The Art and Science of Central Bank Currency Intervention

Intervention act to address dilution of structural woes

In the Indian context given the huge Current Account Deficit, RBI has to do a balancing act to keep Rupee exchange rate attractive to exports (and NRI inflows) and ensure price stability to attract long term foreign currency inflows. It is also important to ensure that exchange rate stay resistive to import of non-essential consumable items, and avoid provision of cheap dollars to hot-money exit and cheap Rupees on fair-weather entry.

RBI is seen adhering to these basic principles. But given the excessive, lumpy and sudden FII mood-swings, USD/INR exchange rate has witnessed sudden bouts of excessive volatility before normalisation. The recent Rupee weakness from 63-63.35 to 66.60-66.85 is also from the FII trigger, so is the appreciation from 66.85 to 65.60-65.85. Given the fact that RBI intervention during these times is with intent to speed-break momentum (rather than being beneficial to FII exit or entry), stakeholders need to stay caution on exchange rate risk on their balance sheet from exports, imports, foreign currency borrowings or investments.

Intervention theme to stay in support for exporters and foreign direct inflows

It is hard reality that there is no long term comfort on sustainability of the CAD at 1-2% of GDP and CPI inflation around mid-point of 2-6% tolerance zone. More so, when the benefit is largely from external cues over which India has no control. The risk in play are from Brent Crude recovery from long term base of $35-50 into $70-85; this 75-100% swing can push the CAD back to 3-5% if not backed by accelerated exports. If Rupee goes into excessive weakness along with Brent price recovery, CPI will be at risk of overshoot beyond 6% if domestic supply side capacity is not scaled up. All combined, it is kind of between the devil and deep sea situation. There is need to cut Rupee over-valuation (to support exports and NRI/FDI inflows), but can't go cheap to exert pressure on the CPI. In this context, it is not an easy task for RBI to do the balancing act to keep Rupee exchange rate around fair-value against the sudden burst of FII outflows and flood of FII inflows.

What's RBI intervention strategy?

RBI is seen to have 2-type strategy; operation of currency-peg when FII play is neutral, while allowing Rupee to find its own "floor" and "cap" on one-way FII flows from core stakeholders hedge strategy. What is the issue then? During normal times, the administration of particular range in alignment with adjustment of time value gives importers the comfort of staying unhedged to avoid paying time value, while exporters stretch their cover to encash time value. When Rupee gets into appreciation mode thereafter (from FII inflows), there is no regret for all. But, when it goes on the other side (from sudden burst of FII outflow), importers get caught on the wrong-foot and exporters in pain on the opportunity loss (and mark to market impact on the export contracts). This sets up "importer's fear and exporter's greed" syndrome adding momentum to one-way Rupee weakness (from importer hedge and exporter unwind). This kind of scenario is common in India Foreign Exchange market. More recently is the sudden value adjustment from 58.35/63.35 to 66.85 post the 68.85 to 58.35 Rupee rally between August 2013 to May 2014. While it is not major P&L hit on long term foreign currency liabilities/assets, it is severe damage on short term unhedged liability exposures.

RBI has no resolution to these stakeholders behaviour except to urge them not to take market risks for granted and to align the risk with on-balance sheet reward with appropriate Risk Managment policies and execution strategies. The philosophy is to avoid real bottom-line P&L hit, unmindful of opportunity losses if any.

What Next?

RBI range administration zone is now sighted at 65.60/65.85-66.60/66.85. In the event of lumpy supply from FIIs, RBI will be happy to allow Rupee appreciation to 65-65.35 looking for $ bids from importers. Can RBI allow Rupee appreciation beyond 65, which could hurt export growth? Doubt it against recent devaluation in EM currencies. If FIIs choose to exit (seeing limited juice in India risk-on assets against significant downside risks in the short term), RBI may allow the Rupee to set its own "floor" from exporters $ supply, building risk of revisit to 66.60-66.85, and beyond into 66.85/67.10-68.60/68.85 if DXY extends gain into 96.50-100.50.

Moses Harding

What to expect from RBI monetary policy review?

