What next for USD/JPY over 110-110.65?

It has been a great relief for Japanese economy (and its exporters) on JPY unwinding the excessive one-way rally from over 124 to 75.50 (between June 2007 to October 2011); since then recovery to over 110 is great relief. The agenda of BOJ is to force-in oxygen into the system through administration of excess liquidity at zero interest rates. This stance has helped significant recovery in equity/stock market and relief to Japanese exporters through weak JPY. The irony is that despite all these monetary support measures, there is no improvement in macroeconomic fundamentals, which is serious worry! There is nothing to cheer when the relief is from overdose of life-line support and from the extended delay in getting back on feet on its own! What next?

The liquidity (and interest rate) supportive measures will help investors ride the extended bullish momentum on equity and currency markets. The strategy of MARKET PULSE for 2014 is to ride the move from 100/101 to 110 with latest revision of focus to 105-115. As per script, USD/JPY began the second round of intra-2014 rally from 105.18 and has now taken out strong resistance at 110.65. 

The next target is at 113.75, above which 2007 high of 124.16 will be pulled into radar.

For now, let us set focus on 110.65-113.75 retaining short term bias into 124 with immediate support at 109.85-110. Be with the chase!

Moses Harding

What next for NIFTY beyond 8150-8180?

NIFTY recovery from 7723 hit 8167 in completion of back-and-forth moves within set strategic focus (and trading) range of 7700/7750-8150/8200 with 8160 to 7723 to 8167 in quick time from 23rd September; speed either-way is indeed break-neck!? What next?

NIFTY is significantly re-rated from the high's of 6338-6357 seen in 2008-2010 with lift of long term base at 7723 (worst case not below 7540) and short term base at 7850. What can trigger upside momentum beyond 8180? Foremost is the steady (and sustainable) improvement in India macroeconomic fundamentals that would set up rating upgrade and accelerated off-shore inflows and increased domestic investor appetite. Next is from RBI shift into dovish monetary policy stance in support of growth taking comfort from sustainable ease in inflation. These two events are strong to trigger extended rally in NIFTY beyond 8180 into 8285-8300 and beyond. What are the risk factors? Foremost is from the high valuation at current levels which is not seen cheap to acquire.  Next is from recovery in developed economies which could shift investor appetite from India for portfolio churn from high value India Equity to affordable value DM equity assets. The most important risk is from execution failure of the BJP/NDA Government. All taken the risk-reward is balanced between domestic and global cues; best of both will lead to next round of re-rating (over 8500) worst of both will lead to collapse (below 7550) and mix of both will be consolidation at 7850-8350.

At this stage, there is no clarity to set high probability directional bias; but the risk-perception bias is in favour of the investors (and the bulls). All taken, it is good to review strategic focus at 7850/8000-8350/8500 (risk below 7700-7725). The investor strategy will stay in "buy-dips" mode with immediate supports at 8085/7985 and resistance zones at 8285-8300, 8350-8365 and 8400-8415.

The approach on the way forward is the following: (a) take-out the capital and run the balance portfolio with trail stop at 8085 and reinstate investment at 8085-7985; (b) take entire money off the table to advance the Christmas/New Year holidays leaving bids in the market at 8085-7985; (c) retain the portfolio with trail stop below 8085/7985 and be with the chase into 8350-8500.

You are the best judge! Good luck!

Moses Harding

What next for Rupee beyond 61.70-62.20?

The expectation of MARKET PULSE for 2014 was for consolidation at 58-63 with back-and-forth trading mode; as per script, Rupee posted strong recovery from 63.32 (low on 27th January) to 58.33 (high on 23rd May). The outlook thereafter was for strong dollar recovery from 58.35, followed by lift of base at 60.20 for 61.95-62.20 target by/before end of 2014. The back-and-forth moves set up good hedging opportunities both-ways for passive entities and great P&L benefits (import cost reduction and/or upside on export realisation) for the pro-active hedgers, while it was party-time for strategic traders. What next?

USD/INR is already into near term play at 61.20/61.45-61.95/62.20 with short/medium term base at 60.20-60.70. During this period 6M $ found stability at 63.25-64.25 and 12M $ at 65.50-66.50; overshoot either-way didn't sustain for long! Over all, USD/INR spot value got adjusted for the time-decay, while RBI ensured that Rupee value is administered at level attractive to exports and foreign currency inflows. The risk factors on Rupee are from interest rate squeeze between India & US, medium/long term bullish momentum of the USD, bullish correction in imported commodity assets and RBI hunger to build $ reserves to ring-fence unforeseen (and sudden) shocks from FII mood-swings. The positive cues are from gradual baby-steps improvement in India macroeconomic fundamentals (with high confidence on India sovereign rating upgrade in 2015) and huge pipe-line FDI (and long term) inflows and shift of foreign investor appetite from China to India (seen as the most-favoured investment destination in the BRICS group). All taken, while long-term (2019-2024) story is good for Rupee, concerns is in the short/medium term; having said this, long term optimism will limit Rupee weakness into 2015 at 62.85-63.35 for consolidation at 60-63. What can go wrong? The bolt from the blue can be from execution failure of Narendra Modi Government (diluting the pent-up hope and optimism) and geo-political risks; both are seen now as low probability risks. On the other side, combined impact from external tailwinds (lower Brent, higher demand for India produced goods & services and dilution in $ bullish momentum from Euro zone recovery) and realisation of domestic euophoria (GDP into higher end of 5.5-7.5%, CPI stability around/sub 6% and Swiss-money driven lower fiscal deficit) will be manna from the blue to set up long term Rupee recovery adjusting the 2008-2013 excessive weakness from 39.20 to 68.85.

For now, let us set long term focus (into 2019) at 58.33-68.85 with attention on the said factors that could trigger either the "bolt from the blue" or "manna from the heaven"; in either case, do not expect overshoot either-way!? For rest of 2014, retain focus for Rupee at 60.95/61.20-61.95/62.20 not ruling out downside extension beyond 62.20 into 62.85-63.35 on combination of DXY rally over 86.75 and delivery of rate cut from RBI on 2nd December.

Moses Harding

Long term Rupee forecast!

