Weekly report for 25Feb to 01March 2013

MARKET PULSE: Weekly report for 25 February – 1 March 2013

Tough to play ball between Global rating agencies and “aam aadhmi”

The Finance Minister (FM) is in tight spot managing expectations of all stake holders of the Indian economy at the same time, and it is more difficult when the economy is in serious conflict of play among growth, inflation and twin-deficits. The Global rating agencies have close watch on fiscal consolidation and policy reforms to spur investments, consumption and growth for capacity expansion of the economy. FM cannot afford to ignore them as sovereign investment rating to junk grade will be an economic, fiscal and monetary disaster. The “aam aadhmi” (at bottom of the pyramid) are worried about their survival during this tough period and do not want the Government to cut into the ‘entitled’ subsidies on essential items, and want more to cover elevated retail inflation. FM cannot ignore UPA’s political ambition when the next general election is round the corner. The middle class (at the middle of the pyramid) wants more money in the purse to retain consumption and maintain the standard-of-living. This is the class worst hit from sub-optimal capacity usage and wish for early turnaround for creation of employment and wealth. It is a very important agenda for the FM as the middle class is the strength of the Indian economy. The upper class (at the top of the pyramid) hope for return into over 9% GDP growth momentum for wealth creation, and also looks for better investment opportunities. This is the segment which locks wealth in unproductive assets such as Gold and real estate. FM has the agenda to get the money out and improve the savings and investment rate. The super-rich resident investors and off-shore entities are seen to have risk appetite for investments but do not see viable opportunities struck by political and regulatory bottle-necks. FM has the agenda to remove this fear and perception by rolling out measures to improve investor confidence and sentiment. The business community is under severe top-line pressure; percentage of fixed expenses against total revenues has moved high, squeezing the margin and the bottom-line. They wish the growth momentum to be revived at the cost of everything else. This also has direct impact on the revenue of the exchequer. FM has the need to give top priority to this agenda. RBI, while staying concerned on fiscal consolidation and twin-deficits, is not seen to have the confidence on the ability to spur growth (and revenues) without desired policy reforms. FM has the agenda to remove this fear to enable RBI to shift from moderate to more dovish monetary policy stance.

Given these multiple and complex agenda, FM has chosen to take “bottom-up” approach. The starting point of Budget FY14 is the fiscal deficit number at 4.8% of GDP. The cost and public investment management comes first, followed by revenue projection to meet the fiscal deficit target and then to project the growth momentum needed to get desired revenues. FM will have the option to sell public assets to fix large gaps, if any. On the cost side, interest pay-out continues to stay high while efforts are on to cut subsidy cost. There may not be significant impact on subsidies in FY14 as cut in fuel subsidy will be largely off-set by food security. The expenses relating to interest and subsidies to the percentage of GDP are expected to remain steady. FM has little leverage in controlling the cost excluding interest and subsidy with the need to stay on business-as-usual mode on administrative and management expenses. FM will be forced to cut fund allocation for productive expansion of Public assets/enterprise. To meet all these agenda while retaining steady revenue to GDP percentage, the growth projection for FY14 will obviously be very high, expected to be not lower than 6.50-7.0%. Will there be aggressive policy (and administrative) actions to achieve significantly higher sequential growth from March 2013 end-date print of around 5%? The stake holders are curious to get answers to all these queries and are seen to be in disbelief at this moment. It is important for the FM to prepare the Budget FY14 which will not end up either as a “shock” or “ambitious” or “disbelief”; either of these will set up bearish outlook on the Indian economy and asset markets.

Exchange rate market:

USD/INR traded back-and-forth within the set weekly range of 53.90-54.40/54.55; initial recovery from 54.44 to 54.02 was followed by sharp rally into 54.59 (driven by weak Euro and NIFTY) but could not sustain there (on strong supplies from exporters) for sharp reversal into 54.15 before close of week at 54.18. MARKET PULSE (in the intra-week update on Twitter) advised strategic traders to establish short-dollar book at/above 54.55 and urged exporters to cover 3M receivables at/above 55.60 (high of 55.66) and 12M receivables at/above 58.10 (high of 58.20) while asking importers to stay aside for post-budget rupee rally below 53.60. What next? The weekly close below 54.20/54.35 is rupee bullish into the near term. Rupee is strongly supported by pipe-line dollar supplies and elevated FX premium of 6.5-8.0% (across 1-12M) driving forward market into supply-driven mode. These strong factors have diluted bearish impact on the rupee from huge Current Account Deficit with added comfort from softening stance on commodity prices. The major trigger for now will be from Budget FY14. It is possible that sharp fall in rupee from 52.88 has already ended at 54.59 posting lower “low’s” in 2013 down from 55.38 and 54.89. The immediate support for the dollar is at 53.95-54.05 followed by 53.70-53.75 with post-budget target at 53.22-53.47 while rupee finds solid support at 54.35-54.60. The hedging activity has to be based on the outlook of near/short term stability at 53-55, hence consider not prudent to stay “long dollars” at 54.50-55.00 and high risk to stay “short dollars” at 53.00-53.50. For the week, let us watch 53.45/53.70-54.35/54.60 with bias into lower end while extension into outer corridor will attract strong interest. The trading strategy is to retain “short dollar” book entered at/above 54.55, add at 54.35-54.60 with stop at 54.65 for 53.40-53.55. Exporters who sold 3M dollars at/above 55.60 and 12M dollars at/above 58.10 can add 3M at 55.40-55.65 and 12M at 57.95-58.20 for 54.45-54.60 (3M) and 57.00-57.15 (12M) while enjoying the “carry” and “time-decay”. Short term traders can look to sell in two lots at 54.25-54.35 and 54.50-54.60 with stop at 54.65 for 53.70-53.80 (stay tuned to intra-week amendments and review on the Twitter).

EUR/USD fell sharply post FOMC from 1.3433 to 1.3144 and into consolidation mode at 1.3150-1.3250 before close of week at 1.3191. MARKET PULSE has set reversal objective at 1.3075-1.3150 before gaining steam for taking out 1.3440 for 1.3710. In the meanwhile USD Index completely unwound its recent fall from 81.50 to 79.00 and had bullish weekly close at 81.45. The expected bearish undertone on the dollar driven by loose monetary policy is now diluted on fear of bit of tightness and early end to QE3 liquidity support. What next? The economic data out of the US and Euro zones are not encouraging and monetary support is expected to stay through 2013 but the fear (and risk) is from not extending through 2014-2015 as committed earlier. It would be period of consolidation without excessive moves either-way with possible near/short term trading range at 1.30-1.37. For the week, let us watch consolidation at 1.3075/1.3150-1.3375/1.3450; move into outer corridor is expected to hold. The strategy is to trade end-to-end with stop/reverse for extended objective into 1.30 or 1.37.

