTY is into near term consolidation mode at 5800-6100. For the week, let us watch consolidation at 5880/5910-5980/6010 and stay neutral on further extension into 5850-6040. The directional bias will be set post release of headline WPI inflation number but test/break either-way is not expected to sustain.

Commodity market

Gold is in consolidation mode at 1625/1640-1680/1695 (with intra-week low of 1642 and high of 1678) before close of week at 1662. The undertone is mildly bullish into higher end driven by weak US Dollar. No change in view and we continue to watch consolidation at 1640-1680 with extension limited to 1625-1695. The strategy is to trade end-to-end and there are no strong cues to trigger break-out either-way.

The rally in NYMEX Crude from 85 (low at 85.21) has extended into 95 (high at 94.70) unwinding most of sharp reversal from 100.42 into 84.05. The undertone is neutral to mildly bullish and seen to be shifted into higher range trade at 92-97 with bias into higher end. The strategy is to trade end-to-end and there are no strong cues to trigger break-out either-way.

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

  

Weekly report for 7-11 January 2013

MARKET PULSE: Weekly report for 07-11 January 2013

Currency market

USD/INR traded back-and-forth of set weekly range of 54.10/54.35-55.00/55.25 (intra-week low of 54.26 and high of 55.17); down from 55.00 to 54.26 and then up to 55.17 before close of week at 55.07. In the process, value of forward dollar swung end-to-end within set ranges of 54.90-56.00 (3M) and 57.25-58.50. What next? The undertone continues to remain weak (and suspect) for rupee driven by concerns on widening Current Account deficit, downside risks on macroeconomic fundamentals and fear of cut in FII flows post hawkish stance of FED on excess liquidity, ruling out extension of QE4. But, there is no need to throw in the towel (and give up on rupee) as yet. Government is on over-drive with measures to add momentum to growth and cut fiscal deficit. There are pipe-line measures to cut non-essential imports to reduce Current Account deficit, and red carpet is rolled out to off-shore investors to maintain surplus Balance of Payment at all times to avoid pressure on Rupee exchange rate. The risk however is from signs of improvement in Western economies (resultant dilution in abundant liquidity support), and deterioration in domestic macroeconomic fundamentals (or delay in bullish reversal for whatever reasons) can pose serious concerns on availability of off-shore liquidity (and appetite) for India’s debt and equity markets. Taking all these fundamental factors in play, MARKET PULSE preferred short term range trade for USD/INR at 54-56 till February/March 2013; post that, the pair rallied to 55.88 (into set sell zone of 55.65-55.90) and reversed sharply to 54.04 (set buy zone of 53.85-54.10) and now at mid-point of 54-56 range. Now, Rupee is seen to have shifted into higher range trade at 54.35/54.60-55.40/55.65 with extension limited to 54-56. There is no clarity on break-out direction, hence prudent to trade end-to-end (with stop/double reverse strategy), rather than being biased on particular direction. The hedging strategy is to stay covered on near/short term FC liabilities on move into lower end and to hedge medium/long term FC assets on move into higher end. The hedging strategy needs to be dynamic to unwind import hedge at higher end and uncover export hedge at lower end for maximum reward.  For the week, let us watch consolidation at 54.60-55.40 (USD Index at 80.00-81.50). There is no clarity on break-out direction for extension into 54.00/54.35-55.65/56.00. Strategic players can trade end-to-end by buying in 3 lots at 54.65/54.40/54.05 (stop/reverse below 54 for 53.60/53.10/52.30) and selling in 3 lots at 55.35/55.60/55.95 (stop/reverse above 56 for 57.30-58.80). For hedging activity, 3M forward dollars at 56.25-56.50 and 12M dollars at 58.50-58.75 will look good for exporters. Watch (and trade end-to-end of) 3M forward dollars at 55.25/55.50-56.25/56.50 and 12M forward dollars at 57.60/57.75-58.50/58.65; test/break either-way will be difficult to sustain.