One of my Twitter follower posted this question to me: Where will USD/INR be in 2025? I responded tweeting instantly that it is good to sell 2025 US dollars (against Rupee) given the attractive interest rate differential (high forward premium for the USD/INR currency pair) and to ride the NaMo optimism which would set up significant improvement in India macroeconomic fundamentals in the years ahead, also with the belief that Modi will be in command till 2024. My opinion is also based on the confidence that Rupee depreciation can not be more than 3-4% per annum post the positive domestic developments since May 2014 (seen along with strong external tailwinds from ease in imported commodity prices); all taken, it is high probability that Rupee will be valued at premium to REER. My follower is not seen to be satisfied with this answer, hence it took me to the charts to study the past behaviour of Rupee and the circumstances which caused those movements. Here goes the analysis:

Rupee is down by 28% from 1995 to 2005 (35.15 to 45.04); down by 36% from 2005 to 2014 (45.04 to 61.36) and down by 75% during the period 1995 to now, at annualised rate of sub 3.5%. There have been abnormal fluctuations when Rupee lost by 55% during 1995 to 2002 from 31.35 to 49.07 (on weak domestic cues); recovered by 20% during 2002 to 2008 from 49.07 to 39.20 (on favourable global cues and robust $ inflows) and sharp fall by 75% during 2008 to 2013 from 39.20 to 68.85 (on series of global cues); annualised rate of Rupee depreciation was high during the period 1995-2002 and 2008-2013 beyond the interest carry advantage. The reasons for these abnormal moves either-way is attributed to hot money FII fund movements (in or out) and impact on India macroeconomic fundamentals from excessive one-way movement in commodity assets. All combined, Rupee exchange rate direction was guided by external cues and India's defence mechanism was weak given the structural woes from high CAD and low $ reserves with no ring-fence protection against FII mood-swings!

The situation now is different; there will be lot of positive developments going forward from manageable CAD, build-up of deep-pocket $ reserves, robust FDI flows diluting FII dependency and 'Make-in-India' strategy providing boost to exports. Given these positive shift of economic and market dynamics, worst case for Rupee may not be over 3% annualised depreciation rate, not ruling out best case scenario of adjusting the excessive 75% depreciation seen in 2008-2013 from 39.20 to 68.85.

Taking the best and the worst case scenario, USD/INR value by the end of 2024 may be at 65-85 and will not be surprised to see it in lower-half at 65-75, thus setting up long term "carry-trade" play for interest cost advantage. Good luck!

Moses Harding

Better comfort from global cues?!

It is good to see emergence of strategic investor's value-buy support to global equity markets by moving money away from over-valued Gilts. DJI strong recovery from 15850 to over 16600 and sharp spike in US 10Y bond yield from 1.90% to 2.25% are signals of shift in investor risk appetite from risk-off to risk-on stance! Gold failure at 1st sell-zone of 1250-1265 for push back below 1230 and Brent finding support below 85 for pull-back into 87.50 add credence to expectation of dilution in near-term risks on the financial markets. DXY is back to stability at 84.75-86.25 unable to retain overshoot either way into 84.50 & 86.75. Strategic investor's cherry-picking and short-squeeze by traders have come to the rescue to bring some sense (and relief) into markets.

Can this relief sustain? As said, near-term trading range is seen to be cemented till fresh cues emerge either-way; DJI at 15850-17350, US 10Y bond yield at 1.90-2.40%, Brent Crude at 82.50-87.50, Gold at 1185-1265 and DXY at 84.75-86.75; if there are no significant triggers either-way, said ranges are there to stay into the near term and in back-and-forth mode into 2014 year end.

The dilution of external risks is a relief on Indian financial markets to ride on the domestic optimism. NIFTY has already set up bullish momentum on sharp recovery from above 7700 to over 8000 with firm undertone for near-term extension into 8150-8180 to complete back-and-forth of set near-term focus at 7700-8150. Investor interest to stay invested in Gilts ahead of rate-cut extends solid support for India 10Y benchmark bond at 8.35-8.40%; it is possible that 8.40% 2024 trading at discount is behind for shift into short term trading range of 8.15-8.40%. Despite all these positive cues, Rupee is in nervous mode unable to retain gains into solid resistance zone at 60.70/60.95-61.20 with equally solid protection at 61.70-61.95/62.20 to prevent downside excessive run.

Its gonna be very quiet ahead as markets (global & domestic) are expected to stay in sideways consolidation mode into end of 2014, post lot of fireworks since July 2013. It is time to take stock and plan for the future. There is no need to stay overly worried but it is important to stay glued to trending in macroeconomic fundamentals; policy rate stance of FED and RBI will be the major triggers going forward. My bet is on RBI rate-cut in early 2015 and FED rate-hike in 2nd half of 2015. So, need to tighten the seat belt now for roller-coaster rides in 2015!

Moses Harding

Special update: Rupee

USD/INR has gained since the August 2013 to March 2014 reversal from 68.85 to 58.33. Although the sharp fall in Rupee from May 2013 high of 53.66 to 68.85 was triggered by external cues (shift of FED into QE unwind mode & into hawkish monetary guidance) which can be termed as one-off, domestic structural woes from large Current Account Deficit, high dependency on hot-money $ inflows and RBI's weak position to defend (and protect) Rupee in the event of sudden shocks (and resultant one-way excessive fall) are seen as high long term risk on the Rupee. Combination of these factors put RBI in an awkward position to retain high interest rate differential till inflation risks are out of the way. All taken the vicious cycle (and conflicts) between growth-inflation and interest rate-Rupee exchange rate is tough to be broken to aspire for permanent long term relief for Rupee.

What is the way forward? It is possible that USD/INR has already shifted its long term base at 60.20-60.70 adjusting to inflation-interest rate differential to maintain REER favourable to exports and inflows. The permanent solution for the system is obviously to turn surplus in trade/current accounts or to fund the deficit through long term FDI flows and to ring-fence Rupee exchange rate from sudden (and lumpy) exit of FII hot-money, fair-weather inflows. The CAD management strategy should revolve around reducing non-essential import consumption, optimisation of imported essential consumption (through domestic production) and boost (and promote) exports. The Government has already started the ball rolling through cuts in subsidy on imported items, higher tax on non-essential imports, energy substitution and "Make-in-India" invitation to foreign manufacturers, benefits from these initiatives will accrue over long term; till then structural woes on the system will remain valid, but with diluted intensity going forward, hopefully!?