USD/JPY stayed in consolidation mode within set near term range of 92.25/92.75-94.25/94.75; posted intra-week high of 94.20 and low of 92.76 before close of week at 93.38. What next? JPY continues to maintain its bearish undertone with limited resistance from G20 on current excessive weakness on the JPY. We retain the set near term play at 92-95 before extension into 96-97 ahead of 100. Continue to favour formation of short term base at 92-93 for 99-100. For the week, let us continue to watch 92.25/92.75-94.25/94.75 and prepare steam for extension into 96-97 in the near term. The strategy is trade end-to-end and track intra-week updates for break-out signals for extended bullish run into 97-100.

Interest rate market:

10Y Bond posted a strong intra-week rally from 7.85% to 7.78% but found strong resistance there for marginal pull back into 7.82% before close of week at 7.80%. The rally since end November 2012 from 8.24% to 7.78% is strong, hence consolidation around 7.80% will be in order given the mixed cues from now on. 3M return on 10Y Bond is at whopping 26.5% on annualised basis which would attract profit-booking. The strategy of MARKET PULSE is to unwind long tenure bonds (over 10 years) on extended rally below 7.80% and shift to shorter end (up to 5 years) with objectives to cut duration of the portfolio (maintaining the portfolio yield) while staying invested and realise profit ahead of FY end. The undertone is mildly bullish but major gains from now on will be in the shorter end. What next? Bond yields have already priced-in 25 bps rate cut on 19^th March with or without 25-50 bps CRR cut. Beyond there, if operating policy rate stays steady at 7.5% for next 6-12 months, it is difficult for 10Y Bond to sustain its extended gains into 7.65-7.75% on huge supplies from fresh issuance from RBI in FY14, unwinding of excess SLR from AFS/HFT ahead of FY13 end and sale from HTM in April 2013. It is also in order to build minimum 25 bps tenor premium over the operating policy rate. For the week, let us watch consolidation at 7.78-7.83; test/break either-way to attract. The strategy is to trade end-to-end by buying at 7.83-7.85% and selling at 7.76-7.78% with tight stop. Strategic players to retain “long book” and gradually switch tenor from over 10 years to below 5 years on extended gains below 7.78%.

OIS rates in consolidation mode at 7.60-7.65% (1Y) and 7.22-7.27% (5Y) and back-and-forth trading within these ranges is traders’ delight. What next? The benchmark overnight MIBOR will be under pressure on shift into March with risk of draw-down from LAF counter inching into/over Rs.2 Trillion in second fortnight of March. It will be attractive for Banks to tap funds from Repo counter at 7.75% and invest in high-yielding shorter end CD/CPs (expected to move into double-digit for 1-3M tenure in the second fortnight of March). Given the expectation of extended pause in operating policy rate at 7.5% (overnight MIBOR at 7.55-7.65%), 1Y OIS rate will find strong support at 7.58-7.60% with strong resistance at/above 7.65%. This factor along with signs of formation of base close by in the 5-10Y Bond yield, 5Y OIS will find support at 7.18-7.20% with resistance at 7.27-7.30% not ruling out extension into 7.35% in the short term. For the week, let us watch consolidation at 7.60-7.65% (1Y) and 7.20-7.27% (5Y); test/break either-way to attract. The strategy is to initiate “pay” in 1Y at 7.58-7.60% and in 5Y at 7.18-7.20% for a 5-7 bps trade.

FX Premium stayed firm in shorter end with 3M premium up into set objective at 7.85-8% while 12M in consolidation mode at 6.60-6.75%. What next? It is mixed cues; strong upside momentum from interest rate play with good supplies from exporters across 1-12 months. It makes sense for exporters to receive 1-3M premium at 7.85-8% by availing export finance in rupees (at say 10%) for a zero cost export funding with 2% interest subvention. On the other hand, higher spot and high premium attracts export supplies in 3-12M tenor. For the week, let us watch consolidation in 3M at 7.75-8% and 6.60-6.75% in 12M; there is risk of break higher as Banks swap dollar liabilities into rupees for double-digit yield in shorter end Fixed Income. The strategy is to retain the “paid book” entered at 7.5% (3M) and 6.5% (12M), add at 7.65% and 6.6% respectively for over 8% and 6.75%.

Equity market:

NIFTY traded perfect to the script; triggered sell levels at 5920-5935 and 5960-5985 (high at 5971) and met the set profit objective at 5820-5845 (low at 5836) before close of week at 5850. In the process, it also triggered the strategic play of re-open of the investment book (post exit at/above 6100) with first lot at 5825-5840. What next? The undertone is mixed and the comfort is from FIIs staying invested despite sharp reversal from above 6100 to below 5850. Domestic investors continue to favour fixed income and not yet prepared for shift into equity assets. MARKET PULSE retains mildly bullish undertone on the belief that no unpleasant surprises will be in store in the Budget FY14 and domestic investors are expected to see value in equity assets at current levels with limited gains in Fixed Income from now on. But shift of domestic investor appetite from fixed income into equity may not happen in March given the very attractive 1-3M yield in CP/CDs. For the week, let us watch 5825-5975 with bias into higher end, but not ruling out extended weakness into 5750-5765 for set up of strong post-budget rally. The strategy is to retain long entered at 5825-5840 with tight stop/reverse at 5820 for 5750-5765 and buy here for sharp reversal. Strategic investors who have reinvested first lot at 5825-5840 can add second lot at 5750-5765 and watch this space on twitter for intra-week review.

Commodity market

Gold met the set near term objective at 1530-1565 (low at 1554) ending our recent chase from 1685 and correction from 1554 lost steam at set intra-week resistance at 1585-1590 before close of week at 1580. What next? The undertone is bearish for extended weakness to take out 1555, and thereafter into strong support at 1520-1535. This support needs to hold to prevent start of unwind of sustained three year rally in Gold from 680 (October 2008) to 1920 (September 2011) and 1790 (October 2012). Gold at current value is over-priced with risk of tightening in the loose monetary policy in western economies. The kind of dream returns seen till 2011-2012 are no more available in Gold and has clearly lost its shine. For the week, let us watch 1525-1590/1605 with bias into lower end. The strategy is to re-build “short book” in two lots at 1585-1590 and 1605-1620 with tight stop for 1520-1535 ahead of 1490.

NYMEX Crude traded end-to-end of set weekly range of 93.00-97.50; fell sharply from 97.07 to 92.44 before close of week at 93.13. This also completes our chase from above 98.00 (high at 98.11/98.24) to complete end-to-end of set near term range of 93-98. What next? The undertone is neutral to mildly bearish. The weak economic data from the US and Euro zones and minor change in the monetary policy have triggered the reversal, thus diluting the risk of extended rally beyond 99.00-100.50. It is possible that unwind of recent rally from 84 to 98 is underway. For the week, let us watch 90-95 with bias into lower end. The strategy is to reinstate “short book” at 94.50-95.00 with tight stop for 89.50-90.00 and thereafter further extension into 84 in the near term.