EUR/USD held at set intra-week resistance/sell zone at 1.3300-1.3350 (high at 1.3299) for sharp reversal into set support/strategic buy zone at 1.2990-1.3040 (low at 1.2997) before close of week at 1.3067. What next? The strong bearish set up on the US Dollar is now diluted and it would be period of consolidation in the near/short term till fresh cues emerge to provide clarity on directional break-out. The risk is for extension of gains in USD Index into 81.50 (EUR/USD around 1.2900) while 79.00-79.60 stays firm (EUR/USD at 1.3150-1.3200). For the week, let us watch consolidation in EUR/USD at 1.2875/1.2925-1.3100/1.3150 and prepare momentum for extension into 1.3300-1.3350. The strategy is to trade end-to-end. Strategic players can buy in 2 lots at 1.2965-1.2940 and 1.2890-1.2865 for back into 1.3285-1.3310 (with stop/reverse at 1.2850 for 1.2660 before strongly up). Over all, EUR/USD is seen to be boxed at 1.2650/1.2850-1.3150/1.3350 in the near term.

USD/JPY held at set support/buy zone of 85.50-86.25 (intra-week low at 85.68) and rallied into set objective at 88-90 (high of 88.40 before close of week at 88.12). The undertone is very bullish retaining the strong momentum since reversal from September 2012 low of 77.11. MARKET PULSE set new trading range at 85-90/95 on break of 85.50 and upward momentum since then is strong building steam for shift into higher range trade at 90-95 soon while 87.25-86.75 stays firm. For the week, let us watch 86.75/87.75-89.75/91.25 with bias into higher end. The strategy is to retain “long book”, add at 87.75-87.25 with stop below 86.75 for immediate objective at 89.75 and thereafter into 91.25-95.00.

Interest rate market

Bond market witnessed strong intra-week rally; 10Y Bond rallied from 8.10% into set near term objective at 7.90-7.93% before close of week at 7.93%. The speed of the rally from 8.10 to take out 7.90 without any fight for extended gains into 7.93% was bit of surprise (a pleasant one)! The trigger definitely is not from the cancellation of bond auctions as supplies are expected to be met with OMO bond purchases. There is build-up of over confidence on expectation of 50 bps rate cut at front-end of January-March 2013. The current yield at 7.93% has built in 25 bps rate cut on 29^th January policy review followed by another 25 bps cut in mid March mid quarter review. If this expectation builds steam, 10Y Bond yield will get into consolidation mode at 7.65-7.90%; any disappointment here will drive the yield back into 7.95-8.10%. RBI will get good comfort from Government’s actions to cut fiscal deficit. FED’s stance on liquidity will dilute RBI’s fear of commodity price risk on inflation (and twin deficits). RBI will base their rate cut decision on December 2012 headline WPI inflation print. The tolerance zone is seen at 6.50/7.0-7.5% for rate cut trigger. It would be critical for December 2012 print to be at lower end of 7.0-7.5% for 25 bps rate cut on 29^th January and any surprise move below 7.0% (into 6.5%) will push RBI to deliver one-shot 50 bps rate cut. On the other hand, print around 7.5% will delay shift into rate cut cycle, may be beyond March 2013! For the week, let us watch 7.87/7.90-7.97/8.0; test/break either-way to attract. The trading strategy is to trade end-to-end while strategic players can retain “long” entered at 8.18-8.23%, add at 7.97-8.0% and unwind part (or most) at 7.87-7.93%. It is not prudent to stay over confident on sharp reversal in rates given the huge downside risks from twin deficits and weak Rupee, hence extended gains beyond 7.90% will be seen as excessive till delivery of expectations.

OIS rates stayed steady at 7.58-7.61% (1Y) and 7.13-7.16% (5Y) and surprisingly did not track the sharp rally in Bond market. The concerns are from two factors: expectation of “hold” on operating policy rate at 7.5% (post 50 bps rate cut action in Q1/Q2 2013) till headwinds from twin deficits (on inflation) is completely out of the way and start of build up of steepness in the tenor. Bond spread (between 5Y Bond yield and 5Y OIS rate) is already down from over 1% to 75 bps and 1X5 OIS curve is steep down from over 60 bps to 45 bps. There is no strong momentum either-way and prefer consolidation around current levels not ruling out bullish momentum if Bond market gets into correction mode. For the week, let us watch consolidation at 7.55-7.65% in 1Y and 7.10-7.20% in 5Y. The trading strategy is to trade end-to-end. It may not be prudent to stay “paid” at/above 7.65/7.20 or stay “received” at/below 7.55/7.10 given the high risk-low reward there.