What is the Rupee exchange rate outlook? Having lifted long term base to 60.20-60.70, Rupee is at risk of slow (but gradual) weakness into 62.10-62.25 (near term) and 62.85-63.00 (short term), while not ruling out further weakness into/beyond January 2014 low of 63.32 in the event of dollar establishing its strength over global currencies. All taken, major risks on Rupee from external sector are from FED shift into rate hike cycle and reversal in commodity prices, while worry from domestic sector is the execution risk to resolve said structural woes that could impact the optimism on improvement in macroeconomic fundamentals leading to delay in sovereign rating upgrade. For now, strategic long term focus on Rupee is to be tuned at 60.20/60.70-62.85/63.35. The hedging strategy is to stay balanced on risk (and to avoid near/short term carry-trade play) keeping 6M $ range at 63-64 and 12M $ at 65.50-66.50; to stay balanced on risk, it is seen prudent to buy 6M $ around 63-63.25 and sell 12M $ at 66.25-66.50. The hedging strategy should be to avoid monetary loss on the balance sheet without worry on opportunity loss. Given the two-way volatility, it would be a trader's delight to ride the waves around the upward sloping trend line through right entry with tight stop (and reverse, if the correction or extension is seen to go deep); the art of trading the waves is akin to skills of wind-surfing; waiting for start of the right wave to enter, with exit before the next one may pull the rider down! Going forward, there is no major risk of excessive one-way move as RBI is now better placed to guide price-stability and prevent excessive overshoot either-way!

Moses Harding

Special update: India Equity Market (NIFTY)

Most stake-holders are worried on NIFTY struggle for build-up of bullish momentum while on its recovery path from 7723 (into 8000 as I write this blog), despite combination of positive domestic and global cues. The external trigger (and supportive tailwinds) was on value-buy from global investors driving the DJI from 15850 to 16600 and dilution in risk-off stance unwinding the US 10Y bond yield from 1.90% into 2.25%. The domestic triggers are many from NaMo gaining political advantage, slew of policy reforms and step-up momentum in policy implementation and execution. While all these cues are well taken, positive take-away is from shift of focus from 7540 to 8180 which is big relief, post the nervous signals of NIFTY extending the reversal from 8150-8180 into 7540-7685.

What next? If no bolt from the blue, NIFTY has already established firm strategic (and long term) base at 7723 (up from 7540) and would need manna from the heaven to post a new all-time high over 8180. Both these events are not ruled out from weak external sector and optimism on the domestic sector. The lead-lag play of these events (risk from external and reward from internal) is causing the worry at this stage! The bias however is for upside break of this 7723-8180 focus zone as global investors continue to prefer to stay overweight on India on hope of monetary easing ahead of expectation and inevitable sovereign rating upgrade in 2015.

The attention at this stage is on the momentum of positive shift on India macroeconomic fundamentals; growth into higher end of 5.5-7.5%; CPI sustainability at lower end of 6-8% and steady WPI at 2-4%. The structural woes on twin-deficits continue to exist but not seen as major hurdle to dilute the pent-up bullish momentum, as the worst is seen to be behind and light at the end of the tunnel is sighted.

All taken, strategic focus on NIFTY is reviewed to earlier trading/investment range of 7700/7850-8150/8300 and stay on buy mode on corrective dips to be invested to ride the bullish trend.

Wish you all a very Happy Diwali and profitable year ahead!

Moses Harding

Special update: India Bond market

India 10Y benchmark 8.40% 2024 is firm (and steady) at 8.35-8.40% despite fireworks (and excessive volatility) in US 10Y yield at 1.90-2.65%; in the process bond spread has moved back-and-forth of 5.85-6.35% tolerance zone, seen as ideal range to support Rupee stability at 60-62 by retaining FII appetite on India MM assets as alternate to equity. What is the way forward.

The factors (and cues) in support of decline in Bond yields (and Money Market rates) are many! yield/rate curve across short to long term is flat in expectation of shift to dovish monetary policy stance; borrower's demand for funds is in the shorter end while investor's supply is in the longer end, thus squeezing the tenor premium to zero (with 1-5 year Rupee IRS curve at deep discount by 40 bps); cause of concern (and worry) from twin deficits and its adverse impact on inflation and Rupee are no more relevant. Then, why delay the inevitable?

RBI's worry is from the sustainability of retail inflation at lower end of 6-8% target zone (and WPI stability at 2-4%) when benefits from external cues are seen to be fully done?! The risks as seen by RBI from external sector is from possible recovery in commodity prices and aggressive rate hikes from the FED. On the domestic side, worry is from possible lag time to build supply-capacity to meet demand-expansion and lack of muscle power (and deep pockets) to protect Rupee against squeeze in interest rate differential between Rupee and the dollar. Given the limited traction between interest & growth rate, RBI see prudence in retaining extended pause till structural woes on Rupee (from CAD and high dependency on hot-money inflows) and supply-side bottlenecks (from capacity expansion) are resolved to its satisfaction (and comfort). Till then, intent of RBI is to retain 8.5-9% as overnight Rupee supply/refinance rate from RBI counters, through administration of deficit system liquidity. RBI has the support of IMF in validation of its stance to stay neutral on rate direction, and that the rate direction (up or down) to be set by inflation expectation and interest rate differential (and not turn it around as support to consumption/growth and to disincentivise savings).

RBI has two options: (a) cut policy rates by 50 bps with status-quo on liquidity administration policy to allow consolidation in overnight rate at higher end of 7.5-8.5% LAF-MSF corridor; (b) refrain from pumping out excess system liquidity to allow ease in overnight rate into 7%, lower end of LAF corridor, without the need to cut policy rates. The third option of extended pause (taking wait-and-watch stance) may not stay for long given the pressure from most stake-holders! RBI agenda is the balancing act to retain interest rate supportive to growth/consumption & savings and Rupee exchange rate. It is obvious that the stance can not be extremes and the policy stance has to be somewhere in the mid-path, without losing balance either-way!