RBI retains its priority on long term inflation comfort

There is no cheer from RBI on successive sub 4% CPI print in July-August 2015, when noise for rate cut has turned into scream! Most take comfort from low CAD at 1-2%, steady fiscal deficit at 3.5-4% and relatively strong Rupee against emerging market currencies. The need is also felt to guide GDP growth into higher end of 7-8% through low interest rate regime, if not through surplus system liquidity. It is more critical to avoid growth slippage below 7% when global rating agencies are already delivering downgrade to both developed and EM countries on risks growth pressures. A downgrade for India at this stage will be suicidal.

RBI see relief on CPI, CAD and Rupee as short term development (from external cues) with no major comfort on fiscal deficit against growth pressures. The sense is that the Government has not done enough to remove structural woes on the CAD and CPI and to spur growth through big-bang policy initiatives and huge investments in infrastructure and core sectors. The concerns on the CAD is from export stagnation (and risk of de-growth), sharp rise in gold imports and doubt on long term sustainability of beneficial impact from crash in commodity prices. RBI continues to stay suspect on CPI stability at lower-half of 4-6% tolerance zone into 2016. The concerns are from supply side issues from monsoon impact, unwind of crash in commodity prices and downside risk on the Rupee. RBI also see monetary support to growth can only be steroid type temporary relief, and not permanent cure. While low interest rate policy is not enough to build sustainable momentum in economic capacity expansion, elevated interest rate alone can't guide soft landing of inflation. In this situation, RBI is firm in its balanced approach, and now seen to bat for "silent" savers rather than "vocal" borrowers. It is also clear that RBI is not keen on short-cut "hook or crook" approach for short term relief, and would prefer "wait-and-watch" approach for long term permanent comfort. All combined, it is obvious that RBI does not see merit to deliver rate cut based on the sub 4% CPI print and to stay focused on long term outlook which is at higher end of 5-6%.

Dilemma between rate cut (with extended pause signal) or rate pause (retaining hope for December cut)

It is not pro-market if RBI delivers 25 bps rate cut with 2016 CPI outlook at 5.5-6%. Signals of end of rate cut in India (with September rate cut) against start of rate hike by FED in October - December 2015 is very bearish on both equity and interest rate markets. The trigger of FII exit (against weak equity and long term base in 10Y yield) will push Rupee down. On the other side, RBI rate pause stance till better clarity from base effect (and monsoon) impact on CPI and timing of FED rate hike may turn out to be neutral stance to provide price stability. Given the logical rationale for and against rate cut, it is 50:50 probability on run upto 29th September policy review date.

Jaitley and Rajan seen walking together on monetary policy

It is clear that the Finance Ministry has agreed to disagree with RBI, cutting off the influencing amblical chord. FM is seen to be ok with whatever Rajan does on 29th September. If given such a free hand, Rajan's preference will be to follow Yellen's foot-steps of staying in pause till July-August impact settle down. Most economists are unanimous on CPI shift into 5.5-6.0% in September 2015 to March 2016, which is in alignment with RBI outlook. Then, why demand for rate cut based on the past rather than the future outlook? Government is seen to see merit in this, hence the removal of pressure on RBI to cut rate, and stay content with the 75 bps ease in Q1/2015.

Markets to position for 50:50 bias ahead of 29th September event day

There are 2 options ahead: either 25 bps rate cut with signals of extended pause or rate pause keeping the option open for 25 bps cut in December if September-October CPI print stay at/below 5.5%. The post-event market impact will be the same, hence it is possible that 25 bps rate cut price-in gets unwound on run upto policy. In either case, price volatility is seen to be restricted - Nifty at 7500-8100, Bank Nifty at 15700-17700, 10Y bond yield at 7.68-7.78% and Rupee at 65-67 awaiting next steps of FED and RBI. On run upto FOMC, global markets unwound rate hike impact - recovery followed by post-event push back. Now on run upto 29th September, India markets will be seen to unwind recent recovery followed by post-event price stability.

Fingers crossed for now; 25 bps rate cut will be a pleasant surprise without positive impact, while rate pause will be unpleasant, but to be taken as bitter-coated sweet pill!

Moses Harding

FED looked beyond "self" for rate pause : What Next on markets?

