Weekly report for 25-29 March 2013

MARKET PULSE: Weekly report for 25-29 March 2013

Political uncertainty and limited monetary support dilutes confidence

The Indian economy (and its asset markets) encounters strong headwinds from all sides, hurting the investor sentiment and confidence. The Euro zone crisis strikes back through Cyprus and there is fear of more in pipe-line. There is absolute lack of confidence in the economic recovery of Euro zone with struggle to stay afloat. On the domestic front, RBI maintains its hawkish monetary stance. The stake-holders anticipated RBI to be more concerned on growth taking comfort from sharp down-trend in headline WPI and core inflation. The hope was built on the presumption that RBI will shift into loose monetary policy stance in recognition of shift into tight fiscal policy stance. It is obvious that sustainability of tight fiscal policy is dependent on quick shift into higher growth trajectory. It is not that it is possible only with favourable monetary conditions (of low interest rates and surplus system liquidity) but it will definitely be a catalyst to the process. The bolt from the blue is the political uncertainty building doubts over the ability of minority UPA to roll-out key reforms covering FDI limit enhancement in select sectors, tax (and land) reforms and more importantly igniting the pick-up of infrastructure (and core) projects. The market is not expected to get into bullish mode unless the fiscal consolidation is achieved through growth pick-up and not through cost compression. Government’s disinvestment process (for one-off revenues) has limited appetite from investors and the bail out from PSU FIs is not seen in good light. All told, dynamics are very complex at this stage with strong cross-winds inhibiting combined strength of political, fiscal and monetary forces come into play for lifting the growth trajectory in FY14. What is the impact on markets?

Exchange rate market:

Rupee derives comfort from good off-shore flows and elevated FX premium despite pressure from high Current Account deficit and weak macroeconomic fundamentals. There is no clear trend at this stage given the cross-winds. USD/INR finds strong support at 53.90-54.05 attracting importers’ interest to cover 1M dollar liabilities (April’13 dollars at/below 54.50) while 54.40-54.55 seen good to cover 3M exports (June’13 dollars at/above 55.50). The down-side risks to rupee (beyond 54.55 into 54.80/55.15) will be from FII pull-out and warning signals from rating agencies if economic data prints do not provide comfort on growth, inflation and twin-deficits. On the other side, it is prudent to arrest extended rupee gains beyond 53.90 (into 53.65) to retain export competitiveness and RBI using this opportunity to build dollar reserves to release pressure on tight system liquidity. The trading range for rest of 2013 is seen firm at 53.65-55.15. USD/INR has been volatile in 2013; 55.38 to 52.88 to 55.15 to 53.89 and now there is risk of move into 54.80-54.95 while 53.90 stays firm. In the absence of favourable trending in macroeconomic indicators, intra-2013 low of Rupee at 55.38 will be at risk, while it would need dramatic turnaround in confidence to trigger rupee gains below 53.89 into intra-2013 high of 52.88. The hedging strategy for 2013 (and FY14) should reflect these expectations. For the week, let us watch consolidation at 53.90/54.05-54.40/54.55. The hedging strategy is to stay covered on imports due till April’13 (end April’13 dollars at/below 54.50) and consider good to sell 3M exports (end June’13 at/above 55.50). Exporters can await higher spot to cover 6M exports (end September’13 at 56.60-56.85) and 12M exports (end April’14 at 58.50-58.75) while importers extend coverage to 1-3M on rupee gains into 53.65-53.90.

EUR/USD sharply down into 1.2850 (from 1.3100-1.3150) post fresh issues from the Euro zone and thereafter got into consolidation mode at 1.2850-1.3000. In the meanwhile USD Index traded in consolidation mode at 82-83. The undertone is weak which can run deep into lower end of set near term range of 1.2650-1.3150 with USD safe-haven preference driving the Index into/above 84. For the week, let us watch consolidation at 1.2850/1.2925-1.3075/1.3150. The strategy is to trade end-to-end while staying neutral on break-out into 1.2650 or 1.3350. The near term trading range is seen at either 1.2650-1.3150 or 1.2850-1.3350.

USD/JPY was in consolidation mode at 94-96 post the sharp recovery from 91 to 96.71. The bullish undertone is retained on BOJ monetary/financial support for eventual move into 100. BOJ will work to retain JPY weakness into short/medium term to support economic recovery.  For the week, let us watch consolidation at 93/94-96/97. The strategy is to trade end-to-end while staying prepared to build strategic “long” book at 93-94 for 99-100.  

Interest rate market:

10Y Bond is down from 7.78-7.80% to 7.96-7.98% despite delivery of expected rate cut and assurances on OMOs (without delivery of CRR cut). It is not very negative per se but the tone of monetary policy and fear of demand-supply mismatch on shift into FY14 triggered the fall. MARKET PULSE strategy was to unwind “long bond” portfolio (10Y and beyond) at 7.78-7.80%, cut duration of the portfolio by shift into 1-3 year tenors in anticipation of sharp reversal for buy back in 3 lots at 7.93-7.95, 7.98-8.0 and 8.03-8.05 which would then complete end-to-end of set short term range of 7.80-8.05%. For the week, let us watch 7.90/7.93-8.0/8.03 with bias into higher end. Strategic players can retain “long book” entered at 7.95-7.98%, and await 8.00-8.05% (for the third and final lot) while enjoying the “carry” of minimum 45 bps against LAF/CBLO. Need to carry this portfolio with patience; it is similar kind of chase that MARKET PULSE made from 8.20-8.25 to 7.78-7.83. This time the chase is expected to be from 8.00-8.05 to 7.65-7.75% building 25-50 bps rate cut in April-June 2013, setting up short/medium term range play at 7.65/7.75-8.0/8.05%.

OIS rates remained firm; 1Y up from 7.50 to 7.55% but 1X5 steepened to push 5Y from set pay zone of 7.10-7.13% into 7.28-7.30% in quick time. We continue to watch the set short term range of 7.35-7.60 (1Y) and 7.10-7.35% (5Y); test/break either-way is not expected to sustain. For the week, let us watch 1Y at 7.53-7.58% and 5Y at 7.22-7.30%. The strategy is to switch sides by initiating “received book” in 1Y at 7.58-7.60% and in 5Y at 7.30-7.35%; there are no major cues to trigger break-out of the set short term trading range of 7.35-7.60% (1Y) and 7.10-7.35% (5Y). The strategy to receive 1Y at 7.57-7.60% and pay 5Y at 7.10-7.13% has worked well and it is time to retain 1Y received book and unwind 5Y paid book at 7.28-7.33%.