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

            

Budget FY14: expectations and impact

Economic gloom is behind but way to go to build hope for recovery

The Finance Minister has very limited “band-width” to deliver either a populist or growth-supportive Budget for FY14. The economic agenda is to dilute conflicts in play between growth-inflation dynamics. The growth momentum is sluggish while retail inflation is uncomfortably high. The economic woes have hit the fiscal balance hard pushing the Government to defer expenses and raise one-off revenues through distress sale of public investments/assets. The fiscal agenda is to cut fiscal deficit through ramp-up in revenues without deferring productive expenditure. The monetary agenda requires providing good comfort to RBI to maintain dovish and growth-supportive monetary policy. The current dynamics are complex; growth momentum is sluggish leading to poor fiscal condition which delays monetary support to growth. Budget FY14 should provide solutions to cut this vicious cycle (and conflicting momentum) among economic, fiscal and monetary dynamics. There is now a new dimension to this conflict from elevated Current Account deficit which has squeezed domestic liquidity, diluting monetary policy impact on money market rates. The need is also to provide comfort to Global Rating agencies on growth and twin-deficits to remove the fear of rating downgrade; junk investment grade status for India will be an economic, fiscal and monetary disaster. The Finance Minister is not in an enviable position at this stage to provide resolutions to all at the same time. The priorities however will be to revive growth momentum, remove supply-side constraints and spur long term foreign (and domestic) investments; resolution to these will dilute the impact of other evils on the economy. The actions (and measures) since September 2012 is encouraging, removing the doom and gloom on the Indian economy providing relief rally in Indian asset markets. These are good to prevent the worst but lot to be done to provide significant recovery; stake holders will watch for triggers to revive growth momentum, attract investments and achieve fiscal prudence.

Projection of moderate GDP growth momentum: The Advance Estimate of FY13 GDP Growth is low at 5% with expectation of Revised Estimate at 5.0-5.5%. While the Government can take comfort from the global economic gloom, its impact on revenues exposes the lack of fiscal prudence and very high composition of consumption expenditure. The Finance Minister is expected to set an ambitious target/FY14 estimate of around 6.5% deriving comfort from possible global economic recovery and adequate inflow of external capital and liquidity. The actions (and measures) to revive core sectors and roll out of non-financial reforms to attract investments and consumption will be critical. The economy is now in a state of sub-optimal capacity usage; the need is to fill up this gap and prepare for capacity expansion to get the growth momentum above 6.5% while shift to over 8% looks a distant away!

High expectation (and tall promises) on fiscal deficit: The Finance Minister is vocal on achieving the 5.3% fiscal deficit target for FY13 and has taken follow-up actions through extra-ordinary items such as accelerated disinvestment and deferral of productive expenditure. The projection for FY14 at 4.8% of GDP will look ambitious despite sharp reduction in subsidies during the course of the financial year; tax reforms and higher taxes on select group will help. The dependence on market borrowing to finance fiscal deficit is expected to stay steady.

Over-drive to contain expansion in Current Account Deficit: CAD has expanded since June 2012 to unmanageable levels around 6% of GDP. The Finance Minister has taken measures to discourage import of non-essential consumption and expanding investment opportunities for off-shore investors to bridge CAD diluting its impact on exchange rate and liquidity. While this is a structural issue with no quick-fix solutions, the Budget should focus on boosting exports, reduce external dependence on essential imports and expand opportunities in non-services sectors while removing the hurdles to ensure smooth and sustainable flow of off-shore liquidity and capital.

Focus on infrastructure and other cores sectors for capacity expansion: There is not much of attention to core sectors in UPA2 regime and few steps have been taken to remove hurdles (and administrative bottle-necks) to revive these sectors which contribute to expansion in consumption, increased economic productivity and employment generation. The Finance Minister is expected to address issues related to reforms, flow of capital and availability of liquidity to these sectors. This is the low-hanging fruit at this stage to set up acceleration in growth momentum.

Steady tax regime but additional burden on top of the pyramid: The Finance Minister has assured to stay steady on taxes with signals that the super-rich and the minority at the top of the pyramid should stay prepared for higher contribution to the exchequer. The efforts also will be on to broaden the tax payer’s base, remove slippages in tax collection and to cut tax evasion. There may be tax sops for essential (and critical) sectors contributing to growth and higher burden on non-essential sectors contributing to CAD and inflation. The focus will be more on revenues with limited scope to squeeze expenditure.

Expectations from Banking and Financial Services sector: The concerns emerge from lack of credit risk appetite and general liquidity squeeze. The huge excess SLR build-up by Banks to the tune of around Rs.5 Trillion (7% of NDTL) highlights the risk aversion with customer deposits being used to fund Gilts portfolio, given the draw-down from LAF/Repo counter at around Rs.1 Trillion. The slackness in deposit growth is adding to pressure on deposits rates, with lenders not inclined to ease lending rates in most products. The expectation will be from opportunities to lend at acceptable credit risk, build working capital lending opportunities through revival of core sectors and expand credit pick-up through higher capacity usage and expansion. These requirements highlight the need for RBI to either expand their Balance sheet and/or shift asset structure from rupees to dollars while staying moderate to dovish on monetary policy.

Impact on Financial Markets:

There may not be release of either shock or awe feeling into the Money Market. The market borrowing is expected to stay steady around Rs.5 Trillion while measures towards policy reforms, growth and fiscal consolidation will build bullish set up into the future. Budget is expected to provide monetary space for RBI, through acceleration in growth, moderation in fiscal position and containing supply side pressures on inflation. However, price appreciation in the Bond market is expected to be significant in the shorter end of the rate/yield curve, say 1 to 3/5 years with marginal gains in the longer tenors of over 10 years. 10Y Bond yield is expected to trade steady at 7.65/7.70-7.85-8.0% range in FY14. The shorter end of the Money Market rate curve will ease on shift into FY14 with 3-12M tenor rates steady at 7.75-9.0%. It will be an extended pause mode on rates as ability of RBI to shift system liquidity from deficit to surplus is limited.

Equity market is expected to shift into mildly bullish undertone on cues from measures to support growth, relaxation in investment rules for off-shore investors and improvement in domestic liquidity to pull in domestic investors who are expected to shift from Fixed Income into equities during the course of FY14. NIFTY is expected to extend gains beyond 6100 into 6350 (SENSEX at 21150) while any weakness in NIFTY into 5750-5825 will attract strategic investors.

Rupee exchange rate has become critical to dilute the conflict between growth-inflation dynamics. The elevated Current Account Deficit largely driven by higher commodity prices and subdued exports is there to stay. It is important to retain off-shore appetite for Indian markets and also provide signs of exchange rate stability to maintain forward market in dollar supply driven mode. It would be a period of consolidation in Rupee exchange rate at 53-55 which is seen good to balance inflation risks and export competitiveness.

Over all, Budget FY14 is expected to set course-corrective actions with intent to provide comfort to Global rating agencies to prevent downgrade and prepare for upgrade before end of financial year 2013-2014.