FX premium eased into 6.65% in 3M and 5.7% in 12M on combination of interest and exchange rate play driving the premium down from recent high/receive zone of 7% and 6.1% respectively. What next? At current level, interest rate impact is factored in and moves will be tuned to exchange rate play. The expectation of consolidation in spot rupee at 54.35/54.60-55.35/55.60 will provide consolidation at 6.50-6.85% in 3M and 5.60-5.85% in 12M. The strategy is to trade end-to-end with test/break either-way to attract. The near/short term range is firm at 6.15/6.35-6.85/7.0 (3M) and 5.45/5.60-5.95/6.10.

Equity market

2013 began on bullish note in the equity market; NIFTY rallied to meet the first objective at 6015-6040 (high at 6020) from intra-week low of 5897 before close of week at 6016. The expected 200 point rally from 5800-5840 (low of 5823) into 6000-6040 is now complete. What next? FIIs are the sole contributors to the super performance of NIFTY in 2012 and have stayed invested from December 2011 low of 4531 and June 2012 low of 4770. The risk-reward is not in favour for FIIs to stay invested from now on, hence there may be set up of correction process in the near/short term. Having made bumper profit in 2012 from India, FIIs might get better return in their domestic markets in 2013 or in other emerging markets which have underperformed in 2012. On the other hand, domestic cues are looking good in 2013 to attract domestic investors. Over all, it is mixed signals; when way forward is not clear, it is best to stay “light” on equity assets. For the week, let us watch consolidation at 5965/5980-6040/6065. Beyond there (into near/short term), maximum reward will be for extended gains into 6095/6120 (ahead of 6180) while downside risks can extend below 5880 (into 5823), risk-reward of less than 1:1 is not seen good for strategic investors at current level. It would be traders’ market while strategic investors prefer to stay “light” (or away!).

Commodity market

Gold traded end-to-end of set resistance/sell zone of 1690-1705 (high of 1694.70) and set support/buy zone of 1620-1635 (low of 1625.50) before close of week at 1656; moves driven by shift of “risk” into and post “fiscal cliff”. What next? Gold is now into familiar range trade at 1620/1635-1690/1705 with no strong momentum to trigger directional break-out. The short/medium tone is steady to bearish with risk of shift of appetite away from commodity assets on liquidity squeeze and turnaround in growth momentum. For the week, let us watch consolidation at 1620/1630-1670/1680 with extension limited to 1580/1595-1705/1720. The strategy is to trade end-to-end. Strategic investors can sell at 1680-1705 (with stop above 1720) and buy at 1620-1595 (with stop below 1580).

NYMEX Crude traded end-to-end of 90-95 range (with intra-week low of 90 and high of 93.87) before close around 93.00. There is lack of clarity on direction beyond 90-95, hence prudent to trade end-to-end with tight stop on break-out without having directional bias. However, near/short term trading range is seen firmly set at 85-100. For the week, let us watch consolidation at 88.50/90.00-93.50/95.00 with extension limited to 85.50/87-96.50/98.0. The strategy is to trade end-to-end. Strategic players can sell at 95-96.5 (with stop above 98) and buy at 88.50-87.00 (with stop below 85.50).

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

Commodity market: daily update for 04JAN13

04 January 2013

Commodity market

Gold lost its bullish momentum at the door-step of set resistance/sell zone at 1690-1705 (high at 1689.60) for sharp reversal into other end of set support/buy zone at 1635-1650 (low at 1645.24), thus posting one more round of back-and-forth moves within the set range of 1635/1650-1690/1705. What next? The cues are mixed but tone remains mildly bearish for extension below 1635 into 1590 while below 1670. For today, let us watch consolidation at 1620/1635-1670/1680. The trading strategy is to trade end-to-end. Strategic players can stay away for break-out and it would be good risk-reward to sell in 2 lots at 1680/1695 and buy in 2 lots at 1610/1595 with tight affordable stop.

NYMEX Crude is in consolidation mode at “inner ring” of 91.50-93.50 (92.14/93.30) within the 90-95 trading range. The absence of sharp reversal despite strong rally in the USD Index is concern for the bears. The immediate term is risk for extension of this relief rally beyond 93.50 into 98.50 before sharp reversal. For today, let us watch consolidation at 89.50/91.00-93.00/94.50. The trading strategy is to trade end-to-end by selling in 2 lots at 93.50/95.00 and buying in 2 lots at 90.50/89.00 with tight affordable stop.

Have a great day and Good luck.....................Moses Harding