USD retain bullish consolidation mode building steam for upside break
DXY take-off in the last one year (from 92.62 to 100.51) was from uni-directional bias from the monetary policy stance of major Central Banks. While FED started the rate hike cycle in late 2015, ECB and PBoC worked towards keeping their currency weak through liberal dose of liquidity at near (or sub) zero interest rates. All combined, USD derived fundamental advantage from better growth momentum and interest rate advantage over major (and emerging markets) currencies. During this period, EUR/USD crashed from 1.1601 to 1.0495, USD/JPY moved up from 116.06 to 125.63 and USD/INR up from 61.29 to 68.17.
In the last one month, the collapse in risk-on equity markets triggered the need for FED to defer the next round of rate hike, thus pushing the US 10Y yield down fro 2.35-2.50% to 1.95-2.10%. The value erosion in global equity markets beginning 2016 is huge and investors are scared to panic. While ECB responded to investors cries with review of QE support, PBoC is seen in over drive to arrest hard landing of its economy through artificial weakness of Chinese Yuan. The combination of delay in FED rate hike and more stimulus from ECB make the monetary impact on currency exchange rate neutral for now, and what is unknown is the extent of China impact on global currencies. During this one month period, the currency markets have been in back-and-forth mode in the absence of clarity to set up breakout momentum either way. DXY is now seen in sideways mode at set 97.50/98-99.50/100, EUR/USD at 1.07/1.0750-1.10/1.1050, USD/JPY at 115/116.50-120/121.50 and USD/INR at 65.85/66.20-67.85/68.20.
Risk-on play add strength to the US Dollar
The risk-aversion triggered YTD 2016 crash is exaggeration (and over done) from fear and panic. This needs to be normalised, which sets up the near term bullish consolidation undertone. DXY is likely to be firm at upper-half of 97.50/98-100/100.50 (at 99-100.50) with momentum for new high above 100.51. EUR/USD failure at 1.0950-1.10 is no surprise for shift of play into lower-half of 1.0450/1.06-1.10/1.1150 (at 1.0450-1.08). USD/JPY reversal from over 120 held at strategic support base of 115-116.50 and has now gained momentum for revisit to 123.50-125 on break of intermediate risk-neutral zone of 118.50-120. All combined, the sentiment has shifted from negative to neutral to accumulate USD on dips.
USD/INR bullish momentum beyond 67.20-67.35 (into 68.17) is driven by panic and fear. However, the strategy to stay risk-off (or neutral) at 65.85-66.20 on liabilities (importers) and at 67.85-68.20 on assets (exporters) has worked well. 12M $ met target 72.25-72.50 to pull in carry-trade flows from shift of liabilities from Rupees to US Dollar. MARKET PULSE in its 2016 outlook (and review) set rest of FY16 big-picture trading range for spot USD/INR at 65.85/66.20-67.85/68.20, 1M $ at 67.15/67.50-68.15/68.50, 3M $ at 68.15/68.50-69.15/69.50 and 12M $ 71.25/71.50-72.25/72.50 with end-to-end focus and overshoot eitherway not expected to hold for long. It was swift end-to-end move from lower to higher end since start of 2016. MARKET PULSE do not see reasons to review the set ranges and allow consolidation till ECB "walk the talk" on QE. The ideal January 2016 close was seen at 66.85-67.35, which is now the target being the intermediate zone between 66 and 68.20. However, retain end March 2016 target at 68.35-68.85. All combined, it is only a relief phase as nothing else has changed but from the support statement from Draghi. The overdose liquidity steroid (from major Central Banks) has not helped in reviving the global economic fundamentals, and it is not prudent to expect it now. The global investors are not likely to stay risk-on for long, and relief recovery will only lead to portfolio normalisation searching for exit. Hence FPI support for Rupee may not be there. RBI has the need to shore up its reserves to cover pipeline liabilities and to build purse to ring-fence China impact. For now, see spot USD/INR in sideways mode at 66.85/67.20-67.85/68.20, seen as RBI admin range. The strategy remains more or less the same for importers to hedge 1M $ liabilities at forward rate of 67.20-67.50, exporters to cover 3M exports at forward rate of 68.85-69.15 in traction with 12M $ at 71/71.25-72.25/72.50.
MARKET PULSE EUR/INR outlook was for consolidation at 71.65/72-74.65/75 post the completion of down-hill chase with strategic base at 69.90-70.15. The next round of chase from 70.15 to 74.65 (high 74.70) is also done, followed by sharp fall below intermediate support zone of 73.15-73.50. The momentum was built from uni-directional moves in EUR/USD at 1.07-1.10 and USD/INR at 66.20-68.20. The trading range is now reviewed down at 70/70.35-73.15/73.50 with attention around intermediate risk-neutral zone of 71.65-71.90. While there is better clarity on EUR/USD trend down at 1.05-1.10, it is bias neutral for USD/INR at 67-68.
Have a great week ahead.
Moses Harding
harding.moses@gmail.com
9674734145
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