FX Premium remained firm to hit 8.0-8.10% (3M) and 6.70-6.75% (12M) to complete the move from 7.60% and 6.40% respectively. The strategy was to unwind “paid” book and switch to “received book” at/above 8% in 3M and at/above 6.7% in 12M. For the week, let us watch 7.75-8.0% (3M) and 6.50-6.75% (12M) with bias into lower end on shift of spot date into April. The strategy is to hold “received book”, add at 7.90-8.0% in 3M and 6.70-6.75% in 12M for near term objective at 7% and 6% respectively.

Equity market:

NIFTY completes end-to-end of 5600-6100 near short term range; down from 6111 to 5631 in less than 2 months and weekly close at 5651 is bearish. The trigger is from combination of weak domestic and global cues with lack of support from domestic investors. Despite this sharp fall of 8% in 2 months, FIIs are seen with patience to stay invested. The undertone is neutral only for the reason that NIFTY is trading at lower end of set short term range of 5600-6100 and can gain steam to set up relief rally into 5850. The strategy of MARKET PULSE was to absorb weakness into 5600-5650 with tight stop for this relief rally but the recovery from 5631 could not take out 5700 which is major worry. For the week, let us watch 5550/5625-5825/5875; extension into outer corridor will attract good interest. It will be very bearish below 5550 which could trigger FIIs exit. All taken, there are no strong cues to build strategic investments till some positive surprises emerge from political, fiscal and monetary dynamics.

Commodity market:

Gold extends its relief rally from 1560 to 1615 getting its shine back from Euro zone worries. The tone is mildly bullish for extension into 1685 to retain set short term range play at 1500/1525-1675/1700. MARKET PULSE preferred formation of short term base above 1500-1525 (low at 1554.50) for consolidation play into 1605-1620 (high at 1616) before getting back to bearish trend for 1300. Gold is down from 1800 since October 2012 to 1550 in 4 months and resultant shorts squeeze with combination of risk-off sentiment from the Euro zone has provided relief rally into set reversal objective. For the week, let us watch consolidation at 1585/1600-1635/1650. Strategic investors can look to sell at 1650-1700 for reversal into 1500-1550.

NYMEX Crude completes end-to-end of set near term range of 89/90-94/95 (low at 89.33 and high at 94.09) and there are no strong cues to suggest break-out of this range. For the week, let us continue to watch consolidation at 91.00/91.50-94.50/95.00. Strategic investors can look to build “short” book in two lots at 94-95 and 97-98 (with stop at 98.50) for 89.50/85.50,

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

No surprises from RBI but no comforting signals

Caution on inflation and comfort on growth is bearish on markets

RBI delivered to expectation on policy rates, and not delivering CRR cut is not relevant to markets with option to release liquidity through Bond/USD purchases. RBI has already absorbed excess dollar supplies (to release rupees) on recent rupee rally from 55.15 to 53.90. RBI has ensured to retain post-policy price stability through its neutral stance on the way-forward. There are no signals of its comfort on inflation or concerns on growth! The balancing act between growth-inflation dynamics continues to be on stage!

The cues into the way forward are mixed. RBI has chosen to avoid sending bullish signals at this stage. The die-hard bulls expected RBI to exhibit its comfort on inflation and concerns on growth. So, bulls are disappointed. On the other hand, RBI has retained the declining interest rate cycle creating space for 25-50 bps rate cut before June 2013. This should provide comfort to bulls absorbing excessive weakness from now on. Over all, there is no shock or awe feeling post-policy as RBI continues to watch developments in global and domestic factors to shift bias from inflation to growth! It is worry that RBI is not yet prepared to walk along with the FM despite best efforts to dilute risks (on inflation) from policy reforms, fiscal consolidation and Current Account deficit. RBI is doing its bit to dilute the risk on growth from monetary conditions; but given the large appetite, the dosage is not seen to be enough! Hence, the bearish set up on asset markets post-policy!

Markets are expected to stay in consolidation mode; NIFTY at 5650/5750-6000/6100; USD/INR at 53.60/53.85-54.35/54.60 and 10Y Bond at 7.80/7.83-7.92/7.95. The strategy is to absorb post-policy weakness into 5650-5750; 54.35-54.60 and 7.92-7.95% for possible near term rally into 6000-6100; 53.60-53.85 and 7.80-7.83.

Moses Harding  

Weekly report for 18-22 March 2013

MARKET PULSE: Weekly report for 18-22 March 2013

Exchange rate market:

USD/INR reversed quickly into the set first reversal objective of 53.95-54.05 (low at 53.97) from sell zone of 55.10-55.35 (high at 55.15), and traded end-to-end of set intra-week range of 53.95/54.10-54.55 (high at 54.52/low at 53.97) before close of week at 54.02. MARKET PULSE urged exporters to stay covered in 3-12M exports (3M at/above 56.00 and 12M at/above 58.50 on USD/INR rally over 55.00 where USD is over-valued) and borrowers to shift rupee loans to dollars to encash higher spot and attractive FX premium. In the intra-week update (on the Twitter), exporters were urged to sell April’13 dollars at/above 55 on spot rally into 54.45-54.55. So, exporters would stay comfortable on Rupee rally from 55.15 to 54.00 while it is great relief for importers who stay open on FC liabilities (post unwind of hedge entered at 52.85-53.10) deriving comfort of short/medium term USD/INR consolidation at 53-55. What next? The undertone of Rupee is bullish; downside risks from twin-deficits and fear of rating downgrade is not relevant while stable commodity prices and RBI’s shift to growth supportive monetary stance add to bullish momentum. There is greater comfort now on sustainability of off-shore flows into Indian debt and equity capital market. The high forward premium continue to keep forward market in supply driven mode; importers do not have the fear (of rupee depreciation) to pay high premium to acquire forward dollars while exporters are in greed to absorb high premium (with comfort on rupee stability). The trading range was reviewed on 15^th March with set up of strong resistance at 54.05-54.20 for extended rupee gains below 53.93 into 53.60 to completely unwind the post-budget dollar rally from 53.60 to 55.15; beyond there, pre-January monetary policy high of 52.88 is pulled into the radar. For the week, let us watch 53.60-54.10/54.25 with bias into lower end. The strategy is to chase rupee gains into 53.60-53.70 (with trail stop above 54.25) and stay neutral on extension into 53.20-53.35 or correction from there into 54.05-54.20. It will be good for importers to absorb extended rupee gains into 52.85-53.35 where dollar will look cheap to acquire. It is good opportunity for RBI to absorb excess dollar supplies without hurting the rupee bullish tone. The near/short term undertone is firmly in favour of rupee for consolidation at 52.85/53.10-54.10/54.35. The only risk factor is from disappointment from RBI which will quickly get the focus into 55.10-55.35 (not a preferred scenario).