What is the way forward? 10Y benchmark yield at 8.35-8.40% is at mid-point of short term best case scenario of 8.15-8.20% and worst case of 8.60-8.65%. While the pull is towards 8.15%, the risk of push into 8.65% is also high on any weak data, external headwinds and supply expansion-demand squeeze market dynamics. All taken, while there is great confidence in retaining the set strategic focus at 8.15-8.65%, cues are not clear to suggest directional bias while at 8.35-8.40%.

What should investors do? When it is risk-neutral, it is prudent to stay light either-way! It is also certain that extended gains into 8.15% is surely in the making; doubt is from either 8.35-8.40% to 8.15% or post some more sideways play at 8.30/8.35-8.45/8.50%. Given this expectation, it makes sense to stay light on the "long" side with good appetite to add on weakness into 8.40-8.50%.

Moses Harding

NaMo impact on India gets stronger!

Narendra Modi grip on the Indian politics and Government gets stronger post the political control over Maharashtra and Haryana! It is great news for the Indian economy (and financial markets) to believe in long term prosperity into 2019-2024. The platform to script (and execute) India economic prosperity is rock-solid and it could only strengthen going forward as NaMo dominance gets spread across India into other non - BJP governed states. Combination of NaMo Tsunami & external tailwinds and creation of India economic (and business) opportunities will pull-in domestic & external liquidity to step-up momentum in India economic growth prospects to trigger significant improvement in India macroeconomic fundamentals. All these positive factors will obviously lead to sovereign upgrade in second half of 2015 for financial markets to switch gear for next round of re-rating in 2015. All cues taken (combining domestic & external cues in play), there is no reason to stay in doubt on the long term economic and social prosperity of India.

There are good reasons to stay on "buy dips" mode on financial markets and not to get worried on any event (or data) led correction. The medium/long term bullish trend is firmly in place as establishment of "higher low's" will be in the making going ahead!

It is cheers to Narendra Modi to steer India's economic prosperity to higher level (and India into the club of Developed economies); let Modi's team be not complacent over this euophoria (and stake-holders confidence) as execution risk (and failure) can lead to doom & gloom for BJP and India. The proof of the pudding is in eating!

Moses Harding

Global cues volatile: sentiment weak & confidence low!?

Global markets are in erratic mood-swings breaking the investor confidence on financial assets. Dow Jones Index continue to struggle to retain (and hold on to) strategic support zone of 16000-16350 post the swift fall from 17350, and resultant shift of appetite to safe-haven Gilt/sovereign assets pushed US 10Y bond yield from 2.65% to 1.90%. Global economic demand compression drives Brent Crude from $115 into $80-82 strategic support zone. The interest rate play which turned in favour of the dollar drove DXY from 79.75 to 86.75 is now not seen very relevant as FED loses its band-width to get into rate hike mode soon. Gold gets back its shine (as alternate to Gilts) for decent recovery from 1180 to 1250. All taken, investors appetite is highly risk-off with appetite for Gilts and Gold when cash earns nothing. This risk-off sentiment is firm with no great prospects of recovery signals, while "powers that be" have no clues to execute bullish turnaround post the extended QE liquidity support and near Zero Interest Rate Regime have not yielded desired results.

There is support now from "short-squeeze" and long term value buying while retaining appetite for more on extended weakness beyond recent lows; small portion of portfolio is seen to be allocated to non-Gilt financial assets as capital protection strategy adjusting to recent gains made on Gilts and Gold. The recovery from recent lows is seen as "correction" phase retaining near term bearish undertone. The visibility ahead is very poor to take short/medium term view on financial markets/assets and no clue whatsoever on long term investment strategy.

What next? The attention is obviously on the recent lows and the extent of correction.  The undertone (and appetite) is mixed with "buy-dips" (by strategic investors) "sell-on-recovery" (by short term traders); needless to say, volumes from traders are seen to be much higher than the investors, which is a serious cause for concern, thus retaining the risk of DJI extended weakness below 16000, US 10Y bond rally below 1.90%, Brent Crude below $82, Gold above 1260 and DXY above 86.75; all combined will be signals for emergence of global economic depression. It is tough for EMs to ring-fence the economy (and financial markets) from the Tsunami headwinds from developed markets, who contribute to the demand for goods (and services) from EMs, while economies with good domestic consumption/demand and ability to open new business opportunities will stand out relatively better. India is in this position with good confidence to expand domestic demand (thereby capacity expansion) and create opportunities to put foreign monies to work.

How to trade markets in this tough environment?

DJI unwinds most of intra-2014 gains from 15340 to 17350 with recent low at 15855. The undertone is weak while below 16200-16350 and need to keep the downside risk below 15770-15855 open for extended drag into 15340, relief only on early recovery above 16400-16600. For now, let us keep focus at 15770/15855-16200/16350 and stay neutral on break-out direction, bias however is into 15340 before set up of relief rally.

US 10Y bond rally from 2.60-2.65% into 2.30-2.35% and gained speed on break of 2.30% into 1.90%, followed by sharp correction into 2.15%. It is tough to suggest positional trade at current high valuation and lack of clarity on the way forward. All cues taken, it is fair to assume possible trading range of 1.90-2.15%; bias however is for limited upside (below 1.90%) and whip-saw downside (above 2.15%) on strong economic data print which could bring the rate-hike fear back into focus.

Gold completely unwinds intra-2014 rally from 1184.50 to 1391.76 with recent low at 1183.46; while the fall is in alignment with FED hawkish monetary stance, the recovery from below 1185 into 1249.30 has diluted impact from emergence of weak economic outlook and resultant investor risk-off stance. The short term trading range is seen at 1150/1185-1265/1300; while the near term bias is for safe-haven benefit for extended recovery into 1265-1300, which will be seen heavy for push-back into 1150-1185. The strategy is to sell in 2 lots at 1250-1265 and 1285-1300 (with stop at 1305) for 1150-1185, which is low risk - high reward strategic trade.

Brent Crude gave up intra-2014 geo-political concerns led rally into 115.71 for sharp reversal into set strategic support zone of 80-82 with recent low at 82.60; recovery from here is sharp into 87.34. It will be worry if Brent falls below 82.30-82.60 on growth deceleration and consequent demand compression outlook/environment. Given the demand-supply dynamics, upside is seen to be firm at 90-95 to look for near-term consolidation at 80.00/82.50-87.50/90.00. The strategy is to play end to end with stop on range break-out.