Yellen played to the gallery with good intent to avoid adding fuel to the fire

Global markets are on fire (since mid August) from China impact driving risk-on equity and Currency markets sharply down. While the relief recovery from August low's provides comfort, the sentiment (and confidence) on the way forward remain weak with fear that the worst is yet to be sighted. The trigger for extended bearish momentum is with the FED from rate hike action, which would send the markets crashing down. Against this background, FOMC decided not to hike rates now, allowing time for restoration of normalcy and price stability on financial markets. If Yellen had gone by economic data alone, there is case for start of rate hike cycle moving away from the near zero policy rate. But, priority was given to resultant impact on financial assets, and more importantly downside risks on EM currencies. FOMC rightly chose not to hike rates when combination of growth pressure and collapse in EM financial assets (equity against currency weakness) will be against the interest of US financial system and its investors. Ahead of FOMC, there was pressure to defer rate hike action and it was no surprise that FED chose to stay status-quo with rate pause. More importantly, the guidance tone was mild shifting rate hike action to end of 2015, not ruling out further delay into 2016 if market normalcy is not restored by then from better comfort on global growth recovery. It is high expectation, though!

Yellen cheer diluted by lack of optimism on the way forward

While downside risks stay diluted, there is very little optimism on the way forward. The cheer from the FED is seen as short term relief, and not long term gain against global growth pressures and fear from follow-on China measures that would exert downside risk on the financial markets. All combined, it would be period of consolidation for risk-on assets in the near term with expectations of new 2015 low in Q4/2015. At this stage, all is not seen to be well despite relief from the FED. The time ahead (maximum 3 months before FED rate hike) is too short to wish for permanent relief.

Equity assets continue to stay in risk-off mode into the short term in search of medium term base

DJIA relief recovery from set strategic base of 14850-15350 (low of 15370 on 24/8) held at higher end of zoom-in focus range of 16000/16150-16850/17000 with intra-week recovery from 16330 to 16933 before close at 16384, unable to retain gain above set 16650-16660 intermediate resist zone. What next? The short term outlook is for consolidation between recent low and high at 15350-17600 with immediate focus at 15700/15850-16850/17000. The breakout bias is set towards set strategic support zone 14850-15350, seen as 2015 base. On the other side, relief stretch beyond 16950-17100 will be limited at 17500-17650 before down. The investment appetite can only be from staying away from long term US Treasury when 10Y yield at 1.95-2.10%.

India equity market is also tuned within set strategic focus at 7500/7550-8050/8100 (NIFTY) and 15700/15850-17600/17750 (Bank Nifty). Since expiry of August Futures, September delivery has already seen back-and-forth moves with crash followed by recovery with equal momentum. What next? RBI rate cut is not the game changer, nor the optimism from improved domestic macroeconomic fundamentals. The traction will largely be with external cues. At this stage, see high probability of consolidation within set focus big picture range. For now, immediate focus will be at upper-half, NIFTY at 7800-8100 and Bank Nifty at 16700-17700 before shift of play into the lower-half at 7500-7800 (15700-16700). Having said this, see low probability of unsustainable stretch beyond 8090 (17700-17750) into 8200-8350 (18000-18500) before down. At this stage 2015 high of 8650-9150 (19200-21000) is distant away, and rest of 2015 action is seen not beyond  7150/7500-8100/8350 (14700/15700-17700/18500). The strategic play is seen in "sell-on-recovery" mode with value-buy appetite at 7500-7550 (15700-15850) with room to add on extended bearish momentum into 7000-7150 (14300-14700). Retain strategy for build up of NIFTY portfolio at an average of 7250-7500 for 2016/FY17 target 8650-9150 for 15-25% return in 6-12 month period. It is good for FIIs as well against maximum 5-7% downside risk on Rupee.

Bond market in risk-neutral mode with best mostly covered

US 10Y yield has been volatile at 1.95/2.10-2.45/2.60% in back-and-forth mode from mood-swings on FED interest rate action. So is India 10Y bond at 7.68/7.73-7.88/7.93%. RBI delivering 75 bps rate cut in Q1/2015 has helped in driving the 10Y yield below 8% squeezing the India-US spread from over 6% to 5.50%, while FED preparedness for shift to rate hike cycle extends strong support for India 10Y yield at 7.65-7.70% against risk of end of rate cut cycle in India with another 25 bps cut on 29th September.