EUR/USD traded “inner ring” of set weekly range of 1.2885-1.3085 (low at 1.2910 and high of 1.3107) before close of week at 1.3080, while USD Index failed to retain gains above 82.85-83.00 (high of 83.16) for sharp reversal into 81.85-82.00 (low of 82.05) before close of week at 82.12. What next? The ability of EUR/USD to hold at near/short term base of 1.29-1.30 provides confidence to the bulls for strong push into 1.34-1.35. EUR/USD will find solid support at 1.2985-1.3035 and need to take out immediate resistance at 1.3140-1.3165 (USD Index at 81.45) for extended gains into 1.34-1.35. For the week, let us watch 1.2985/1.3035-1.3310 with bias into higher end not ruling out extended gains into 1.34-1.35 to complete end-to-end of set near/short term range of 1.29/1.30-1.34/1.35. The strategy is to stay “long” on dips into 1.3035 for 1.3285-1.3310.

USD/JPY traded end-to-end of set intra-week range of 94.75/95.25-96.50/97.00 range (low at 95.06 and high at 96.71) before close of week at 95.30. What next? The rally from 90.92 is losing steam below 97 and seen to be in consolidation mode before extending gains into 100.00, retaining near/short term bullish undertone while bulls need to take cover on test/break of immediate support at 94.55-94.80. For the week, let us watch consolidation at 94.50/94.75-96.50/96.75 and neutral on break-out direction. The strategy is to trade end-to-end with stop/reverse which then could bring the focus into 89/90 or 99/100.

Interest rate market:

10Y Bond found solid support at intra-week weakness into 7.90% but unable to extend gains beyond 7.83% for close of week at 7.85%. Post entry into 2013, 10Y Bond has settled into familiar trading range of 7.78/7.80-7.90/7.92 and has traded back-and-forth many times since then. What next? 10Y Bond has strong support at 7.90-7.93% irrespective of RBI’s rate action, while the uncertainty is on the near/short term objective. There is strong resistance at 7.78-7.80% which covers 25 bps rate cut (operating policy rate at 7.5%) but given the expectation of Repo rate at 7% by end June/September 2013, 10Y Bond can extend gains into 7.50-7.65% in the short/medium term. For the week, let us watch 7.70/7.80-7.88/7.90% with bias into lower end; 25 bps rate cut will provide consolidation at 7.80-7.88/7.90 while 25 bps rate cut with dovish guidance or 50 bps rate cut will guide the trading range at 7.70-7.80%. The strategy is to retain “long” book entered at 7.88-7.93%, add at 7.88-7.90% for 7.78-7.80% (on 25 bps rate cut) or 7.70-7.73% (on 50 bps rate cut).

OIS rates ease from set resistance/receive zone of 7.58-7.60 (1Y) and 7.23-7.25 (5Y) and met reversal objectives at 7.51-7.53% and 7.16-7.18% before close of week at 7.52% and 7.17% respectively. What next? The market has priced in 25 bps rate cut (Repo rate at 7.5%) but given the expectation of 7.25-7.0% soon, the trend is bearish for 7.35% (1Y) and 7.10% (5Y). For the week, let us watch 7.35/7.45-7.53/7.55 (1Y) and 7.10/7.15-7.20/7.23 (5Y) with bias into lower end; 25 bps rate cut will provide consolidation at 7.45-7.55% and 7.15-7.23% while 25 bps rate cut with dovish guidance or 50 bps rate cut will guide trading range at 7.35-7.45% and 7.10-7.20%. The strategy is to receive 1Y at 7.53-7.58% (for 7.35-7.38%) and receive 5Y at 7.20-7.23% (for 7.08-7.10%).

FX Premium in consolidation mode at 7.60-7.85% in 3M and 6.40-6.65% in 12M before close of week at 7.8% and 6.5% respectively. It was mixed cues with strong bids from interest rate play against strong supplies from exporters across all tenors beyond 1M. What next? It is time to build “received book” ahead of rate cut and shift into FY14 with near/short term objective at 7.0% and 6.0% respectively. In anticipation of this 1X12M has established reversal trend but good support has emerged from exchange rate play tracking USD/INR weakness from 55.15 to 54.00. For the week, let us watch 7.60-7.90/8.0% (3M) and 6.35-6.60% (12M). The strategy is to receive 3M at 7.90-8.0 and 12M at/above 6.60% and await test/break of lower end into set objectives.

Equity market:

NIFTY was in volatile mood with initial fall from 5971 to 5791, followed by sharp recovery to 5945 but lost steam for deeper correction into 5861 before close of week at 5872. The only clarity was from establishment of strong resistance at 5925-5975 till RBI’s policy is out of the way. What next? The near term trading range is firmly established at 5600-6100 and attention is on RBI to provide guidance for immediate term bias. The global cues and off-shore support are in favour of the bulls. On the domestic front, bearish signals from macroeconomic fundamentals are diluted but domestic institutional investors are glued to the fixed income with attractive coupon, less volatility and decent rally in the immediate term. RBI’s rate actions (and dovish guidance) will favour upside break-out to get the focus into 6200-6215 ahead of 6338-6357. For the week, let us watch 5765/5835-5945/6015; 25 bps rate cut (with dovish guidance) will get the focus into 5945-6015 and 50 bps rate cut will trigger extended rally into 6100/6215. The possibility of disappointment from RBI will be very bearish for 5600, pulling in risk of FIIs exit (not favoured at this stage). The strategy is to stay “long” on dips into 5765-5835 for 5945/6015 or 6100/6215.