Moses Harding

Weekly report for 18-22 February 2013

MARKET PULSE: Weekly report for 18-22 February 2013

Signs of rough weather ahead for the Indian economy (and asset markets)

The economic data prints are mixed, complex and tightens the noose around the conflict between growth-inflation dynamics. There is great relief from sharp decline in headline WPI inflation print; January 2013 below 7% with expectation build-up of March 2013 print around 6.5%, much below RBI’s revised estimate of 7%. Core inflation is also sharply down into 4% highlighting the sub-optimal capacity usage of the economy (low investments and consumption) and the need to shift into dovish monetary policy, declining interest rate and surplus system liquidity. The good things end here! The retail CPI inflation print is up at 10.8% for January 2013 with strong uptrend from the impact of cut in subsidies, higher MSP for agriculture commodities and supply side constraints. RBI is also now vocal about the concerns of “Aam Aaadhmi” who take the pain without any resistance. Current Account deficit is up at $20 Billion for January 2013; concern is from strong uptrend since June 2012. There seems to be no credible solutions to this make-or-break issue. MARKET PULSE highlighted these two issues hurting the Indian economy hard and restraining RBI from shifting into growth supportive monetary stance. It is less said the better on fiscal deficit; market stake holders are in disbelief at numbers of 4.8-5.3% projected for FY13-FY14 by the Finance Ministry. If it is achieved through distress sale of public assets and by deferring productive expenditure, it will do more harm than good! The cues on GDP growth momentum is not encouraging, estimated at 5.0-5.5% for FY13. It would be a pleasant surprise if revenue targets are met this fiscal. There seems to be no serious efforts to lift the growth momentum through support to core sectors and policy reforms to spur investments and consumption. There is lot to be done to improve the productivity and efficiency of the India Inc Balance sheet with the need to achieve acceleration in growth momentum for higher revenues, moderation in consumption expenditure and improvement in return on assets of public investments. The system is in “borrow to consume” mode for long with no internal cash generation for shift into “invest for productivity”; ‘powers that be’ need to work for this shift. What the system awaits is the start of “work-in-process” for this shift and will look for cues in the Budget FY14. In the meanwhile, RBI is expected to deliver 25 bps rate cut on 19^th March mid-quarter policy review while staying cautious on the way forward. What it really matters for RBI is the liquidity squeeze in the system; widening CAD has not only increased external debt (and high dependence on short term/hot money equity flows) but has also siphoned out domestic liquidity which dilutes price-transmission of rate cut actions. It’s indeed complex and provides little clarity on the wary forward, building uncertainty and bearish undertone.

Exchange rate market:

USD/INR has traded end-to-end of 52.85-54.10 since end January 2013; down from 53.95 to 52.88 and back into 54.23 before close at 54.22. MARKET PULSE expected a formation of strong short term base at 52.85-53.00 with bounce limited to 53.95-54.20. The strategy was to cover up to 3M imports at 52.85-53.00 (at forward value below 54.00) and to cover 3M exports at 53.95-54.10 (at forward value above 55.00). It was also considered good to part-cover 12M exports at forward value above 57.50. Rupee stayed steady to mildly bullish despite higher CAD taking positive cues from sharp decline in headline WPI inflation print and robust FII flows. The trigger for extended weakness beyond 53.95 into 54.20 is largely attributed to sharp reversal in EUR/USD from 1.37 to 1.33; positive take-away is that of diluted impact of Euro traction on rupee. What next? The domestic cues continue to weigh heavy on rupee; macroeconomic fundamentals remain weak and fragile. The comfort for rupee is from strong FII flows and high FX premium maintaining forward market in supply driven mode. Importers derive great comfort from Government’s measures to address issues relating to growth and twin-deficits and RBI’s shift into growth supportive monetary stance. There is no sign of set up of “fear factor” for importers to panic at this stage. On the other hand, there will be set up of “greed factor” for exporters to rush to hedge medium/long term receivables and borrowers to shift long term rupee liabilities into dollars; current 12M forward rate around 57.75 will attract given the 2013 trading range of USD/INR at 51/53-56/58. Since entry into 2013, Rupee has been volatile; opened bullish at 54.90 (against 2012 close of 54.99) and rallied sharply from 55.38 (low on 8^th January) to 52.88 (hi on 6^th February) and now nervous at 54.20. USD/INR has now shifted into higher trading range at 53.50-54.50 with extension limited to 53-55. For the week, let us watch consolidation at 53.75/53.90-54.40/54.55; bias thereafter is for rupee recovery into 53.10-53.35 on positive cues from Budget FY14 and rate action from RBI. Rupee is also expected to get support from bullish momentum in Euro from 1.3250-1.3300 into 1.3550-1.3700 and signs of reversal in Commodity prices. The strategy is to build “short dollar book” in two lots at 54.40-54.55 and 54.75-54.90 (with stop above 55.00) while importers to stay aside for 53.75-53.90 and 53.35-53.50.   

EUR/USD traded end-to-end of intra-week support at 1.3300-1.3325 and resistance at 1.3500-1.3525; initial rally from 1.3324 lost steam at 1.3520 for sharp reversal into 1.3305 before close of week at 1.3360. What next? The ability to close the week above 1.3350 provides comfort for recovery into 1.3450-1.3525 and thereafter into 1.3700. It would be a  period of consolidation in the near term at 1.30/1.32-1.35/1.37. For the week, let us watch consolidation at 1.3275/1.3300-1.3500/1.3525; extension into outer corridor is expected to hold. The strategy is to trade end-to-end with tight stop/reverse on break thereof for extended move into either 1.3075-1.3150 or 1.3650-1.3725.

USD/JPY traded back-and-forth within set support zone of 91.95-92.25 and resistance zone of 94.25-94.75; initial rally from 92.34 failed at 94.42 for sharp reversal into 92.34 before close of week at 93.48. What next? The sharp rally (and depreciation of Yen) from 77.11 (16/9/12) to 94.42 (11/2/13) by 22% in less than 5 months has caught the attention of other Central Banks but there is no risk of sharp reversal while upside gains may be shallow from now on; May 2010 high of 94.98 is still in the radar while 92.00 stays firm. For the week, let us watch consolidation at 92.00/92.25-94.75/95.00. The strategy is to trade end-to-end with tight stop/reverse on break thereof for extended move into either 90.00-90.25 or 96.75-97.00.