DXY staged smart intra-2014 rally from 78.90 to 86.74 on combination of interest rate play and safe-haven demand; US economy is now seen as the best among the worst in the DM community! Correction from 86.74 is sharp into 84.47 mainly on short-squeeze and fear of concerted G7 Central Banks intervention to crush the extended dollar rally. Immediate support is seen at 84.45-84.90 (worst case at 83.75) to retain bullish undertone for reclaim of 86.75 and to pull 88.70 (2010 high) and 89.62 (2009 high) into focus. The strategy is to buy in 2 lots at 84.50 and 83.75 with tight stop on downside break.

EUR/USD saw strong intra-2014 push back from 1.3992 to 1.2499 triggered by combination of Euro zone woes (leading to extended QE and sub-zero interest rate regime) and US rate-hike worry ahead of expectation. The emergence of US economic woes pulled marginal recovery from 1.2499 to 1.2885. At this stage, it is seen as correction (and consolidation) phase retaining the short term bearish undertone. The first sign of back into the bearish trend will be below 1.2685-1.2700 for back into strategic support zone of 1.2450-1.2500 which protects re-visit to July 2012 low of 1.2040. Near term relief will be only from recovery over 1.30-1.3070. For now, let us set our focus at 1.2450/1.2500-1.3000/1.3050; tone consolidation till fresh cues come in.

USD/JPY posted strong intra-2014 rally from 100.74 to 110.08 which is "manna from the heaven" for Japanese exporters who have been hit by extended JPY strength for long. The rally is as per strategic script set at 100/101-109/110. The reversal was deep (at 105.18) but held at lower end of revised strategic focus at 105.00/105.50-110.00/110.50. The way forward is mixed; recovery above 107.50-107.65 will get the focus back to 110, while below 105.00-105.50 will be shallow at 104.30 before strong bounce back! For now, let us focus our attention at 104.30/105.15-107.65 and retain bullish undertone for revisit into 110.

What is the impact on India markets?

Global (and external) headwinds stay muted on significant improvement in macroeconomic fundamentals and Modi euophoria. India is the only destination seen to open up opportunities (with improved business friendly environment) to put external liquidity to work.

It has been a fantastic bull-run for NIFTY from intra-2014 low of 5933 into 8180; as per script, correction phase from above 8150 has hit 7700 with low at 7723. The positive take-away is the lift of long term strategic base from 5933 to 7422-7540 seen as the worst case scenario for now. The positive triggers are many across political, economic and monetary factors despite strong external headwinds. NIFTY has firm short term support at 7650-7700 to get back into recovery phase into 7830/7900/7950 while 8180 is expected to stay safe through rest of 2014. For now, let us stay focused at 7650/7700-7900/7950 and neutral on break-out into either 7550 or 8030/8180. The strategy is to be fleet-footed by trading end-to-end while strategic investors could buy extended weakness into 7550-7700 for 8000-8150.

10Y bond 8.40% 2024 has seen back-and-forth of 8.35-8.65% since issue. There is conflict of interest between RBI and FM on monetary policy. While RBI's preference is to stay neutral (to hawkish) to ring-fence domestic impact on inflation and external impact on Rupee, there is seen to be pressure from most stake holders for shift into dovish stance taking cues from sharp downtrend in core & retail inflation and weak IIP print from capacity squeeze. All conflicting cues (and dynamics) taken, see stability at 8.30/8.35-8.40/8.45% (with overshoot limited to set strategic focus at 8.15-8.65%). There is no clear trend at this stage for possible price-stability around mid-point at 8.40% and await more cues for set up of directional bias into 8.15% or 8.65%. It is important to stay tuned to 10Y India-US bond spread at 5.85/6.0-6.20/6.35% while deciding entry strategy for directional clarity. For now, let us watch tight range play at 8.35-8.40% with attention on global cues (shift back to risk-on mode) and domestic cues (inflation trend) for break-out guidance.

Rupee has been bit volatile in 2014; recovery from intra-2014 low of 63.32 held at 58.33 for push back into 61.95 twice in October, recovery from here held at 60.90 (again twice in October); back-and-forth at 60.90-61.95 is as per script limiting volatility in end Mar'15 $ at 63-64 and 12M $ at 65.50-66.50. RBI is seen ok with lift of intra-2014 USD/INR base from 58.33 to 59.52 to 60.20 (and now at 60.90); the said shift is fair taking the REER impact from strong dollar and differential in inflation/interest rate. There are no fresh cues to review the set strategic focus at 60.70/60.95-61.95; going forward into end FY15, Rupee weakness into 62.25-63.00 is in order. Hence, RBI's advise to stay hedged on exchange rate exposure as no big monies to be made on unhedged imports till March 2015, while it is good for exporters to play the high premium (and time-decay) for better realisation. This approach will establish long term price-stability for win-win across stakeholders!

Moses Harding

Is there no stop to the one-way down-hill in the West?!

It is collapse in the developed markets led by the US! The severe bearish undertone (and resultant investor risk-off stance) drives Dow Jones Index below strong support zone of 16000-16350 with huge appetite for Gilts, pushing Brent the 10Y US yield below 2%; weak equity assets and over valuation of Gilts is sign of extended grief on the system, making FED guidance on shift to rate-hike stance irrelevant. The diminishing risk of rate-hike (for extended ZIRP beyond 2015) cuts the bullish momentum of the USD for unwind of 79.75 to 86.75 rally. Euro gets relief over 1.2785-1.2800 and Yen below 106.50. Gold gets support from lower Gilt yield for marginal gain into 1235-1260.

What is the impact on Indian markets?

The worst hit will be the equity assets as investors shift appetite from equity to Gilts. NIFTY is at risk of extended weakness below 7815 into 7685; hold here is critical to keep 7550 out of focus. As feared, NIFTY focus zone shift to 7550/7700-8000/8150; retain 7550-7700 as no-sell zone for strategic traders and look good to buy for strategic investors.

Gilts will be in demand despite RBI's intent to hold 10Y yield above 8.40%; focus shifts to 8.15-8.40% trading range with higher bond spread of 6.20-6.35% with US 10Y yield. It would be good tussle between investors and RBI, cutting the bullish momentum through higher negative carry (pulling call rate close to 9%). Till clarity on RBI counter attack, prefer back-and-forth at 8.30-8.40%.