Commodity market:

Gold extended its correction mode from 1560 into 1600 and into consolidation mode at 1575-1600 before close of week at 1592. What next? The tone is mildly bullish for extension into 1605-1620 while 1560-1575 stays firm. There is no clarity at this stage to establish break-out direction. For the week, let us watch consolidation at 1560/1575-1605/1620 and stay neutral on break-out direction. The strategy is to trade end-to-end with tight stop/reverse on break thereof.    

NYMEX Crude extended its gains from 89/90 (low at 89.33) into 94/95 (high at 93.84) before close of week at 93.45. What next? The weekly close above 93.37 is bullish and extended rally beyond 94.45-94.95 will open up 98.00-98.15. For the week, let us watch consolidation at 92.00/92.50-94.50/95.00. The strategy is to trade end-to-end with tight stop/reverse for 89.50 or 98.00.

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

RBI's monetary policy stance on 19th March 2013

RBI is seen obliged for shift into dovish monetary policy stance

There is unanimous expectation of 25 bps cut in policy rates and CRR on 19^th March mid-quarter review of monetary policy, but what is more relevant is RBI’s policy tone (and guidance) for shift of its priority (and support) to growth with good comfort on moderation in inflation. The disappointment on 29^th January is still in memory; despite delivery of cuts in policy rates and CRR, hawkish guidance on the way forward set the bearish tone on markets for post-policy collapse of 10Y Bond from 7.78% to 7.93%, NIFTY down from 6110 to 5850/5650 and Rupee down from below 53 to above 55. However, post-Budget FY14 optimism (and confidence on the way forward) has provided stability to markets, and the attention now is on RBI for directional guidance. There are good reasons for RBI to shift its concerns from inflation to growth, and to set the monetary conditions as catalyst to growth and fiscal consolidation.

·       The Government has delivered on fiscal consolidation and policy reforms. The commitment to contain fiscal deficit at 5.2% for FY13 and high confidence to achieve 4.8% for FY14 means that the Government has tightened the screws on the loose fiscal policy. The Government is on over-drive to remove policy-irritants and roll-out new reforms to attract foreign and private investments for revival of core sectors and capacity expansion of the economy. Global rating agencies have responded positively on Government’s efforts to address their main concerns on policy paralysis and fiscal consolidation, but remain suspect on growth aspiration. The risk of sovereign rating downgrade is no more a risk factor, but restoration of stable outlook (and rating upgrade) is dependent on achieving FY14 GDP growth target of 6.5% and prepare for step-up into 7.0-8.0% in FY15.

·        The Government is doing its best to address issues related to the Current Account Deficit. The measures to cut consumption of essential imports (through removal of subsidies) and discourage import of non-essential consumption are steps in the right direction. In the interim, efforts are on to attract FDI/FII flows to fund the current account deficit to dilute its impact on the rupee exchange rate. The impact is already visible with expectation of monthly CAD at $10-15 Billion which can be easily bridged through capital account flows and “lead” of dollar supplies from exporters. CAD and weak rupee are now not seen as risk to inflation.

·       The Government’s delivery on fiscal deficit (and consolidation) is highly dependent on stepping up the GDP growth momentum from below 5% (FY13) to above 6.5% in FY14. This will be difficult to achieve without strong tailwinds from favourable monetary conditions of low interest rates and surplus system liquidity. The UPA regime has the agenda to achieve higher growth trajectory (at moderate inflation) before 2014 general election.  

At this stage, twin-deficits (and Rupee exchange rate) are not seen as major risks on inflation. RBI should ensure that monetary conditions do not remain as risk to growth, and to align the monetary policy to reflect tight fiscal policy. It is not in the interest of the economy if tight fiscal policy and tight monetary policy co-exist.  

• The only irritant for RBI is from elevated CPI inflation and double-digit inflation of food, fuel and essential items linked to basic consumption. While nothing much could be done to address this through monetary policy, Government is seen to guide soft-landing through squeezing the demand-supply gap.
• RBI should derive comfort from sharp decline in core inflation to below 4%; huge gap between core inflation and headline print create good space for monetary easing even at the cost of marginal uptrend in core inflation.
• Tight system liquidity and lag in deposit growth will dilute monetary easing impact on the deposit/lending rates. It means that even an aggressive reduction of 75 bps in the operating policy rate, impact on savings/investments may not be significant, thus giving a good balance to growth, savings, investment, consumption and inflation dynamics.

Given these dynamics in play at this stage, there is strong case for RBI to cut the operating policy rate from current 7.75% to 7.0% and CRR from 4.0% to 3.0%. If the need to turn the monetary conditions to pro-growth is valid, it would be prudent to front-load the action rather than taking baby-steps! MARKET PULSE sees merit (and prudence) in RBI delivering 50 bps cut in policy rates and CRR to drive the 3-12M deposit rate at 8.0-9.0%, and to maintain drawdown from LAF counter at reporting fortnight average of Rs.50K Crores. While stability in money market rates will provide balance to the interests of investors and borrowers, rally in asset markets will add to confidence of stake holders. The resultant accelerated foreign currency inflows and supply-driven mode in the forward market would get RBI into the act of arresting rupee appreciation, thus easing the pressure on domestic system liquidity through aggressive dollar purchases. The remedy to expand system liquidity is either through expansion of RBI’s balance sheet or dollarization of its assets. The cost-benefit (and risk-reward) to the Indian economy is clearly in favour of RBI’s giant steps towards the set objectives of operating policy rate at 7% and CRR at 3%. It is a win-win proposition for all stake holders, and the UPA coalition ahead of 2014 elections!

The post-policy range is seen for NIFTY at 5600-6100, 10Y Bond at 7.75-7.95 and Rupee at 53-55 and markets are indecisive, trading at the middle of these ranges with attention on RBI. MAREKT PULSE remains bullish on markets taking comfort from RBI’s obligation to walk along with the Government. It happens everywhere, why not in India when risks to inflation from twin-deficits is significantly diluted?