Interest rate market:

10Y Bond traded end-to-end of set intra-week range of 7.79/7.81-7.88/7.90%; initial rally into 7.89% found solid support for swift reversal into 7.80% before close of week at 7.83%. The rally was triggered by OMO and sharp decline in headline WPI inflation print for January 2013 building up hope for rate cut on 19^th March mid-quarter policy review. It was followed by strong selling interest around 7.80% with Banks unwinding huge excess SLR investments. What next? As explained, it would be period of consolidation as bullish momentum from sharp downturn in WPI inflation is diluted by widening CAD and elevated retail CPI inflation. While RBI is expected to deliver 25 bps rate cut on 19^th March, it may be an extended pause thereafter. Given this expectation, MARKET PULSE considers it prudent to unwind longer tenor Bonds (10Y and beyond) on extended gains below 7.80% and to reduce the duration of the investment portfolio by shifting into shorter tenor bonds (5Y and below). It is prudent to take money off the table while retaining the portfolio yield. Moreover, upside gains is expected to be higher in the shorter tenor than in medium/long tenor as yield curve prepares for steepness to build tenor premium. For the week, let us continue to watch consolidation at 7.79/7.81-7.86/7.88 and move into outer corridor expected to hold. The strategy for traders is to trade end-to-end with tight stop on break thereof. Strategic investors who have unwound at/below 7.80% can stay prepared to reinstate in two lots at 7.85-7.87% and 7.90-7.93% given the short/medium term trading range at 7.65/7.70-7.90/7.95%; beware of huge supplies at 7.65/7.70-7.80% where it is not prudent to hold strategic investments.

OIS rates traded end-to-end of set intra-week range of 7.58-7.65% (1Y) and 7.23-7.30% (5Y) before close at 7.60% and 7.25% respectively. What next? Given the mixed cues, it would be period of consolidation but the tone would remain bid tracking hardening money market rates/yields. The system also may need to stay with operating policy rate at 7.5% till second half of 2013, thus triggering short term consolidation play at 7.50-7.65% in 1Y and 7.20-7.30% in 5Y. For the week, let us watch consolidation at 7.55/7.57-7.63/7.65% (1Y) and 7.20/7.22-7.28/7.30 (5Y) and move into outer corridor is expected to hold. It is traders market and it would be good risk-reward to trade end-to-end with tight stop on break thereof. Strategic players can stay away for break-out for action but strong momentum is not seen for break-out either way.

FX premium traded end-to-end of 7.50-7.75% (3M) and 6.50-6.75% (12M) before close at 7.6% and 6.6% respectively. The strong interest rate play which was building momentum for break-up into 8% and 7% met with strong headwind from exchange rate play driving USD/INR from below 53 to above 54. The undertone continues to remain bullish despite 25 bps rate cut expectation on 19^th March with risk of reversal in USD/INR from above 54.20 into below 53.60 in the near term. For the week, let us watch 7.35/7.50-7.75% (3M) and 6.40/6.50-6.75% (12M); risk of break-up into 8% and 7% on shift into last month of FY13 remains valid. The strategy is to stay paid at 7.35-7.50% (3M) and 6.40-6.50% (12M) for near term objective at 7.75-8.0% and 6.75-7.0% respectively.

Equity market:

NIFTY posted intra-week rally from 5879 to 5969 but only to reverse sharply for extended weakness into 5853 before close of week at 5887. MARKET PULSE strategy was to sell at 5935-5960 (with stop above 5970) while expected near term reversal from above 6100 into 5825-5850 has been met. What next? The undertone is not bullish given the lack of participation from domestic investors who continue to prefer Fixed Income assets for coupon and price appreciation; makes sense. There is also no cheer from macroeconomic fundamentals with severe pressure on growth and twin deficits. While the cues are uncertain and mixed in the near term, there is confidence that momentum will be built to trigger short/medium term rally in second half of 2013. Given these expectations and lack of confidence on corporate performance in next reporting quarters, NIFTY is expected to stay in consolidation mode with mild bearish undertone pulling 5750-5765 into the radar while 5960-5985 stays firm. For the week, let us watch consolidation at 5800/5850-5950/6000; move into outer corridor will attract. The strategy is to sell in two lots at 5920-5935 and 5960-5985 (with stop above 6000) for 5820-5845. Strategic investors who unwound investment at/above 6100 can stay prepared to re-build the book with first lot at 5825-5840.

Commodity market:

Gold has met the set reversal objective at 1590-1605 (low at 1598) from set sell zone of 1680-1695 (high at 1685) before close of week at 1609. The undertone is bearish pulling 1530 into the radar; first signal will be on break of 1585 while 1620-1635 stays firm. But there are no strong signals for extended weakness below 1530 with risk of relief rally (on shorts squeeze) into 1660-1685. For the week, let us watch 1565/1580-1620/1635 with bias into lower end. The strategy is to reinstate “shorts” at 1620-1635 (with stop above 1645) for 1565 ahead of 1530.

NYMEX Crude traded back-and-forth within set weekly range of 95.00-97.75/98.50; initial rally from 94.97 held at 98.11 and back into 95.21 before close at 96.05. There are signs of loss of bullish momentum and prepare for sharp unwind of recent rally from 84.05 to 98.24; first signal will be break of immediate support at 94.85-95.00 with targets at 92.85 and 91.15. For the week, let us watch 93.00-97.50/98.25 with bias into lower end. The strategy is to stay “short” at 97.50-98.25 (with stop above 98.50) for 93.00 ahead of 91.00-91.25.

Have a great week ahead and Good luck! ....................................Moses Harding

Weekly report for 11-15 February 2013

MARKET PULSE: Weekly report for 11-15 February 2013

Exchange rate market:

USD/INR traded end-to-end of set weekly range of 52.85-53.60; initial rupee rally into 52.88-52.91 could not sustain for sharp reversal into 53.65 before close of week at 53.50. In the meanwhile, 3M forward dollar rallied from intra-week low of 53.90 to 54.67 before close around 54.50. MARKET PULSE strategy was to (a) completely unwind “short dollar” book at 52.85-53.10; (b) buy 3M dollars at forward value below 54.00 and (c) sell 3M dollars at/above 54.65. What next? The undertone for rupee is neutral to mildly bullish on solid inflows from off-shore investors into debt and equity market. Rupee held strong despite sharp reversal in EUR/USD from above 1.37 to below 1.34 (USD Index up from below 79 to above 80). While the near term (up to release of Budget FY14) momentum is in favour of rupee, short/medium term outlook is bit suspect and lacks clarity. It is good that high FX premium keeps importers’ appetite very low in the forward market which adds to rupee bullish undertone. The big worry for rupee bulls is from weak macro fundamentals of the Indian economy and ability of the Government and RBI to implement (and execute) course-corrective measures. Some measures such as higher limits for capital account flows, accelerated clearance of FDI proposals, cutting non-essential imports like Gold & precious metals and removal of subsidy to reduce consumption of essential imports will do good in short/medium term. But lot more to do to not only cut the huge (and widening) Current Account deficit but also to finance the gap through capital account to cut its adverse impact on rupee exchange rate. The sudden reversal in USD fortunes (from bearish to bullish) against major currencies is also a concern with the need to keep rupee weak to protect exporters’ interest. Given all these factors, MARKET PULSE continues to stay with set near term range of 52.85/53.10-53.85/54.10 and prefer end-to-end consolidation with test/break either-way not to sustain. The need is to focus on the next 3 months; urge importers to cover 3M dollar liabilities at 53.90-54.00 (with intent to unwind on spot dollar rally into 53.85-54.10) and exporters to sell 3M dollar receivables at 54.85-55.00 (with intent to unwind on spot rupee rally into 52.85-53.10). At this stage, let us stay neutral on break-out of set near term range of 52.85-54.10 which then would bring either 51.35-51.60 or 55.10-55.35 into the radar. For the week, let us watch consolidation in USD/INR at 53.10/53.25-53.70/53.85 with risk of break-up into 53.95-54.10 which should hold. The strategy for traders is to trade end-to-end while hedgers look to cover end February imports at forward value of 53.30-53.45 and await spot rupee weakness into 53.70-53.85 and 53.95-54.10 to hedge 3M exports. Exporters can also look to absorb higher FX premium by receiving 1-12M (February/January at/above Rs.3.25 for 11 months) and await higher spot at 53.85-54.10 before end of February.  

