MARKET PULSE - 14 DEC 2011

Market Pulse – 14 December 2011

Currency market

Rupee weakness got good support at 53.50 (low of 53.52) before reversal into 53.11 for close at 53.22. Now, move into next support at 53.65-53.75 (ahead of 53.90-54.00) is on cards to complete end-to-end move within the set short term range of 51-54. In the meanwhile, USD Index has sliced through resistance at 79.65-79.80 for move over 80 (at striking distance to the set near term target at 80.80-81.00). Rupee continues to be under pressure despite sharp weakness from 44 to 54 with more negative factors in play and stake holders looking up to RBI to save rupee from further disaster. There are no genuine dollar supplies to complement RBI’s dollar sales to cushion rupee weakness. RBI’s ability to intervene is limited in a strong demand driven market. RBI is heavily short of dollars (in its Reserves) and short of rupees in the system (with risk of shortfall overshooting over 2% of NDTL post advance tax outflows). Given the strong downtrend in EUR/USD and NIFTY, extended weakness in rupee beyond 54 into 56 is not ruled out; thus we had set up a 51-56 range (on 22/11) when rupee hit all time low of 52.72. The reversal from there found strong support at 51.35-51.20 buy zone (low of 51.19) and now set to move into 54-56.  What is the strategy for exporters from now on? Exporters, who have run open positions from 44 to 54, can afford to cover 25-50% at 53.65-54.00 and retain the balance for run into 56 with stop loss below 53. It is important to stay prudent overcoming the element of greed at this stage. It is also good for companies to shift long term rupee liabilities into dollars at 54-56. The forward value of 3/5/7/10 years dollars looks good with attractive interest carry. Given the scenario of peaking rupee interest rate and stability in dollar interest rate till end 2013; shift of rupee liability into dollars at 54-56 will be most interest cost effective with good upside gains on rupee into the long term. We asked importers to stay fully hedged on 1-3M payables and there was good opportunity to do so on sharp reversal into 48.61 (from 50.32) on 31/10 and from 52.72 to 51.19 (on 2/12). Importers who continue to remain uncovered despite the strong bearish set up on rupee; can continue to stay away for move back to 51.00 with stop above 56.00. It is time to allow the market into supply driven mode to make RBI’s intervention effective. For now, let us watch consolidation at 53.15-53.65 with overshoot limited to 53-54. RBI needs to protect 54 with firm hand to arrest rupee impact on inflation to prepare ground for quick reversal into monetary easing cycle to address growth issues.

EUR/USD held below the sell zone of 1.3250-1.3300 (high of 1.3236) to meet the set objective at 1.30 (low of 1.3016). The momentum continues to be strong for extension into 1.2850. This would complete the end-to-end move of set short term range at 1.2850-1.4150. Let us unwind EUR/USD shorts at 1.30-1.2850 and stay aside for fresh cues. For now, let us watch 1.2850-1.3150 with test/break either-way to attract. In the meanwhile USD/JPY has moved from lower end to higher end of set near term range of 77.25-78.25. Now, we look for consolidation at 77.50-78.50 with test/break either-way not expected to sustain.

12M FX premium fell nicely from 4.5% into strong support window of 4.0-3.90% before spike again for close at 4.4%. In the meanwhile reversal in 3M held above 5.5% for close at 5.9%. Over all, we have seen end-to-end moves within the set near term range play at 5.5-6.0% in 3M and 4.0-4.5% in 12M. Now, there is clarity on interest rate play (strong downward set up tracking CRR cut now and rate cut later) but exchange rate play is neutral. It would also need RBI to release rupee liquidity into the system (through CRR cuts) to spend USD 5-10 billion dollars to prevent extended weakness in spot rupee beyond 54. The risk is of test/break of higher end on sharp reversal in USD/INR spot from 54 to 51. 3X12M has also traded end-to-end of 3.5-4.0%. For now, let us continue to watch consolidation at 5.5-6.0% (3M); 4.0-4.5% (12M) and 3.5-4.0% (3X12M) with test/break either-way not expected to sustain. Let us stay with 3X12M play by receiving over 4.0% and paying 3.5%.

Bond/OIS market

Bull-run in Bond market continues with 10Y yield down from 8.46% to 8.40% while initial reversal in OIS rates into 7.70% (1Y) and 6.95% (5Y) found support for close at 7.75% and 7.0% respectively. No change in view as we watch consolidation at 8.35-8.45% (10Y bond); 7.70-7.80% (1Y) and 6.95-7.05% (5Y). The bias will be for move into lower end on run up to monetary policy. It is prudent to unwind long bond and received OIS books on test of lower end and stay square into the policy. There is 51% probability of 50 bps CRR cut with signals for 50 bps rate cut in January 2012.

Commodity market

Gold held below the set resistance of 1680 (high of 1674) before reversal into set objective at 1620-1605 (low of 1622). While the immediate target is at 1600-1580; it is prudent to exit shorts and await fresh cues. For now, let us watch 1580-1680 not ruling out strong reversal from the lower end. In the meanwhile NYMEX crude held well below 98 (and above 97) for spike into 100. We continue to watch consolidation at 97-102 and prepare to gain stronger momentum for test/break of lower end into 95-90. Over all, prefer consolidation at 93-103 into the short term.

NIFTY

NIFTY held above strong support zone of 4725-4675 (low of 4728) but bounce from there held below strong resistance at 4850 (high of 4824) before close at 4800. There is no change in view of looking for consolidation at 4725-4875 before look at recent low of 4639. Beyond there, we need to watch RBI’s action on 16^th December to provide directional guidance within 4300-5300. So, suggest staying square into the policy but need to keep in mind that the short term bias is in favour of move into 4350-4250 considered good for strategic entry.

Moses Harding