Moses Harding

Weekly report for 11-15 March 2013

MARKET PULSE: Weekly report for 11-15 March 2013

Signs of RBI’s shift of priority from inflation to growth

The Finance Minister has tightened the screws on loose fiscal policy by delivering 5.2% fiscal deficit for FY13, and seen very confident on delivery of FY14 budget estimate of 4.8%. The Government is also doing its best on policy reforms to spur growth and investments, and to attract capital flows to limit impact of Current Account deficit on inflation, liquidity and rupee exchange rate. The Global Rating agencies have acknowledged the measures taken to address their concerns relating to policy reforms and fiscal consolidation. All along, RBI did not have the option to release its grips on hawkish monetary policy stance on the presumption that loose fiscal policy and dovish monetary policy cannot co-exist. Now that fiscal policy is water-tight, it is time for RBI to set the monetary policy tunes in traction with moderation in fiscal policy. It is obvious that FM’s deliverable on growth and revenues is largely dependent on RBI’s support through administration of low interest rates and surplus system liquidity. In anticipation of RBI’s shift into growth-supportive monetary stance, post-budget weakness on markets is reversed quickly and shift into bullish undertone is dependent on RBI’s rate action on 19^th March and dovish guidance on the way forward. RBI should take note of the bearish impact on markets post hawkish guidance on 29^th January monetary policy despite delivering 25 bps cut in policy rates and CRR. It is not a straight-forward decision for RBI. Its concerns on CAD, elevated retail CPI inflation and low real interest rates remain valid but the immediate priority now is to step-up GDP growth momentum in H1/FY14 to above 6% from Q4/FY13 GDP growth estimate at 4.75-5.0% through strong revival of investment and consumption; achievement of these is highly dependent on interest rate and liquidity support of RBI.

The expectation build-up is for shift of LAF corridor to 6.0-7.0% by end June 2013 with room for 75 bps rate cut, along with release of liquidity through gradual reduction in CRR from 4% to 3%. If RBI finds merit in these expectations, it may be good (and prudent) to front load rate action, rather than delivery of 25 bps cut each in its policy meeting on 19^th March, end April and mid June. RBI’s concern however will be on real interest rate to promote savings, but the comfort is from liquidity driven build-up of higher tenor spread for medium/long term deposits. The significant dilution in headwinds from external sector on the Indian economy and markets will add to confidence. It is time for RBI to set its monetary policy as catalyst to achieve FY14 GDP growth at 6.5-6.7% to support the political ambition of the UPA ahead of 2014 general election. The expectation on 19^th March is for minimum 25 bps cut in policy rates and CRR, not ruling out an aggressive stance of 50 bps cut in policy rates.      

Exchange Rate market:

Rupee quickly recovered from post-Budget jitters for strong intra-week rally from 55.15 to 54.26 before close of week at 54.28. MARKET PULSE strategy was to initiate strategic “dollar short” positions and cover exports (across 3-12 months and beyond) at 55.10-55.35 with high confidence that intra-2013 low of 55.38 will stay safe, driven by dilution in headwinds from external sector, high (and attractive premium) and RBI’s obligation to walk the monetary policy in tune with Government’s fiscal prudence. The sharp rally from 55.15 met the intra-week target at 54.13-54.28 (intra-week update on Twitter) where it was suggested to exit 30% of “short dollar book” in anticipation of pre-monetary policy consolidation play at 54.20-54.70. What next? It has been a volatile ride for Rupee in 2013; posted strong recovery from 55.38 to 52.88 but gave up most of gains since 29^th January Monetary policy into post-Budget low at 55.15 and now at 54.28 (around mid-point of intra-2013 low of 55.38 and high of 52.88). Despite CAD worries, USD strength above 55 is seen highly over-valued, hence deserved to be dumped with 3M forward value above 56, 6M dollar above 57 and 12M dollar above 58.50. MARKET PULSE considered Spot dollar above 55 good to shift rupee liabilities to dollars for 3-5/10 years for cost reduction with room for significant price appreciation. Given these dynamics, the market will witness complete pull-out of importers (beyond 15-30 days tenure) at spot above 55 and pull-in accelerated dollar supplies (across 6M-10Y) in the forward segment, and at this point Rupee cuts its traction with Euro weakness. On the other side, spot dollar below 53 will look cheap and attractive to acquire, thus generating good demand from importers and unwind of earlier dollar sales. Given the current economic, fiscal and monetary dynamics, rupee is seen to be firmly struck at 53-55 consolidation and break either-way to attract large one-way flows. That’s what the market witnessed at 55.00-55.15/55.38 and 52.88-53.00 to retain short term consolidation at 53-55. The near term outlook for directional guidance either into 53 or 55 depends on sustainability of high FX premium at 6.50-8.0% (across 12-3M tenure) and RBI’s monetary policy stance on 19^th March, which exerts conflict of interest on the Rupee. At this point of time, there is minimal risk of FII reverse flow and sustainable FII interest is seen in debt and equity capital markets to bridge CAD. For the week, let us watch consolidation at 53.95/54.10-54.55/54.70, test/break either-way not expected to sustain. Given the expectation of 25-50 bps rate cut with neutral (to dovish) guidance on the way forward, near term outlook is for extended rupee gains below 53.80-53.95 into 53.45-53.60. Strategic players can retain “short dollar book” entered at 55.00-55.15, add at 54.55-54.70 for 53.45-53.60. Importers can look to part-hedge April’13 dollars at/below 54.50 (spot at/below 53.90). Stay tuned to intra-week review/trade ideas on Twitter.

EUR/USD traded back-and-forth between set support/buy zone of 1.2950-1.2965 (low at 1.2955) and resistance/sell zone of 1.3135-1.3150 (high at 1.3134) before close of week at 1.3005. In the meanwhile, USD Index was boxed at 81.85-82.00 and 82.85-83.00 (low at 81.90 and high at 82.92) before close of week at 82.71. What next? The USD is looking good post strong US economic data, bullish stock market and signs of easing interest rates in the Euro zone. The risk of extended weakness in the Euro below 1.2950 (into 1.2780) has come into the radar on spike in USD Index beyond 82.92 into 84.10. For the week, let us watch 1.2780/1.2885-1.3085/1.3165 with bias into lower end. The strategy is to trade from “short” for test/break of 1.2950 into 1.2780-1.2880 with the risk of complete unwind of recent rally from 1.2660-1.3711.

