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