Now that FED rate hike is seen to be in December with low probability of October hike, US 10Y yield is seen in comfort at 2.0-2.35% range in the short term with most play at 2.10-2.25%. Given the risk of shift into 2.35-2.60% by end December 2015 and higher into 2.60-2.85% in 2016, most investors would prefer to stay at shorter end with low appetite to stay invested at medium/longer end. The 1-10Y yield differential at 1.25-1.50% is not good to cover 50 bps spike in 10Y yield in the next 6-12 months.

India 10Y yield at 7.68-7.71% (set as duration-cut zone) has factored in 25 bps rate on 29th September and US 10Y yield stability at 2.10-2.20% with India-US 10Y yield spread at 5.50-5.65%. India 10Y yield has been volatile at 7.68/7.71-7.90/7.93% since 20th August  (100.05 to 98.70 to 100.14). MARKET PULSE urged trading this range, investing at 7.90-7.93% for exit (and short-build) at premium (below coupon 7.72%). What next? Staying invested at 7.68-7.71% now is high risk for domestic investors, despite possible stretch into 7.62% (high of 100.62 seen in June 2015). On the other hand, it is very high risk for foreign investors to stay on hold at 7.63-7.68% against the possible USD/INR appreciation from lower to higher end of 65-70 in the next 3-6 months. The risk ahead in the short term (3-6 months) is for Repo rate stability at 7% (10Y yield base at 7.63-7.68%) against US 10Y yield spike into 2.45-2.60% pushing India 10Y yield into 7.70-7.95% range play (with yield spread squeeze at 5.35-5.50%). For now, review big-picture focus range at 7.63/7.68-7.90/7.95% for rest of 2015/FY16. The strategy is to stay fleet-footed churning the portfolio duration on move end to end. While it is good to build long term strategic portfolio at 7.88-7.93%, focus beyond 7.63-7.68% is not in the radar till operating policy rate shift from Repo to Reverse Repo rate (overnight rate down from 7% to 6%). Given the lack of comfort from RBI for shift of CPI stability from 5-6% to around 4%, do not see cues to drive 10Y yield below 7.62% in FY17.

USD in consolidation mode retaining short/medium term strength

USD Index short term range consolidation range is fixed not beyond 92.50/93-96.50/97 till FED gets into rate hike mode, retaining bias for shift into 97/97.50-100/100.50 range before end of 2015. While DXY impact on USD/INR can't be ignored despite short term FII appetite for India assets, extent of flow-driven Rupee appreciation is not clear against lack of clarity on RBI $ buy mode. USD/INR downside break of set 65.85-66.85 focus (into 65.60-65.75) is from RBI off from $ bids to absorb FII supply. It makes sense when it provides cheap dollars for importers to hedge foreign currency liabilities. Having said this, excessive Rupee appreciation against EM currencies is also not good to keep CAD under check at 1-2% of GDP. All taken, USD/INR strategic focus is retained at 65-70 for hedge strategy. Rupee is down by big margin from July-August 2015 high of 63.30-63.70. Now, need to watch USD/INR support at 65.50-65.65; if RBI is not keen to set this as short term base, do not rule out stretch into medium term base at 65-65.35 which is expected to hold. Do not see cues for extended Rupee appreciation beyond here when interest rate dynamics turn against squeezing USD-INR premium spread from FED start of rate hike cycle and low short term money market rates. It is prudent to stay risk-neutral (or off) on USD liabilities at 65-65.65 as the reversal into 66.50-66.85 can be sudden and swift. For now, let us set focus at 65.50/65.65-66.20/66.35 with neutral bias on overshoot into 65 or 66.85. It is good time for RBI to build reserves at 65-65.50 and good for exporters to sell 12M at 70.75-71.25 at spot 66.35-66.85. The big-picture range on 12M is now widened at 69.50/70-71/71.50 till FOMC turn comfort for rate hike, which will put 66.85-67.10 at risk for 68.50-68.85 ahead of 70, between December 2015 - March 2016. It is low probability event for Rupee to extend and sustain gain beyond 65 at this stage.