The impact on Rupee is mixed with conflicts from weak equity and weak dollar. Impact from interest rate cues is supportive to Rupee from administered elevated short term MM rates and widening bond spread into 6.20-6.35% (which has played back-and-forth of 5.85-6.35% shifting directional bias in tune with investor risk stance). All taken, retain Rupee focus at 60.70/60.95-61.70/61.95; end Mar'15 $ at 63-64 and 12M $ at 65.50-66.50.

Moses Harding

Conflict in Rupee-Inflation dynamics support steady policy rates!?

There is indeed strong (and valid) case for shift to dovish monetary policy stance, which builds up expectation for rate cut sooner than later. RBI's recent guidance indicated rate cut action by late 2015, as the best case subject to meeting certain targets (and objectives); now, expectation stands shifted to early 2015. However, stake-holders stay suspect on delivery to expectation, hence the absence of market-euphoria post sharp fall in CPI below 6.5% and WPI print below 2.5%.

Is down-trend in inflation enough to take a directional U-turn? It is too early to jump to conclusion for sustainability of CPI at lower end of 6-8% and stable WPI at 2-4% when Indian growth momentum is in pick-up phase and best of external tailwinds is seen to be done. Another factor emerges from recent Rupee behaviour for steady weakness from 60 to 63. Given the structural mismatch, sharp decline in 1-12 month term money rates can push Rupee further down over 2014 low of 63.32 into all-time low of 68.80; excessive Rupee weakness will un-do the impact of rate cuts. All taken, it is not a straight-forward case for RBI to cut policy rates in a hurry!

What can RBI do?

Despite any policy action, relevance is on the over-night effective policy rate and build-up of adequate tenor premium (or discount) based on future outlook. RBI intent is seen to be administering effective operating policy rate around mid-point of Repo-MSF rate corridor, currently at 8-9% through restriction in availability of liquidity at overnight Repo counter and quota-limit on term Repo, thereby cutting 100% refinance of excess SLR with Banks to 25%. Despite all these restrictive measures, call money rate continues to trade around 8% Repo rate against RBI's comfort zone of 8.5-9%. Of late, RBI is seen aggressive to suck out liquidity through OMOs and secondary market bond sales.

It is possible that RBI may create room for 50 bps rate cut to satisfy the Government and other stakeholders (policy rate corridor at 6.5-7.5%) retaining MSF rate at 9%. RBI will retain the option to manage effective policy rate at 7.5-9% (or at 7.5-8.5% with parallel shift in MSF rate) through liquidity. It is not difficult for RBI to retain overnight rate at/above 8.5% despite delivering 50 bps rate cut! This stance is seen fair (and prudent) till emergence of clarity in domestic and global cues. All taken, it is still early to turn bullish on Bonds; given the flat yield curve across 1 to 10 years, long term borrowers will enjoy the term discount for cost efficiency, while elevated short term interest rates stay attractive to retail investors. This stance is seen win-win to retain savings rate and borrowing rate affordable to support growth pick-up.

Is Raghuram Rajan listening?

Moses Harding

No cheer to markets from ease of inflation

It is welcome news to the Indian economy (and music to the Government) to see September CPI down below 6.5% (at lower end of RBI's target zone of 6-8%) and WPI into 2-4% comfort zone. RBI should be happy with the positive (and favourable) down-trend to cut conflicts in growth-inflation dynamics, but may not get into immediate rate-cut action till confirmation on long term sustainability. It also means that the fear of rate hike in the event stubborn CPI (at higher end of 6-8%) is now behind and if the downtrend is established in the next 2-3 months, rate cut may not be delayed beyond Q4/FY15.

The bullish cues from domestic inflation is diluted by weak global cues, and limited signs of significant upside on domestic growth momentum. The ease is mainly from sharp reversal in commodity prices from global demand compression. In such a scenario, dovish monetary policy itself may not serve the purpose unless enough opportunities are created to put investor's monies to work; too much of money chase into domestic Gilts is risk for Rupee.

All taken, markets have not reacted favourably to the spark in inflation print when global investor sentiment is into heavy risk-off mode. The stake-holders are yet to sight the milestones between Vision and targeted goals, which is important to get clarity on ways, means and time frame from start to finish! It is not surprise to see NIFTY giving up gains from over 7915 to below 7865 and Rupee giving up recovery from 60.90 into 61.40 with 10Y bond yield steady at 8.35-8.40%.

The take-away at this stage is the comfort from high probability of turnaround in India macroeconomic fundamentals leaving the structural woes from growth-inflation, demand-supply and CAD-exchange rate dynamics way behind, all contributing to fiscal prudence! There is no need to get overly bearish on the markets, while retaining the post-Modi optimism!

Moses Harding

External cues weak, but India seen resilient!

Global Cues:

Global economic gloom (and absence of revival instincts) begin to blow strong headwinds on financial markets! DJI unwinds most of recent 1000 point rally from 16350 to 17350 (for push-back into 16550) with no signs of sustainable recovery, most investors in "sell on corrective rally" mode; US Gilts stay firm on risk-off sentiment despite end of QE and risk of FED shift into rate hike mode in 2015, US 10Y bond yield drop from 2.65% to 2.30% highlights weak investor confidence; Commodity assets are down sharply on lack of confidence on growth pick-up and consequent demand compression, pushing Brent Crude down from over $115 into $ 85-90 and Gold down from $1345 to $1185 along with other Base Metal & Energy assets.

There are no turnaround signals; if QE and extended ZIRP have not helped the cause since 2009, what else can? How long Central Banks could stay with ultra-dovish monetary policy at the cost of creation of asset bubble? Where is the consumer demand going to come from for capacity utilisation (and expansion) to put investor's money to work? There are no workable solutions to these major issues in play! To add fuel to the fire, geo-political concerns (and lack of amicable resolutions) keep investor's mood nervous, with the intent to preserve capital. Cash is in plenty for growth capital and risk appetite is good to ride the appreciation in financial assets, but opportunities are few; hence the strong valuation of Gilts and cash-rich corporate assets. All taken, the gloomy global economic conditions turn out to be an extended one and would need "manna from the heaven" to spur growth and revive investor sentiment & consumer confidence! Till then, Cash (and Gilts) is the king, but do not rule out emergence of long term value buying from extended weakness from here! While near/short term outlook is weak, stay neutral on medium/long term value creation.