USD/JPY met the set 96-97 objective with an intra-week high of 96.54 before close of week at 96.02. This completes the expected rally from 90-91 to 96-97 with recent move from 90.92 to 96.54. What next? The tone is bullish driven by dollar strength and loose monetary regime in Japan, pulling April-August 2009 high’s of 97.78-101.45 into the radar while 95 remains firm. For the week, let us watch 95-100 with bias into higher end. The strategy is to stay “long” at 95-96 (with stop below 94.75) for 99.75-100.

Interest Rate market:

10Y Bond found solid support at 7.90% for sharp intra-week rally into 7.83%, thus trading end-to-end of set intra-week range of 7.80/7.83-7.90/7.93%. The rally was triggered by expectation of 50-75 bps cut by June 2013 to be catalyst for step-up in growth momentum from below 5% to above 6%. What next? There are signs of break-out of set near term consolidation range of 7.78/7.80-7.93/7.95 on shift into FY14 with near term objective at 7.70-7.75% covering 50 bps rate cut. Beyond there, pipe-line FY14 bond supplies and unwinding of excess SLR will arrest gains beyond 7.70-7.75%. MARKET PULSE strategy to unwind “longs” at 7.78-7.80% and re-instate at 7.88-7.93% has worked well and the chase for 15-20 bps rally has already begun. For the week, let us watch 7.78/7.80-7.83/7.85 with bias into lower end. The strategy is to retain “long book” entered at 7.88-7.93%, add at 7.83-7.85% for 7.70-7.73%.

OIS rates boxed in now familiar range of 7.55-7.60% and 7.20-7.25% in back-and-forth trading mode. The strategy to receive 1Y at/above 7.60% and pay 5Y at/below 7.20% has worked well while retaining 40 bps “carry”. What next? There is no strong momentum either-way, thus making the trading game not very attractive without any signs of excessive moves. 1Y OIS rate will stay heavy at 7.58-7.60% while 5Y rate finds solid support at 7.15-7.18%, setting up not more than 5-7 bps reversal. For the week, let us continue to watch 1Y at 7.53/7.55-7.58/7.60 and 5Y at 7.18/7.20-7.23/7.25. The strategy is to trade end-to-end with tight stop on break.

FX Premium boxed at 7.65-7.90% in 3M and 6.40-6.65% in 12M with 3X12 play, bullish momentum in the 3M driven by elevated MM rates and bearish pressure in 12M on strong dollar supplies from exporters. What next? The short term bull-run from 6% (3M) and 4% (12M) is already finished around 8% and 6.75% respectively and sharp reversal is work-in-process on shift into FY14 with targets below 7% and 6% respectively. For the week, let us watch consolidation at 7.50-7.75/7.85 (3M) and 6.25-6.50/6.60 (12M). The strategy is to trade end-to-end but to build strategic “received book” at 7.75-7.85% in 3M and 6.50-6.60% in 12M for immediate objective at 7% and 6% respectively.

Equity market:

NIFTY quickly got out of post-budget weakness below 5750 to post a strong intra-week rally from 5663 into set relief-rally objective at 5950-5965 (high at 5952) before posting a strong weekly close at 5945. The trigger for the rally was from combination of bullish cues from external sector and build-up of RBI’s shift of prioritisation from inflation to growth. What next? MARKET PUSE chased the reversal in NIFTY from 6100 into set short term base of 5750; post-budget extension below 5750 held solid above set intra-2013 support of 5600-5650 to trigger 289 pip intra-week rally. This sharp turnaround of  fourtunes would provide comfort to FIIs (backed by relief rally in rupee from above 55 into 54) while DIIs continue to prefer fixed income assets ahead of 50-75 bps rate cut. The bulls have now pulled intra-2013 high at 6111 into the radar and beyond there would need RBI’s dovish guidance on rates and liquidity. For the week, let us watch 5890/5920-6080/6110 with bias into higher end. Strategic investors who have exited longs at/above 5950 can now look to re-build at current and on dips into 5920-5880 for 6100. Beyond there, any pleasant surprises from RBI will get the focus into 6200-6215 ahead of 6338-6357.

Commodity market:

Gold held at 1585 for gradual weakness into first objective at 1555 (low at 1560.80) but attracted good “shorts squeeze” for weekly close at 1578 with most trades at 1570-1585. What next? Intra-2013 reversal from 1695 should find solid support at 1475-1525 in the near term for possible relief rally into 1595-1620. The short/medium trend is bearish for extended weakness into 1300. For the week, let us continue to watch 1525-1590/1605 with bias into lower end. The strategy is to sell in two lots at 1585-1590 and 1600-1605 with tight stop for 1555-1560 and 1525-1530. It is not prudent to stay “short” at 1475-1525 where we switch sides for the relief rally as counter trade.

NYMEX Crude met its reversal target at 89.50-90.00 (low at 89.33) only to attract “shorts squeeze” for sharp reversal to 92.00 (high at 92.03) before close of week at 91.75. What next? The near term tone is mixed, boxed between build-up of global growth momentum and demand-supply squeeze. For the week, let us watch consolidation at 89/90-94/95 not ruling out extended weakness into 84 in the near term. The strategy is to trade end-to-end while strategic players prefer to stay “short” at 93.50-94.50 (with stop above 95) for 84.50-89.50.

