Two-way swing with no unanimity on FED rate action expectation
Global markets in (2-way) volatile mode adjusting value between expectation of 25 bps rate hike followed by unwind not ruling out rate pause and back again to build rate hike risk. It has been trader's markets ahead of FED rate decision (and guidance) for trades in back-and-forth mode at set ranges adjusted to extremes of 25 bps hike and pause. What is not covered the hawkish policy guidance tone for accelerated pace.
Pre FOMC DJIA index focus was set 17000/17150-17850/18000. The intra-November moves have been at 17977 to 17210 to 17914 with close at 17823. The bias on move closer to FOMC is neutral either for stretch into 18000-18350 or extended push-back to 16650-17000, but all within upper-half of set 2015 strategic focus range of 14850/15350-17850/18350. It would need a very hawkish stance to get the pressure into lower-half which is low probability. Given the US & Euro zone priority attention (along with Russia) to restore order in Syria, it's prudent to retain stability in Financial markets by avoiding "bolt from the blue" monetary triggers. Therefore, the probability of pleasant surprise (from the FOMC) is higher than the getting an unpleasant shocker! Based on this outlook, US 10Y yield is in back-and-forth mode at set focus range of 2.20/2.25-2.35/2.40% with intra-November moves between 2.23 to 2.38% with close at 2.26%. The post FOMC breakout bias is neutral between 2.10-2.20% and 2.40-2.50% with stretch beyond here tough to sustain.
Gold 3-month recovery from 1077 to 1185-1200 target (high at 1190.63) got unwound in 1 month into 1065-1070 (low at 1064.95) before consolidation at 1065/1070-1085/1090. The undertone continues to remain weak for stretch into 1020/1035-1050 against firm near term resistance at 1085-1100. In the big-picture (into 2016), the range focus is biased at 950/985-1100/1135.
Brent failed to retain steam at 52.50-55 shifting focus back to lower end support zone of 40-42.50 (from September high of 54.32 and October high of 54.05 to November low of 43.15 before close at 44.66). Brent Crude unable to derive support from military tensions around the Oil production zone is surprise, which is unusual behaviour. Is the demand compression so huge to ignore worries from supply and spike in risk premium? What Now? The moves since 2009-2012 is very wide between 36.20 to 128.40, and now at lower end. There has to be hedge demand at value 40-45, sustainability at 40-50 is dream, hence tough to be true for long. It is God's gift for oil importers to make hay while the sun shines at 40-45. For now, stay tuned at 40/42.50-48.50/50 retaining breakout bias into 53.50-55 against unsustainable stretch into 35-36.50.
USD bullish momentum (DXY from 92.62) met target 99.85-100.35 (high at 99.85 before correction into 98.50-98.85 for bullish close at 99.60). The intra-2015 moves in DXY is more or less to the script with outlook for back-and-forth volatility at 92/93.50-98.50/100. Now, the pressure is on April high of 99.99 and March high of 100.39. Inability to break into 100-100.35 and deeper push-back into 96-98.50 is signal for revert into neutral consolidation at upper-half of 92.50-100.50 at 96.50-100.50 awaiting FED.
EUR/USD complete its back-and-forth play at 1.05/1.0650-1.15/1.1650 with correction from 1.06-1.0650 losing steam at 1.0750-1.08. What Next? Need to watch USD bullish momentum while DXY at 99.85-100.35 and EUR/USD at 1.05-1.0650. Can DXY shift bullish gear beyond 100.50 driving EUR/USD below 1.0450? No clear answer to this now ahead of FOMC. Till then it is prudent to stay with neutral bias at 1.0450/1.06-1.0850/1.10.
The FED options are amongst (a) deliver to expectation with 25 bps hike with neutral to cautious data dependent guidance (b) rate pause awaiting more clarity with near 100% probability post festive season and (c) 25 bps hike with hawkish guidance for regular baby steps beyond 50 bps. I tend to stay 51:49 for option (a) against (b) ruling out option (c).
India assets in relief recovery mode with fear of the unknown on the way ahead
The impact on India risk-on assets from external cues have already turned against, from combination of FED monetary policy shift and FPI appetite shift. Domestic cues are also not in favour despite some decisions (and measures) post Bihar results. The only consolation in the near/short term is the relatively cheaper valuation compared to 2015 peak pulling support from short-squeeze, DII bids and from others who missed post NaMo rally. Taking all these, near term focus is fixed in Nifty at 7700/7750-8000/8050 for short term stretch not beyond 7500/7650-8200/8350. Bank NIFTY near term focus retained at 16700/16800-17400/17500 with short term stretch restricted at 16000/16150-17850/18000. Good to stay focused end2end for now.
India 10Y bond yield base is seen firm at 7.63-7.66% with risk of overshoot beyond 7.72-7.75%. In addition to FED rate hike and low FPI appetite, fresh concerns have emerged on fiscal deficit, inflation and higher supply against reduced demand. All combined could lead to RBI rate pause in 2016 and downside risk on the value. While strategic appetite from domestic investors will emerge at 7.72-7.75%, the underlying trend (into 2016) will stay bearish for 7.90-7.93%. Against this big-picture outlook, set 10Y bond focus at 7.65-7.75% for now in traction with US 10Y at 2.20-2.30% with spread around 5.45%. It is unfortunate that the 2-step intra-2015 rally from 7.93%/7.75% to 7.45-7.50% is half unwound (with 7.45% to 7.75% fall) for risk build up for more into 7.75-7.93%.
Rupee recovery from 66.50 held at 65.85-65.90 against import hedge support zones of end December at 66.35-66.50 and 12M $ 70-70.25. The major risk on the Rupee is now from the extent of stretch in DXY beyond 99.85-100.35 and the level of FPI exit from India risk-on assets. All taken, the short term big-picture is already set at 65.70/65.85-66.85/67 (stop at 65.50 or 67.20 for new range shift) against near term play at lower half with most trades at 65.85-66.35 followed by time-decay adjusted shift to 66.05-66.55. The hedge strategy is unchanged watching end December at 66.35-66.85 and 12M at 70/70.25-71/71.25.
EUR/INR complete the push-back from 72.50 to 70 (low at 70.10 from high 72.49) for short-squeeze driven correction into intermediate resist zone at 70.90-71.15. The near term momentum continue to remain bearish for 68.65-69.15 for pre FOMC consolidation at 69-71.50 (reviewed from previous 70-72.50).
Have a great week ahead; Good luck!
Moses Harding
Thank you sir
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