EUR/USD lost its bullish undertone; MARKET PULSE looked for sharp (and deep) correction from above 1.37 into 1.3350-1.3450 for gaining steam for extended rally into 1.40-1.43. EUR/USD reversed sharply from 1.3711 to 1.3352 before bearish weekly close at 1.3363. In the meanwhile USD Index held at strong support zone of 78.60-79.10 (low of 78.92) for sharp rally into set objective at 80.10-80.60 (high at 80.28) before close of week at 80.21. What next? Euro is set for extended weakness into 1.3250 and thereafter into 1.30-1.31 where we look for reversal signals with near term range at 1.30/1.31-1.34/1.35. For the week, let us watch 1.3150-1.3450/1.3500 with risk of extended weakness into 1.3075-1.3025 before strongly up. The strategy is to stay “short” at 1.3435-1.3485 for 1.3165-1.3215 and 1.3065-1.3015 and switch sides for relief rally back into 1.34-1.35. In the meanwhile, USD Index would extend its rally into 80.80-80.95 while 79.80-79.95 stays firm.

USD/JPY traded back-and-forth between set support zone of 91.75-92.25 and solid resistance (and reversal) zone of 93.50-95.00; intra-week rally from 91.96 failed at 94.06 for sharp reversal into 92.15 before close of week at 92.66. What next? The sharp rally in USD/JPY from 77.11 (16/9/12) to 94.06 (10/2/13) by 22% in less than 5 months is splendid though bit short of May 2010 high of 94.98. It is time for consolidation and sideways trading mode before getting the trend above 95 into 98.00-99.50 while 90.00 stays firm. For the week, let us watch consolidation at 90.00/91.50-93.50/95.00. The strategy for traders is to trade end-to-end while hedgers look to cover JPY liabilities (imports and loans) in 2 lots at 93.50-95.00 (already seen but do not rule out second attempt/failure) and 98.00-99.50.

Interest rate market:

10Y Bond found solid support at buy zone of 7.93-7.95 (low of 7.94) and reversed sharply into 7.84% post release of advance estimate of GDP growth at 5%, thus trading back-and-forth of set near term range of 7.80-7.95% (pre-monetary policy high of 7.79 and post-policy low of 7.94%). What next? It is not clear at this stage on RBI’s comfort for shift of monetary policy stance from “moderate” to “dovish” to support growth. Despite serious growth concerns, RBI will look for confirmation in moderation in fiscal policy (and improvement in Current Account Deficit) before shift into aggressive growth supportive monetary stance. It would need more than 25 bps rate cut to trigger extended gains in 10Y Bond below 7.80% which is not seen to be in the radar right now. On the other hand, there is very high risk of build-up of sharp steepness in rate/yield curve, allowing sharp gains in the shorter tenor and moderation in medium/long tenor. This expectation and pipe-line bond supplies from RBI in longer tenors will result in churning of investment book from longer end (to realise profits) to shorter end (to retain portfolio yield and for extended rally) and to cut duration of the portfolio when medium/long term outlook is uncertain. Let us watch more signals from Budget FY14 (end of February) and Annual monetary policy review for FY14 (end of April) to set up medium/long term trading/investment strategy. Till then undertone is expected to stay neutral and mixed with mild bearish undertone. The short term trading range is seen at 7.65/7.80-7.95/8.10 and it would be good to unwind medium/longer tenor bonds on extended gains into 7.65-7.80 (and lock into similar yields at shorter tenors) while adding to 10Y Bond at 7.95-8.10. For the week, let us watch consolidation at 7.80-7.90 with test/break either-way to attract. The intra-week trading strategy is to hold “long” entered at 7.93-7.95% and add in two lots at 7.88-7.90 and 7.93-7.95 for unwind at 7.79-7.81%.  

OIS rates reversed sharply from set resistance/receive level of 7.65% (1Y) and 7.32% (5Y) into set strong support of 7.58-7.60% and 7.20-7.22% respectively before close of week at 7.60% and 7.24%. What next? The next round of rate cut hopes will provide consolidation in 1Y at 7.50-7.65% while 5Y OIS rate is expected to trade steady around 60 bps spread with 10Y Bond yield. For the week, let us watch 7.55-7.63/7.65 (1Y) and 7.20-7.30/7.32 (5Y) with test/break either-way not expected to sustain. The strategy is to retain “received book” entered in 1Y at 7.65% and 7.32%, add at 7.63-7.65% and 7.30-7.32% for unwind at 7.55-7.57% and 7.19-7.21% respectively.

FX Premium traded steady around 7.65% (3M) and 6.65% (12M) within the set near term range of 7.50-7.75% and 6.50-6.75% respectively. The undertone is firm on strong interest rate play while exchange rate play is neutral and mildly bearish. For the week, let us continue to watch 3M at 7.50-7.75% and 6.50-6.75% and prepare momentum for extension into 8% and 7% respectively in the near term. The strategy is to stay paid in 12M at/below 6.60% for 6.90-7.10%. There  will be exporters’ interest in 3M absorbing gains above 7.65%.

Equity market:

NIFTY traded to the script of set weekly range of 5850/5920-6045; lost steam at 6038 for sharp reversal into 5883 before close of week at 5903. The strategy to exit “longs” post monetary policy at/above 6100 (recent high of 6111) and stay aside for 5825-5850 has worked well. What next? The undertone is weak (and bearish) despite strong FII play. The lack of confidence on early turnaround in the Indian economy is keeping domestic investors tuned to Bond market while funds continue to flow into high yielding short term money market/fixed income assets. The risk factor is from FIIs shift of appetite from equity to Bonds for “carry” (and time value) till equity asset forms a solid base for sustained rally. The immediate focus is on 5823 (low of 18/12/12) and break here will get the focus into 5549 (low of 19/11/12). It should be serious concern for the bulls post sharp reversal of 3.7% (from 6111 to 5883) in 9 trading sessions! For the week, let us watch 5800/5825-5935/5960 with initial bias into lower end. The strategy for traders is to sell into 5935-5960 (with stop above 5970) for 5800-5825. Strategic investors who unwound investment book at/above 6100 can stay prepared to re-build the book, first (of three) lot at 5820-5835 and watch this space for next action.   