Domestic Cues:

Narendra Modi brought luck and cheer into Indian economy and financial markets. The oft-said ugly terms of policy paralysis, regulatory irritants and administrative bottlenecks are no more relevant with majority political mandate and decisive leadership over the Government & NDA; the consensus approach with the State Governments and roll-out of red carpet to cash-rich nations to pump growth capital into India is positive long term approach. There has been significant change in transparency and governance. The Modi mantra to build skills, speed & scale aligning with effective & good governance are cues to cheer. The long term agenda on across the pyramid financial inclusion, building social & economic infrastructure, vigour in make-in-India manufacturing story and better leverage of agriculture potential are melody to ears!

The luck factor has brought significant upside momentum to India macroeconomic fundamentals; sharp fall in commodity prices has brought in improvement on current account deficit and fiscal deficit, while diluting cost-push inflation triggers. The robust foreign currency inflows has removed the fear of sudden, excessive downside risk on Rupee. While concerns remain on growth, shift of focus from below 5% to 6.0-7.5% has attracted global investor attention. All taken, combination of positive domestic cues and headwinds from external sector will extend price-stability with minimal downside risks, but not good enough to add momentum to near/short term bullish recovery. Over all, while medium/long term bullish prospects stay intact, do not rule out near/short term weakness, seen as value-buy for strategic investors. 

Outlook on financial markets:

Global markets:

Dow Jones Index is at risk of testing the strong short term support zone of 16300-16350 post the sharp reversal from recent high of 17350; weakness below the said support will be very bearish for global stocks. Let us have attention at 16300 for directional bias for either extended downside risk below 16000 or recovery over 17000 into 17350. Prudent to retain immediate term focus at 16300-17000 by playing end-to-end or break thereof either-way! 

US 10Y bond yield traded back-and-forth of set focus at 2.30/2.35-2.60/2.65%; sharply up to 2.65% from 2.30% on FED hawkish monetary stance, but fell again to 2.30% on ultra-dovish monetary stance of ECB, geo-political concerns and general risk-off investor sentiment in the absence of growth-spark triggers in the system. All these factors lead to believe that FED shift into rate-hike cycle will be delayed one (into second-half of 2015 or early 2016), not withstanding end of US QE in October 2014. The immediate term risk is for further slippage in the yield below 2.30% while 2.50-2.65% stay firm; having said this, the chase below 2.30% has to be very cautious as couple of positive economic data could trigger sharp reversal into 2.65%.

Brent Crude reversal from over $115 (June high at 115.71) into set reversal target of 85-90 (low at 88.11) is comfort for energy importing economies and major relief for those battling with high CAD and elevated inflation. Combination of demand compression and shift to alternate low-cost avenues, the journey of reversal of rally from 36.20 to 128.50 (seen from December 2008 to March 2012) will be an extended one! Near term focus, not withstanding geo-political concerns is set at 80/82-93/95 retaining near/short term bearish undertone; risk of bullish reversal only beyond 98-100, seen as very low probability. 

DXY bullish momentum from below 80 (July low of 79.74) met 86.25 target (high at 86.74) before consolidation at set focus zone of 84.75/85.00-86.25/86.75. The undertone is bullish beyond 86.75 into 88.70-89.60 (high seen in March 2009 - June 2010). Retain immediate term focus at 84.75-86.75 not ruling out upside break! In the given global economic scenario (and related developments & outlook), it is safe to bet monies on the dollar.

EUR/USD reversal from below 1.40 (May high at 1.3992) is sharp into 1.2500 on Euro zone concerns and related shift of assets from Euro zone to US and other growth markets in EM space or otherwise. The dynamics are obviously not in favour of triggering sustainable recovery with short term resistance at 1.2785-1.2800 and 1.2990-1.3015; near term attraction is for weakness into 1.2450-1.2500 and below here, pulls the July 2012 low of 1.2040 into the radar.

USD/JPY bullish momentum from May 2014 low of 100.80 into recent high of 110.08 is as per script for 2014 strategic play set at 100/101-109/110; correction from 110 found support at 107.50 as per expectation. What next? Japanese exporter's interest is huge at 110 ahead of end 2014, but $ strength across global currencies will retain the weak undertone on the ¥ not withstanding exporter dollar supplies. For now, near/short term support is firm at 106.50-107.50 (worst case not below 105.50) with target at 113.75. The strategic focus is revised from 100-110 to 105-115.

Gold completes back-and-forth of set strategic focus at 1185-1335, up from 1180 to 1345 and now down to 1183.50 before consolidation at 1185-1235. Gold outlook is mixed; chasing weakness below 1180-1185 is high risk, but do not see momentum for extended correction beyond 1240-1265. Till more cues emerge to set up better clarity on directional bias, it is prudent to stay with sideways trading mode at 1180/1185-1235/1240, not ruling out unsustainable extension into 1265.

Domestic markets:

NIFTY under pressure post multiple failures at 8150-8200, seen as best case for rest of 2014/FY15; reversal from here finds support at 7800-7850 on domestic optimism, but seen vulnerable from weak global cues. The year 2014 is great for NIFTY investors, up from 5933 to 8180 (from February to mid September) with gradual "lift" in long term base to/over 6600-7100 as worst case scenario. For now, NIFTY is under pressure below 7860 into 7785/7680 before emergence of value-buy support to retain near/short term focus at 7700-8000. This stance fits good into set big picture strategic focus at 7700/7850-8150/8300; having said this, do not rule out the need to review the strategic focus into 7550/7700-8000/8150 if DJI is pushed down below 16300-16350 support zone. For now, it is prudent to stay light (and fleet-footed) as investors dilute the "buy dips" appetite while traders shift to "sell recovery" mode.