EUR/USD retain its sideways mode at set big-picture focus range of 1.10/1.1050-1.1450/1.15 and there are no fresh cues to review focus now. Till clarity from FED on rate move, overshoot eitherway is not beyond 1.0850-1.10 and 1.15-1.1650. EUR/INR bullish pick-up from 73-73.50 lost steam at set short term cap of 75.50-76 for push back to 74.50, mid point of 73-76 big-picture focus. While the near term bias is for push back into/below 73, not sure of sustainability there for consolidation play at 72.50/73-75.50/76. It is good to stay focused end to end for now.

I will be away on vacation from 24th September to 14th October. Next update on return. Till then, take care and be safe!

Moses Harding

The week ahead in Global Markets : Trigger with the FED

Impact shift from China to the US:

China woes on global (and emerging) markets are seen to be behind in the short term, thus providing temporary relief. However, the impact left behind is severe across Equity and Currency markets. During this period DJIA crashed from 17750-18150 to 15350 before stability at 16000-16650. In the Indian markets, NIFTY went down-hill from 8650 to 7550 before stability at 7635-7885; more pain in Bank Nifty from 19100-19250 to 15700-15850 before stability at 16250-16750. Indian Rupee got pushed down from 63.30-63.75 to 66.85-67 before stability at 65.85-66.85, while USD Index eased from 97-98.50 to 92.50-93 before stability at 95-96.50. The Chinese impact on global markets is not a surprise, but the impact momentum caught many off-guard. Now, expect China to stay steady on its monetary and exchange rate policy till wounds are completely healed.

The focus now shift to FOMC rate decision this week. While the macroeconomic fundamentals (uptrend in growth rate and employment) are shaping well for start of rate hike cycle, deflation risk and plea from other Central Banks (including IMF) for deferment to 2016 is loud. Will FOMC budge or go ahead with token hike to begin the cycle to exhibit positive vibes on growth, and to dilute expectation of QE4 from some analysts? While there is certainty of hike before end of 2015, retain 51% probability for rate hike now and 49% probability of signal of hike in the next meeting; impact from either of the move will be the same on financial markets.

India macroeconomic fundamentals are trending in the desired direction. CAD is down at lower end of 1-2% and better comfort on growth for trend into higher end of 7-8%. However, there is some discomfort on inflation and fiscal deficit for FY16 against risk from below average monsoon and its impact on revenues and relief support cost. It is also high time the Government to reaffirm its plans to roll out big bang policy initiatives and execution strategies. The hope on India is yet to be translated into on-ground impact. Combination of the said outlook both on domestic and external cues, there are few positive take-away ahead in the short term to wish for set up of bullish momentum. It is at best into neutral consolidation mode in search of short term bottom to signal end of bearish undertone. The markets have already punched 2015 high and now punch of low is not far away before set up of sustainable relief recovery momentum.

Equity is not the best asset to hold in the short term:

DJIA 2015 May high at 18350 is now behind, and out of focus for rest of 2015. Will the August 2015 low of 15370 remain safe? MARKET PULSE set 14850-15350 as the base to end the reversal from 18350-18500, seen as "too hot to hold" zone for 2015. The relief recovery from above 15350 is losing steam at set resistance point of 16650 for consolidation at inner ring of set near term focus at 15850/16000-16500/16650. What next? The immediate resist zone is at 16650-16700, seen near term "cap" with stretch not beyond 17000-17150 while retaining short/medium term base at 14850-15350 for build-up of portfolio for chase of sustainable recovery (in 2016) into 18350 and beyond for minimum 20-23% return. For the week, set range focus at 15700/15850-16650/16800 with stop at 17150 for near/short term target below 15370, but not beyond 14850-15000. There are 2 options ahead: rate pause would provide short-life relief into 16800-17150 before down to 15700-15850, while a rate hike will shift focus to lower half of 14850/15350-16650/17150 at 14850/15000-15850-16000.

