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 19th March and dovish guidance on the way forward. RBI should take note of the bearish impact on markets post hawkish guidance on 29th 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 19th 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 19th 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 29th 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 19th 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
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