10Y 8.40% 2024 Bond is the only asset looking good and stable while tone elsewhere is weak. Most cues (if not all) are positive in favour of shift into 8.15-8.40% range. The support is from removal of concerns on twin-deficits, dilution in inflation-risk, low US yield and the need to turn growth supportive sooner than later. But, RBI has other agenda to administer tight liquidity regime holding short term rates at elevated levels, thus arresting gains beyond 8.40%. RBI see prudence in delaying the shift to dovish monetary policy stance till absolute comfort on inflation and Rupee, while not seeing sense to cut rates now and to reverse the decision soon, to avoid repeat of 2013 mistakes!? RBI wish to wait and feel the pulse of FED stance on rate-hike momentum. All taken, it makes sense for RBI to stay in sell mode at 8.40% and in buy mode at 8.65% to administer price stability at upper-half of set strategic focus zone of 8.15-8.65%. For now, conflict in domestic & external cues to guide price-stability at 8.40-8.50% with risk of push-back into strategic buy zone of 8.55-8.65%.

USD/INR completes end-to-end of inner-ring of set strategic range of 59/60-62/63 with 60.20 to 61.95 rally in quick time in alignment with DXY gains from 79.75 to 86.75. Rupee recovery from 61.95 held at 60.90 in alignment with end Mar'15 $ focus range of 63.00/63.15-63.85/64.00. What next? There is need to review the strategic focus at 60/61-62/63 for better price stability at reduced volatility. All cues taken, there is no reason for Rupee to get into one-way excessive weakness while the relief will be from DXY giving up gains for steep reversal below 84.00-84.75. The hedging strategy is aligned to end Mar'15 $ at 63-64 and 12M $ at 65.50-66.50 for spot stability at 61-62. For now, retain focus at 60.75/60.90-61.80/61.95; break-out either-way not expected to sustain. 

Moses Harding

Economics in demand-supply dynamics

It is obvious that economic play (growth or depression) revolve around demand-supply dynamics; business opportunities emerge when excess demand lead to supply capacity expansion where cash (equity and debt) is put to work to create jobs & wealth which creates additional demand for goods and services. This combination sets up consistent growth momentum, leading to sustainable bullish undertone of financial assets. This cycle should not be allowed to be broken to retain global economic prosperity!

The issue now is from combination of sharp drop in demand, sub-optimal use of existing capacity and money kept idle in low risk-safe haven assets. Central Banks world over are in rescue act to create demand through ultra-dovish monetary policy (through ZIRP and QE) but opportunities for deployment of liquidity are few! The demand pick-up has to be from Public, Private and combination of both (PPP model to build social infrastructure and support to economic expansion in manufacturing and agriculture sectors).

India had a late-start behind China (and most other EMs), which has now put India in advantage position. There is huge upside for creation of demand beyond the established supremacy in IT, ITES, Pharma and Consumer sectors. The next decade is for India to establish its supremacy over the peers and squeeze the gap with the leaders. At mid-point of the race, India has moved up from the laggards to the crowd in the middle; platform is now perfect to gain speed for move away from the mid-crowd into the leaders league.

Demand creation will emerge from build-up of economic & social infrastructure, "make-in-India" manufacturing story, unearthing natural resources family wealth and the huge upside in agriculture production. The Modi Vision (and Mission) for 2019-2024 is clear, which remains as "wish" at this stage; efforts are visible to turn this wish into strategies and tactics for efficient execution. Modi cannot do it alone; he needs support from administration, investors and the entire manpower of India. Modi's mantra to combine human skills and technology to build speed and scale is a great step in the desired direction. The target is set and visible; but it is distant away at this stage and we need to see milestones at short distance to reach there through shortest possible route. If this process is set in motion quickly, there is huge upside for India financial assets and great monies to be made from equity, debt and currency. India is prepared for significant re-rating from 2014 to 2019/2024. There is no reason to dilute the optimism and positive investor sentiment.

Let us join hands in support to Narendra Modi and his team!

Moses Harding

Global economy capacity squeeze: Extended gloom & doom phase!?

There are no signs of global economic recovery; developed markets are in struggle cutting the capacity of emerging markets, leading to extended ZIRP (Zero Interest Rate Policy) in major economies from near ZGMC (Zero Growth Momentum Conditions); geo-political issues from Russia and extended tussle between ISIS and USA & allies are major risks in play to turn investors into risk-off mode over long period; all these factors lead to risk aversion on equities and safe-haven flow into Gilts, surprise being the loss of shine on the precious metals while weakness in Crude Oil and base metals is from lack of demand when supply in plenty!

The worry is from extended sluggish phase since 2008-2009 with no sight of light at end of the tunnel! US and India is seen to be relatively better (best among the worst?!) while Euro/UK zone, Russia, Japan and BRCS (India excluded) are under severe pressure on growth. The impact on the financial markets is severe; DJI struggle to retain recovery over 17000, 10Y US yield down from 2.65% to 2.40% despite FED preparedness for start of rate-hike cycle by mid 2015, Brent Crude down from over $115 into set reversal target at $85-95 and #DXY extended safe-haven rally over 86.25, driving Euro down into 1.25 and JPY into 110. The general risk-off mood is there to stay retaining bearish momentum on global equities, higher demand for low risk-safe haven Gilts, consolidation in commodity assets and firm DXY.

Impact on Indian markets:

India is better placed than most other economies retaining global investors appetite in India financial assets - equities and bonds with comfort on Rupee exchange rate. If Modi could shift gears from "talk to walk", time-lag from now to sovereign rating upgrade would be minimal; first benchmark target being FY15 GDP growth rate over 5.5% with follow-on policy guidelines to make the global investors walk on the red carpet!? Overall, despite external headwinds, impact on India financial assets may not be significant.

The near term outlook is marginally negative, seen as correction phase retaining short/medium term bullish momentum. All taken, see no major cues to review set short term focus on NIFTY at 7700/7850-8150/8300 but allowing correction not beyond 7700. Rupee is seen to be in sideways mode at 61-62/63 retaining end Mar'15 $ resistance at 63.85/64.00 with importer's interest at 63.00/63.15. Market dynamics is mixed on 10Y bond yield with strong resistance at 8.40% (fear of delay in rate cut not ruling out small hike) and strategic buy support at 8.50-8.65% (chasing easy liquidity and safe-haven appetite).

India is in an enviable position from Modi impact when the global markets are nervous and shaken! 

Great feel indeed!

Moses Harding