Commodity market:

Gold traded back-and-forth of 1660-1685 (low at 1661 and high of 1684) before close of week at 1666. The set “sell zone” of 1680-1685 has held well (twice) but reversal from there finds solid support at 1660 and lacks steam for extension into 1625-1640. There is no change in set near term range play between strong support zone of 1625-1640 and resistance zone of 1680-1695 and the tone continues to stay neutral to mildly bearish. For the week, let us watch consolidation at 1650/1660-1675/1685; bias thereafter is for extended weakness into 1625 which should hold. The strategy is to retain “short” entered at 1680-1685; add at 1675-1685 for 1625-1640.

NYMEX Crude struggles to retain gains above 97 (third failure at immediate resistance zone of 97.50-98.25 ahead of 99.75-100.50) but reversal from there is held at strong support zone of 94.75-95.25. The undertone is neutral to mildly bullish tracking decent economic data from western economies and mild tensions in the Middle East. For the week, let us watch consolidation at 94.25/95.00-97.75/98.50 with test/break either-way to attract. The strategy is to trade end-to-end with tight stop on break thereof. The risk of extended rally into 100.42 (high seen at 16/9/12) is not yet out of the radar while 92 stays firm.

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

Weekly report for 4-8 February 2013

MARKET PULSE: Weekly report for 4-8 February 2013

RBI delivered beyond expectations but markets in bearish mode on lack of optimism

RBI delivered to expectations on rates with 25 bps cut and surprised the market with 25 bps CRR cut but lack of optimism (and confidence) in RBI’s tone (and guidance) drove asset markets into bearish mode. 10Y Bond is down from 7.80 to 7.93 and NIFTY fell from 6100 to 5980. Why? There seems to be “disconnect” between the “fact sheet” and “policy action”.  The pre-policy review highlighted elevated twin-deficits as major risk to inflation with added pressure (in the near/short term) from recent price-hikes and higher commodity prices. Against this back drop, RBI revised the headline WPI target of March 2013 from 7.5% to 6.8% with reminder of its 4.0-4.5% comfort zone. However, there was no reference to retail CPI inflation print which is dangerously above 10%. Obviously so, RBI cautioned the stake-holders on the availability of limited monetary band-width to support growth. While RBI delivered to its commitment given in December 2012 mid-quarter review guidance, market stake holders did not expect a hawkish guidance in January 2013 quarterly review. It is difficult to connect such a hawkish guidance with policy easing, hence the post-policy bearish set up on asset markets! With monetary policy out of the way, attention now shifts to Budget FY14. Here again, it is to be seen how the Government will limit fiscal deficit at 5.3% for FY13 and deliver to its promise of 4.8% for FY14. It is less said the better on the Current Account deficit; BRENT Crude is up 15% since November 2012 and “currency-war” in peer economies making things difficult for Indian exporters with the risk of losing market share and top-line sales! Over all, there is lack of confidence on early resolutions to twin-deficits. It would be difficult task to get growth pick-up through policy reforms, attracting large scale investments from resident and off-shore entities. There is lack of optimism at this stage and the focus is on the implementation and execution of recent reforms and much more, not only to attract investments but also to revive core sectors.  The expectation of best case scenario of LAF corridor at 6.50-7.50% stays valid and not sure on the timing of next round of 25 bps rate cut!

The impact of policy action may not result in significant transmission in money market rates and yields. MM rate curve in 3-12M tenors across bank deposits, CPs and CDs are already up and would head higher into financial year end. On the other hand, there will be shift of credit demand from foreign currency to rupees. The high FX premium makes it attractive for exporters to borrow in rupees; at current level of 3M FX premium and 2% interest subvention, it is zero cost rupee funding for exporters. The surplus dollars in the system will continue to keep FX premium at elevated levels to retain demand for rupee credit and provide solid support to MM rates. There is very limited chance of easing in MM rates despite cuts in policy rates and CRR. SBI showed the way with token 5 bps cut in its Base Rate highlighting the insignificant price transmission on deposit rates. Over all, RBI would take comfort that moderation in monetary policy has been achieved through 75-100 bps rate cut and 2.5% cut in CRR since April 2012 and would look up to the Government to achieve moderation in fiscal policy and work towards removal of supply-side bottlenecks to ease pressure on headline CPI inflation. What is the impact on markets?

Interest rate market:

10Y Bond yield is up from pre and post policy low of 7.79-7.83% to 7.93% before close of week at 7.90%, thus trading end-to-end of set weekly range of 7.83/7.85-7.93/7.95. The undertone is weak on many counts; aggressive rate cuts is not in the radar in the near/short term, there will be large scale unwinding of excess SLR investments for profit-booking ahead of financial year end, low appetite for fresh bond issuance from RBI, lack of optimism on the ability to contain downside risks on twin deficits and emergence of growth-inflation conflicts in the near/short term. The relief will be from reduced market borrowing from the Government for rest of FY13 as they prepare to cut expenditure to the tune of Rs.1 Trillion and possible support from RBI through OMOs to arrest excessive weakness beyond 7.95-8.0%. For the week, let us watch 7.85/7.87-7.95/7.97 with bias into higher end. The strategy of MARKET PULSE to completely unwind investment book at 7.80-7.83% has worked well; reversal from here has already met the first re-entry level at 7.93-7.95% while preparing momentum for extension into 7.98-8.0%. At this stage expectation of 7.60-7.65% is out of the radar which shall be reviewed post Budget FY14 when we would get better clarity on RBI’s monetary action in its mid-quarter review on 19^th March 2013.

OIS rates sharply up from pre and post policy low of 7.50-7.53% (1Y) and 7.10-7.13% (5Y) into set objectives at 7.62-7.65% and 7.27-7.30% respectively. The expectation of 25 bps rate cut in Q1 of FY14 will resist extension of rally in 1Y beyond 7.65% while not ruling out extended rally in 5Y beyond 7.30% into 7.35-7.40%. For the week, let us watch consolidation in 1Y at 7.55/7.58-7.65% and 5Y at 7.20/7.23-7.32/7.35%. The strategy is to build “received book” at/above 7.65% (1Y) and at 7.32-7.37 (5Y) in anticipation of correction into 7.55% and 7.20% respectively.

FX Premium traded firm to hit 7.5% in 3M and 6.6% in 12M. The undertone is bullish driven by excess dollars in the system as borrowers prefer rupee loans to encash high premium in shorter end. The uptrend in money market rates make it cost efficient to swap FC into rupees. It suits RBI as high FX premium extends support to spot rupee with exporters leading future receivables while importers refrain from acquiring forward dollars at high premium. For the week, let us watch consolidation in 3M at 7.35-7.60% and 12M at 6.45-6.70% with break either-way to attract. The strategy for exporters is to absorb 3M at/above 7.5% (for availing rupee export finance) while inter-bank diverts surplus dollars in its books to pay 12M at/below 6.5% to fund rupee assets. Traders can trade end-to-end but stay paid on dips in 12M for extension into 6.85-7.0% in the near term.

