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