NIFTY 2015 high at 9119 (and FY16 high at 8844) is behind and out of focus. The near/short term "cap" is pulled down at 8500-8650. The uncertainty is from the hold of base at 7500-7650 with 51% probability of extension into 7000-7150 before set up of sustainable relief recovery momentum. The attention here is both on the FED and RBI. While delivery of 25 bps rate cut by RBI is seen as certainty on or before 29th September (which has been factored for hold at 7500-7650), FED rate hike and "time lag" between FED hike and RBI cut will set up the bias and momentum from now on. FED rate hike (and delay in RBI rate cut to 29th September or beyond) will quickly extend bearish momentum below 7500-7650 to 7000-7150. On the other hand, rate pause by FED and 29th September rate cut by RBI will shift play into higher end of 7500/7650-8000/8150 for near term consolidation. Thereafter, breakout bias is neutral between 7100-7150 and 8500-8650. It is good to stay focused at 7500-8100 with stop on break (on daily close basis) for 7000 or 8600.

Bank Nifty 2015 high of 20541/20907 is already behind, and out of focus. The bias is for near term stability at 15700/16100-17200/17600 with neutral breakout bias into either 18650-19050 or 14100-14500. The medium term outlook on Bank stocks is linked to earnings improvement from significant cost saving between outgoing and incoming deposits/borrowings and mark-to-market benefit from investment book. The concerns are from extent of drop in yield on assets and provision pressure on stress loan book. Both combined, Banks with less NPA load, high short term liabilities and sufficient excess SLR will stand to gain valuation from earnings improvement. It is good to cherry-pick these stocks for medium/long term hold.

Fixed Income assets safe to hold for capital protection in 2015 and valuation build in 2016

India Interest outlook is in favour of staying invested in Fixed Income despite risk of hardening US yields. While the short term money market yields are in decline since delivery of 75 bps rate cut in Q1/2015, 10Y benchmark 7.72% 2025 is volatile in traction with US 10Y yield, with yield spread of 5.35-5.85%. MARKET PULSE strategy is to cut duration around par value (yield around 7.72%), while building duration at 7.90-7.93%. This stance worked well with multiple back-and-forth moves between 99.95-100.05 (7.71-7.73%) and 98.70-98.85 (7.92-7.94%). What next? While there is clarity on the worst case scenario on India 10Y bond yield at 7.90-7.93% (with intermediate support at 7.80-7.83%), there is no comfort as yet to look for extended rally beyond 7.72-7.75% into short term best case scenario of 7.62-7.65%. US 10Y yield support is firm at set medium/long term base 1.95-2.10% with buy appetite at resistance 2.50-2.65% retaining 1.5-2.0% in 1-10Y yield spread. The short term stability at 2.10-2.60% is seen to cover both extremes of FED rate action (0-0.5% rate move) between now and end of 2015. All cues combined, it is good for long term investors to build portfolio in 2 lots at 7.80-7.82% and 7.90-7.92% (with stop at 7.95%) for 7.62-7.65% by end of FY16; and if all goes well thereafter, FY17 target for India 10Y yield is set at 7%. It is good investment as alternate to fixed income Bank term deposits or AAA Corporate bond. For now, ahead of FED and RBI rate decision, focus is retained at 7.72/7.75-7.80/7.83%, not ruling out extension into 7.88-7.93% on FED rate hike fears and risk from RBI remaining suspect on sustainability of FY16 CPI at 4-5%. It is good for traders to stay focused end to end; worst case at 7.88-7.93% (on FED hike and RBI suspect tone post 25 bps cut) and best case at 7.62-7.67% (on FED pause and RBI optimistic tone post 25 bps cut).