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

Weekly report for 04-08 March 2013

MARKET PULSE: Weekly report for 04-08 March 2013

Not enough stimuli to drive investments and consumption for growth

The agenda (and strategy) into Budget FY14 was to contain fiscal deficit and stoke growth without compromise on social spending. The Budget estimates have fitted well into this agenda with GDP growth estimate pegged at 6.5% to build accelerated revenues to contain fiscal deficit at 4.8%. The net market borrowing at Rs.4.84 lakh Crores (excluding Rs.50K Crores allotted for Buy Back/Switch) is on expected lines of around Rs.5 lakh Crores. The Budget assumes aggressive estimate of over 18% growth in direct taxes, over 20% growth in indirect taxes and one-off revenues at Rs.80K Crores from disinvestment while retaining the expenses at elevated 30% year-on-year growth. The strategic intent is to meet the expectation of the global rating agencies and the vote bank at the same time. While a lot has been discussed on the maths behind Budget FY14, MARKET PULSE evaluates down-side risks to the estimation on the back-drop of severe challenges from both domestic and global cues. While setting up aggressive (and ambitious) budget estimates, the document has not thrown up strong (and aggressive) tactical actions (and measures) to attract investments for growth and solutions to revive (and expand) capacity in core sectors, while crushing demand and consumption of non-essential items, thus opening up execution risks to achieve desired objectives. The Government had no option but to pick up “growth story” for election propaganda instead of throwing “freebies” as before to prevent negative attention from Global rating agencies. The concerns at this stage are from the following:

• There is very high dependency on achieving 6.5% growth (for higher revenues) which looks tough when Q4/FY13 GDP growth is expected to be sub 5%. The H1/FY14 GDP growth has to be at 6% (on higher base of H1/FY13) and H2/FY14 GDP growth of around 7% (on lower base in H2/FY13); this fits well into FY15 GDP growth aspiration at 7.5-8.0%. The risk is from achieving a sequential growth from sub 5% in H2/FY13 to 6% in H1/FY14 and thereafter into 7% in H2/FY14. The budget estimates on revenues is clearly at risk in the absence of big-bang measures to revive growth at this fast pace.
• The tactical measures to stoke growth in infrastructure, agriculture, manufacturing and other core sectors are not seen sufficient to expand capacity when contributions from productive sectors will stay stagnant. The private investors continue to stay on risk-off mode in the absence of opportunities and viable business propositions.
• While the Government recognises the need for accommodative monetary policy to achieve set growth target, there are no efforts to address issues relating to widening current account deficit and elevated food price inflation. The Budget has given up hope on CAD and the efforts are more towards attracting off-shore liquidity to bridge the gap. It is obvious that off-shore liquidity will not be adequate in the absence of robust growth story. There are no measures to remove supply side bottle-necks to contain food price inflation while the intent is to cut demand and consumption!
• While RBI derives comfort from moderation in headline WPI (and core) inflation and recognises the need to support growth through low interest rates and surplus system liquidity, concerns from widening CAD and elevated food price inflation may not provide adequate space for shift to dovish monetary policy stance at this stage. Even if it does, the impact on rates will be muted given the system liquidity squeeze from higher CAD. The pressure on rupee exchange rate will also deter RBI from taking an aggressive growth-supportive stance. Therefore, monetary support to growth is expected to be limited despite ‘managing’ fiscal consolidation.

Over all, the stake-holders of the economy are seen to be appreciative of the presentation and the intent of Budget FY14, but stay with disbelief (and lack of confidence) in achieving the set budgetary targets. At this stage, MARKET PULSE sets its estimate for FY14 GDP growth at 6.0-6.5% and fiscal deficit at 4.8-5.3%, building significant downside risks (from tactical and execution failures) with no expectation build-up for upside surprises! What is the impact on markets?

Exchange rate market:

USD/INR has been volatile since entry into 2013; Rupee rallied from 55.38 to 52.88, reversed into 54.60 before engineering pre-budget rally into 53.60, only to be followed by post-budget weakness into 54.94 before close of week at 54.90. The only comfort is that there were clear signals for such sharp turnaround, providing good opportunity to traders and dynamic hedgers. MARKET PULSE set strong base for USD/INR at 52.85-53.10 (pre/post January monetary policy); at 53.45-53.70 (pre-budget weekly report) and at 54.35-54.50 (post-budget intra-week update on the Twitter) with objective at 55.90-56.05. USD/INR punched pre-budget low of 53.60 and post-budget low of 54.37 before sharp rally into 55. What next? There are not many positive cues for Rupee at this stage. The support to Rupee from high FX premium may not be good given the strong bearish set-up on rupee. There are signs of combined set-up of “greed” (exporters giving up high premium in greed for higher spot) and “fear” (importers willing to pay high premium in fear of sharp spot rupee weakness) factors driving rupee into bearish undertone in the near term. On the other hand, the comfort from strong FII flows may not be relevant now; equity assets are sharply down in 2013; no major gains visible in the Bond market and huge downside risks on currency. All these factors combined will put rupee bulls on the back-foot while dollar bulls take control of the street. Rupee is clearly at risk of posting a new intra-2013 low above 55.38 and thereafter into 55.88 before signs of stability. At this point, prefer to keep 56.43-57.32 out of the radar. For the week, watch USD/INR at 54.35/54.50-55.45/55.60 with near term trading range at 54-56 and bias into higher end. MARKET PULSE readers will now have deep pockets chasing the move from above 55.65 to 53.10; 53.10 to 54.45; 54.45 to 53.70 to 54.55 and now long dollars at 54.35-54.50. The hedging strategy has to be very conservative given the excessive volatility and extended swings; first entry point for exporters will be at 55.80-56.05 (3M dollars at 56.85-57.10 and 12M dollars at 59.40-59.65) while importers to absorb correction into 54.35-54.60 (1-3M dollars at/below 55). Strategic players can trade end-to-end of 54.35-54.60 and 55.80-56.05 with tight stop on break. It would be high risk to stay “long dollars” at/above 56.00 while 53-54 is seen as strong short term base for the dollar. The hedging strategy should be based on expectation of short/medium term consolidation in USD/INR at 53/54-56/57; would see strong arm tactics of RBI to prevent rupee weakness into 56-57 with near zero risk of extended weakness into 58-60. At this stage, widening CAD and weak Rupee are seen as major risks to India growth story.   