Exchange rate market:

USD/INR ran out of steam at 53.85-53.95 sell window (high of 53.95) and reversed sharply into set near term objective at 52.85-53.10 (low of 53.06) before close of week at 53.20. In the process, value of 3M dollar fell sharply from recent high of above 56.75 (seen on 26/11/12) by 3 rupees after adjustment of 2 months carry. It is also down by more than Rs.2.5 rupees since first week of January 2013 high of 56.35. MARKET PULSE was urging exporters to cover 3-12M receivables on rupee weakness into 55.85 (in November 2012); add to 3M “shorts” at/above 55.35 in the first week of January 2013 and till 53.85 (in the previous week). The strategy was also to unwind “short dollar book” at 52.85-53.10 and prepare to switch sides to build “long dollar book” at 52.60-53.85. It was then considered high risk to stay “long dollars” at 55.10-55.60 and it is now seen not prudent to stay “short dollars” at 52.60-53.10. Rupee has not only outperformed the peers in January 2013 but continued its rally post-monetary policy despite strong bearish set up in Bonds and Equity markets. While concerns from CAD continue to stay valid, rupee got solid support from good supplies from FIIs (into debt and equity market), large ticket equity raising inflows and supply-driven mode in the forward market (due to high premium) despite limited support (to rupee) from rally in EUR/USD. What next? Rupee is seen to have gone into consolidation mode at 52.60-53.60; bias thereafter is for possible break-down into 53.85/54.10 on emergence of bunched up dollar demand and strong resistance in FX premium beyond current levels. 3M forward dollars at 53.60-54.00 (spot at 52.60-53.00) may not attract exporter’s interest while it may look good for importers given the risk of weakness in spot rupee into 54-56 on any bad news or on strong reversal in EUR/USD. On the other side, 53.85-54.10 is strong support for rupee; 12M forward dollars at 57.35-57.60 will attract exporters’ interest. It is also possible that RBI takes into account exporter’s interest to arrest excessive rally in rupee into 52.60-53.10. Taking all these together, consolidation at 53-54 is seen as ideal range to balance inflation impact and exporters’ competitiveness. MARKET PULSE retains its intra-2013 range of 51.35-55.88 with expectation of move into lower end in the second half of 2013. For the week, let us watch consolidation at 52.60/52.85-53.60/53.85; test/break either-way is not expected to sustain for long. The strategy is to unwind “short dollar book” at 52.85-53.10 (with trail stop at 53.40) and build “long dollar book” at 52.60-52.85 (1M dollar at 52.90-53.15 and 3M dollar at 53.60-53.85) with stop below 52.50. Exporters can look to absorb higher FX premium by receiving 1-12M (February/January 2013 at/above Rs.3.25 for 11 months) and await higher spot at 53.85-54.10 by end of February.

EUR/USD traded to the script within the set intra-week range of 1.3400-1.3750 (low at 1.3413 and high at 1.3711) before close of week at 1.3639. Euro derives comfort from extended QE from FED and threat of US rating downgrade with signs of financial recovery in the Euro zone. The undertone is bullish into 1.40-1.43 in the near term while above 1.3500-1.3550 support zone. For the week, let us watch consolidation at 1.3500/1.3550-1.3750/1.3800. Strategic players can retain “long book” with trail stop below 1.3550 for 1.3750-1.3800. It is possible that EUR/USD gets into correction mode from 1.3700-1.3800 into 1.3550-1.3400 before gaining steam for 1.40-1.43.

USD/JPY extended its rally into 93 (high so far at 92.96 with strong weekly close at 92.72) and has met the set target for 2013 at 92-95 ahead of time. It is a one-way run since mid September low of 77.11 posting over 20% gains in 4 months time. Many see this as “currency war” to revive Japanese exports and economy which is stagnant for over a decade, makes sense! But, how far it can go? Extended gains into 95 is possible but would need deep correction from some point at 93-95 into 88-90. Strategic players having unhedged medium/long term imports and/or JPY liabilities can look for hedge of imports at 93-95 and shift JPY liabilities into USD. For the week, let us watch 90.25/91.75-93.50/95.00; momentum is good for extended rally into higher end before sharp reversal.

Equity market:

NIFTY traded to the script of set weekly range at 5980/6005-6100/6125; reversed sharply from post-policy high of 6111 for gradual weakness into 5983 before close of week at 5998. MARKET PULSE post-policy strategy was to unwind investments at/above 6100 for correction into 5980-6005 which has worked well. What next? Despite strong FII interest, domestic investors continue to stay sidelined on uncertain domestic market dynamics. Despite moderation in monetary policy, there is little optimism in the way forward; while the market has priced-in all positive cues of recent actions on policy reforms and fiscal consolidation, lack of optimism on its impact on macro fundamentals is yet to be priced in. With monetary policy out of the way, the next major trigger will be from Budget FY14. The strategy of the Government to cut (or carry-over?) of Rs.1 Trillion expenditure will have its impact on growth and domestic liquidity. The undertone into Budget FY14 will be neutral to mildly bearish bringing 5825-5840 into the radar while 6045-6060 stays firm. For the week, let us watch 5920-6045 with bias into lower end, not ruling out extended weakness into 5825-5850. The strategy is to build “short” at 6035-6060 (with stop at 6085) for 5920-5850. It is also good to reinstate short term investment book with first lot at 5900-5925 while retaining good appetite for 5825-5850.

Commodity market:

Gold traded end-to-end of 1650-1685 before close of week at 1666.50. The cues into immediate term are mixed but undertone is mildly bearish with strong resistance at 1670-1685, but there may not be strong momentum to take out strong support at 1625-1640. However, there is risk of extended weakness in the near term into 1525-1540 on portfolio shift from commodities to bonds and equities. For the week, let us watch 1625/1640-1670/1685 with bias into lower end. Strategic players can retain “shorts” entered at 1680 and add at 1680-1695 for 1625-1640 ahead of 1525-1540.

NYMEX Crude extended its bull run over 97 into 99 (high of 98.24) before close of week at 97.77. The tone is bullish despite one-way run from 85 since mid November 2012, up by over 15% in less than 3 months. The ability to hold above 96.75-97.00 carries higher risk of test of 100.42, high seen in mid September 2012. The bullish tone is from combination of good performance of other asset classes and better growth prospects while tensions in Middle East provides strong support around 95. For the week, let us watch 95/97-99/100.50 with bias into higher end. The strategy is to retain “longs”, add at 96.50-95.50 with stop below 95 for 99.00-100.50. It is considered good to switch sides there by opening up “short” book at 99.50-100.50 with stop at 101.

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