Rupee under pressure but most of worst is behind

USD/INR near term stability range is firm at 65.85/66.10-66.85/67.10 and has seen more than once back-and-forth moves, thanks to RBI Rupee support at higher end and huge importer appetite at lower end. MARKET PULSE hedge strategy is tuned with end September 2015 $ at 66.20/66.35-67/67.15 and 12M at 70.25/70.50-71.25/71.50, which has worked well with end to end moves both ways. What next? Rupee is (and will be) under pressure from external cues and neutral (and mixed) impact from domestic cues. While the comfort is from low CAD print at 1.2% against Brent Stability at $40-55, risk is from set up of importers-lead and exporters-lag against FII pull-out mode (in rest of 2015) and wait-and-watch in H1/2016 awaiting FY16 performance of India economy for better clarity for FY17. The DXY impact on Rupee is also not in favour given the bullish undertone at 93.50/95-99/100.50. All taken, the breakout bias of 65.85/66.10-66.85/67.10 is for 68.60-68.85 in Q4/2015 before stability at 67-69. For now, retain spot focus at 66.20/66.35-66.85/67.00, end September at 66.35/66.50-67/67.15 and 12M at 70.25/70.50-71.25/71.50 (with bias into 72.75-73.25, adjusting for 12M FX premium trend down to 6-6.15%).

EUR/INR bullish momentum is high voltage from the set short term base of 68.65-69.15 (outlook based on USD/INR spike from 63.35 to 66.85 and EUR/USD stability at 1.0850/1.10-1.1350/1.15) while stretch beyond set "cap" at 75.65-76.15 (to 78) was momentary before stability at 73.85/74-75/75.15. What next? EUR/USD bullish momentum from 1.1035-1.1085 has hit 1.1335-1.1360 target (from 1.1086 to 1.1349). The pre FOMC range now set at 1.1185/1.1210-1.1385/1.1400 for post FOMC trigger into either 1.0850-1.10 or 1.1550-1.17. Combining this with Rupee outlook, EUR/INR short term base is now seen at 73.65-74.15, searching for medium term "cap" at 76-78 and may be beyond. For now, set focus at 74.50/74.85-75.85/76.20 with neutral bias on breakout direction.

Have a great week ahead & Good luck!

Moses Harding

Fair value for dollar/rupee seen at 65.85-68.85 for rest of 2015 - Business Standard

The impact of the decline in the current account deficit (CAD) from five-seven per cent to one-two per cent of gross domestic product (GDP) is huge....(access complete article through the link below)

Link:- http://www.business-standard.com/article/markets/fair-value-for-dollar-rupee-seen-at-65-85-68-85-for-rest-of-2015-115090700008_1.html

What Next in Global markets? Permanent relief not yet in sight!

Liquidity and zero interest rate driven rally in equity market is now behind

The multi-year bullish momentum on global equity markets triggered by ultra-dovish monetary policy regime of Developed economies is over for now. The risk-on benefits from combination of liberal dose of Quantitative Easing at zero (negative) interest rate policy is over done, and the unwind process has already begun at break-neck speed. The huge valuation build (on risk-on equity assets) in the absence of beneficial impact on growth (and consumption) has triggered the reversal, when FED prepares for start of rate hike cycle. The unwind momentum has gained speed despite other major markets (including Euro zone, Japan and China) stay in accomodative mode through 2016, and may be beyond. The impact on Emerging markets is excessive, building exaggerated momentum both on the up-hill and down-hill.

DJIA multi-year rally from 6469 (March 2009) and 15340 (February 2014) is done at 18351 (May 2015), for reversal to 15370 (August 2015 low) before marking time now at 15850-16350. The unwind of February 2014 to May 2015 rally is undone in 3 months. India got the better of beneficial impact among the Emerging markets. The valuation re-rating in equity assets since 2008-2009 is huge. NIFTY is up from 2250 (October 2008) to 9119 (March 2015) by over 300% in 7 years, while Bank NIFTY up from 3300 to 20900 during same period by over 500%. India markets got the additional benefit (since May 2014) from the NaMo impact, significant improvement on the CAD (from sharp decline Brent Crude from $115-130 during April 2011-June 2014 to $40-55 in August 2015) and soft landing of CPI inflation from over 10% to 4-6%. The foreign investor appetite was good from India growth acceleration against declaration in China.

India equity market under pressure in the short term searching for medium term base

India equity assets valuation is now largely dependent on external cues - direction bias from developed markets, FED rate hike (timing and quantum) and possible "bolt from the blue" from China. The domestic cues are also not very supportive to equity market. The expected sovereign rating upgrade in 2015 is now deferred to 2016, and may be beyond. Despite ease in monetary policy in 2015, FY16 GDP growth is under pressure at 7.0-7.5% against target 8.0-8.5%. The optimism on fiscal and current account deficit is at risk, which could delay shift of system liquidity from deficit to surplus. All combined, the trend into the short term is bearish with hope that medium term "base" will be sighted in Q4/2015 for decent recovery in 2016.