EUR/USD reversed sharply from 1.3320 resistance (high at 1.3318) into set near/short term support at 1.2950-1.3000 (low at 1.2965) before close of week at 1.3020. It is possible that the expected reversal from 1.37 (hi at 1.3711 on 1/2/13) into 1.30 is completed. What next? The cues that triggered this move from fear of dilution in QE3 and political confusion in Italy should fade way to provide relief rally above 1.3150-1.3165 into 1.3320/1.3440 in the near term. For the week, let us watch 1.2875/1.2950-1.3250/1.3325 with bias into higher end. In the meanwhile USD Index is expected to end its sharp rally from 78.92 to 82.51 at 82.85-83.00 for sharp reversal into 81.35-79.90. It is good for strategic players to buy in two lots at 1.2965-1.2990 and 1.2875-1.2900 for 1.3150 and thereafter into 1.3325-1.3450 with stop below 1.2850 which would then bring the focus into 1.2660-1.2685 before strongly up.

USD/JPY settled into consolidation at 91.75/92.25-93.75/94.25 post initial sharp fall from 94.76 to 90.92 before close of week at 93.60. What next? USD/JPY is expected to attract good selling interest at 94.50-95.00 with strong base at 90.00-90.50 for consolidation play at 90-95 while retaining short/medium term bullish undertone for extension into 97-100 in due course. For the week, let us watch consolidation at 91.75/92.25-94.25/94.75. The strategy is to trade end-to-end with tight stop on break thereof.

Interest rate market:

10Y Bond fell sharply from pre-budget high of 7.78% to hit post-budget low of 7.92% before close of week at 7.90%. In the process, it completed end-to-end of set “strategic short zone” of 7.78-7.80% and “strategic buy zone” of 7.92-7.95%. MARKET PULSE urged strategic investors to either unwind “long book” at 7.78-7.80% or cut the duration of the investment book through sale of 10-30 year bonds and buy into 1-3/5 years tenor to retain portfolio yield and to take money off-the-table. What next?  The chances of extended gains in 10Y Bond below 7.78% is low with risk of extended weakness beyond 7.92-7.95% into 7.99-8.04%. The best case scenario in the near/short term is not beyond 7.78-7.80% on delivery of 25 bps rate cut in March/April while unwinding of excess SLR book and fresh bond supplies from RBI will exert pressure into 8.0-8.05%, but expected to get support here from RBI through OMO bond purchases. For the week, let us watch 7.85-7.95/8.0% with bias into higher end. It is good risk-reward for traders to stay short at 7.85-7.88% with tight stop for 7.95-8.0%. Strategic investors can look to re-instate long book in two lots at 7.93-7.95% and 7.99-8.01% for 7.78-7.80%.

OIS rates found solid support at the set pay zone of 7.58-7.60% (1Y) and 7.18-7.20% (5Y) for post-policy rally into 7.63% and 7.25% to complete yet another back-and-forth move between 7.58/7.60-7.63/7.65 and 7.18/7.20-7.23/7.25%. What next? The 1X5 play has opened up with 1Y finding strong resistance at 7.63-7.65% while 5Y extending its rally into 7.28-7.30%. For the week, let us watch 1Y at 7.58-7.63/7.65% and 5Y at 7.18/7.20-7.28/7.30. The strategy is to receive 1Y at 7.63-7.65 and pay 5Y OIS at 7.18-7.20% for 7.58-7.60% and 7.28-7.30% respectively.

FX Premium in tight consolidation at 7.65-7.90/8.0% (3M) and 6.50-6.65/6.75% (12M) struck in counter-play between interest and exchange rate momentum. What next? Interest rate play will continue to exert upside pressure tracking higher MM rates in 1-3M tenures. The exchange rate play may also add to upside pressure if exporters withdraw supplies in the forward market in anticipation of higher spot USD/INR and importers rushing into cover near/short term dollar liabilities. For the week, let us continue to watch 7.65-7.90/8.0% in 3M and 6.50-6.75% in 12M with bias into higher end. The strategy is to retain the “paid book” entered at 7.5% in 3M and 6.5% in 12M and add at 7.65% (3M) for over 8% and 6.75% respectively.

Equity market:

NIFTY fell sharply from intra-week pre-budget high of 5878 into pre-budget low of 5672 before close of week at 5719. The inability to take out 5880 for sharp reversal below 5750-5800 highlights set-up of strong near term bearish momentum. What next? There is nothing much to cheer from the Budget FY14. Now, the focus is on the FIIs. Will they stay invested despite over 7% fall since 29^th January monetary policy review and Rupee at risk of extended weakness above 2012 close of 54.99? The consolation for FIIs is from good returns on their Fixed Income/Bond book since November 2012. Domestic Institutional investors are in no mood to shift their appetite from Bonds to Equity while retail investors stay put in high yield short term fixed income and await clarity on the way forward. Taking all these together, there will be more of supplies than demand in the near/short term. It is possible that the 2 month rally from 5548 to 6111 is at risk for complete unwind during this week/month while any kind of relief rally is possible only if FIIs bring more money to add to investments at lower valuation of stocks and weak rupee. But, given the lack of confidence on robust growth momentum, FIIs may prefer to see signs of appetite from domestic investors to get into buy mode. For the week, let us watch 5550-5775/5825 with bias into lower end. Strategic players can look to sell in two lots at 5760-5775 and 5810-5825 with tight stop for 5550-5565. It would need RBI’s strong growth-supportive monetary stance (at the cost of other risk factors) to arrest extended weakness below 5550 into 5000-5300.

Commodity market:

Gold completed its relief rally from 1555 at set resistance/sell zone of 1605-1620 (high at 1619.66) and reversed to hit the first objective at 1565 (low at 1564.44) before close of week at 1575. What next? Gold is already in the process of unwinding its 3 year rally from 680 (October 2008) to 1920 (September 2011) with short term objective at 1300 where it will look good to buy. The immediate objective is at 1520-1535 and thereafter into 1435-1450 while 1615-1630 stays firm. For the week, let us watch 1525-1590/1605 with bias into lower end. The strategy is to sell in two lots at 1585-1595 and 1615-1625 with stop at 1630 for 1520-1535.

NYMEX Crude traded to the script at set weekly range of 90-95; initial rally lost steam at 94.46 for gradual reversal into 90.04 before close of week at 90.68. What next? NYMEX Crude is in the process of unwinding its 3 month rally from 84.05 to 98.24 with near term objective at 84 ahead of 77.25-77.50. For the week, let us watch 87-92/93 with bias into lower end. The strategy is to reinstate “short book” at 91.50-92.50 with stop above 93 for 87.00-87.15.

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