16th November 2011
Currency market
Rupee got back into bear trend from the immediate support above 49.85 to take out 50.35-50.50 for move into the immediate resistance at 50.85 and looks set for extended weakness into the next pit stop at 51.50-52.00; outer end of the set short term range of 49-52. There is not a single factor in favour of rupee with widening trade gap and significant cut in flows into debt and equity capital market. There is also build-up of sovereign rate cut that could trigger reverse flow of hot money FII investments. Euro zone is not getting better and adds further pressure to extension of dollar liquidity squeeze in the system. There is risk of market getting into (dollar) demand driven mode for extended period of time triggered by short (dollar) squeeze by importers and carry-trade positions. While we stay tuned to near/short term range of 50-52; any correction into 50.35-50.00 will attract interest. USD index is also looking bullish in the absence of concrete rescue plans in the Euro zone and move into 80 from current 78.00 is high possibility to provide momentum for rupee fall into 51.75-52.25 (for retest of historic low at 52.17). The strategy for now is for exporters to stay away for 51.75-52.00 to cover 12M receivables (at 53.50-54.00) and importers to absorb correction into 50.35-50.10 to cover 3M payables (at 51.00-50.50). For the day, two-way consolidation within 50.50-51.00 may be in order with bias for test/break of higher end for extended weakness above 51.00 where RBI is expected to provide bit of relief.
EUR/USD failed at 1.3750-1.3850 sell window for one more knock at 1.3525-1.3475 support zone while USD/JPY is in consolidation mode at 76.75-77.25. No change in strategy as we await EUR/USD move into 1.3150-1.3000 and USD/JPY reversal into 79-80. The strategy for now is to sell EUR/USD at 1.3650-1.3750 for 1.3150-1.3000 and buy USD/JPY at 76.75-76.25 for 79-80. While short squeeze in EUR/USD is providing support above 1.35; recovery from there lacks momentum which is not a good signal for the Euro bulls. Over all, there is no change in view of dollar retaining its safe-haven claim till confidence is back on the Euro zone.
The one-way demand driven mode in the forward segment and rupee liquidity squeeze has pushed premium higher into resistance zone of 5.75-6.0% in 3M and 3.75-4.0% in 12M. The interest rate play is strongly in favour of upward pressure and it is unlikely that draw down from Repo counter will move into tolerance level of Rs.25-50K Crores soon. The resultant higher cash/tom premium will dilute the impact from exchange rate play. Over all, the risk of test/break higher beyond 6% in 3M and 4% in 12M is very low; hence would be prudent to unwind paid book there. While we look for two-way consolidation at 5.5-6.0% in 3M and 3.5-4.0% in 12M; the strategy is to fund PCFC book through rupee resources absorbing 3M premium at 5.75-6.0% and pay 12M at 3.5-3.25% for interest cost advantage through conversion FC sources into rupee uses.
Commodity market
NYMEX/WTI crude held well below 100.00 and reversed from the set sell zone of 99-102 (high of 99.40) and now expected to stay in consolidation mode at 95-100 till Iran fears fade away. The expectation of extended weakness into 90-88 is not ruled out; our strategy to sell at 99-102 and buy at 91-88 stays valid. Gold did not have the steam to take out strong resistance at 1790-1810 (high of 1795) and in preparation for extension to immediate support at 1730-1710. Let us watch two-way sideways trading mode at 1730-1790 with overshoot limited to 1710-1810. The bias thereafter is for test/break of higher end for swift move into recent high at 1920. Gold is expected to hold its safe-haven status and is considered a better bet than the dollar for investors.
Bond/OIS market
10Y bond has reversed sharply from over 9% to below 8.90% on fear of RBI intervention to arrest extended weakness in the market; hence the recommendation for strategic investors to buy into weakness over 9%. Having said this, it is not prudent to expect gains beyond 8.80-8.75% and prefer consolidation within 8.75-9.0%. Here again, there is not a single factor to provide strong bond rally. The domestic fundamentals are weak; there is risk of sovereign downgrade which could trigger collapse in the bond market. As a counter measure, it is possible that RBI get into aggressive rate cut and/or CRR cut mode. Therefore, extended weakness in 10Y bond above 9% is a low probability occurrence. The strategy for now is to trade end-to-end of 8.75-9.0% with test/break either-way not expected to sustain. No change in view of looking for consolidation in OIS market with 1Y at 8.05-8.20% and 5Y at 7.25-7.40%. It is prudent to exit received book entered around 8.35% (1Y) and above 7.5% (5Y) on move into the set lower end. Over all, the chance of downside break is higher for near term target at 7.95% and 7.10% respectively.
Equity market
NIFTY quickly sliced through the strong support of 5150 for close at 5068. As said, there is not a single factor to look for restoration of bull rally and any up move will be seen as correction. Now, the market looks set for extension into the lower end of set near term range of 4850-5350. Traders who sold into 5350 can look to exit at 4850-4700 while adding to shorts at 5150-5200. For now, let us shift our attention to 4850-5150. Strategic investors to stay away for the test of lower end of set medium term range of 4700-5700.
Moses Harding
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