DJIA short term range focus is now set at 15350-16850 with breakout bias into 14700-15340, which should hold for punch of 2015 low here before recovery. FED delivery of 50 bps rate hike in September - December 2015 is also seen as high probability. So, combination of downside risks on DJIA index and spike in short term (overnight to 12 month) US yields pose serious threat to India equity market, not withstanding domestic optimism if any.

MARKET PULSE set 9000-9150 as 2015 high and preferred 7950/8100-8500/8650 consolidation in the short term. Also removed set "cheap-to-acquire" tag at 7950-8100 for shift to 7500-7650. Post China monetary and exchange rate measures, the range focus was reviewed at 7500/7650-7950/8100, not ruling out downside stretch into 7000-7150 in Q4/2015. As per script, NIFTY is down from August high of 8621 to recent low of 7626. What next? NIFTY is under pressure at 7500/7585-7800/7885; even an RBI rate cut with dovish guidance is tough to trigger bullish momentum beyond 7850-8100, seen as short term "cap". At this stage, the risk is for break of 7500-7585 into 7100-7185 which should hold. It is good for strategic investors (and big picture traders) to stay in end to end focus at 7000/7185-7885/8100 watching fragile intermediate support zone at 7500-7585. The only hope for near term consolidation at 7500-8000 is from RBI delivering an immediate rate cut ahead of FOMC meet. The impact from not delivering rate cut on 14th August is severe, and worst is not yet behind on further delay.

Bank NIFTY has solid resistance zone at 16500-16650 ahead of short term "cap" at 16850-17100. The immediate support is now at 15850-16000, which is at risk for stretch into 14500-14650, seen as medium term base. For now, it is good to stay tuned at 15600/15850-16350/16600 and act on break either way with big picture range focus at 14500/14650-16950/17100. Here again, an immediate rate cut could help 15850/16100-16850/17100 consolidation.

India Gilts in risk neutral consolidation mode

India Bond market provides comfort against weak equity market and weak Rupee. While the short term outlook is mixed between 25-50 bps rate hike by FED and similar quantum rate cut by RBI in rest of 2015, medium/long term outlook is good on hope from shift of operating policy rate from Repo to Reverse Repo rate. The overnight call money rate is seen to peak at 7.0-7.25% in Q4/2015 for slide to 6.0-6.25% in FY17. All combined, retain short term outlook on 10Y benchmark at 7.68/7.73-7.88/7.93% for back-and-forth play with most trades at 7.70-7.75%. Strategic investors can look to build portfolio in 3 lots at 7.76-7.78%, 7.83-7.85% and 7.90-7.92% for FY17 target at 7%, while enjoying "carry" of minimum 50-75 bps funding through Repo/CBLO counters. Risk to this outlook is from US 10Y yield spike beyond 1.95/2.10-2.45/2.60% and 1-10Y yield spread squeeze below 1.50%.

Indian Rupee is set for next round of value adjustment

USD/INR has already lifted short term strategic base from 63-63.35 to 65.50-65.85, and building pressure at 66.75-67.10 to pull 68.60-68.85 into focus. Most (if not all) cues are against Rupee in the short term. External pressures are from DXY bullish momentum into higher end of 95/95.50-100/100.50, downside risk on EM currencies from China and fear from FII loss of appetite, if not into exit mode. Domestic cues are not good to counter external headwinds on the Rupee. The impact will be from $ demand driven mode in the forward market from importers fear, exporters greed and squeeze in FX premium. Given these dynamics, RBI's FC reserves is too little to defend break of 66.75-67.10 in the near term. The near term trading range focus is set at 66.10/66.35-66.85/67.10, and prepare for shift into 66.85/67.10-68.85/69.10 focus soon. 12M USD/INR retain bullish undertone at 70.25/70.50-71.25/71.50 for set up of medium term "cap" at 73-73.25 before consolidation.

It is tough ride ahead; tighten your belts and have a safe week ahead!

Moses Harding