MARKET PULSE - 09 JANUARY 2012

MARKET PULSE – 09 JANUARY 2012

Premium trade recommendations now available at www.mosespeaks.blogspot.com

Currency Market:

RBI is doing its best to get the rupee out of bear trap and has been successful so far to provide consolidation at 52.50-53.50. The objective of RBI at this stage is to prevent the worst (extended weakness into 56-58) and not to trigger rupee rally (below 52-51). RBI has done enough to “lead” foreign currency supplies and “cut” abnormal demand for dollars to bridge the demand-supply gap in the cash market. The higher forward premium has helped to cut dollar demand in the forward market. Over all, things look better for rupee since RBI’s action on 15^th December 2011. This guidance provided good opportunities for exporters to sell up to 3M receivables on spot weakness into 53.50 while gains into 52.50-52.00 considered good for importers to cover 1-3M payables. Rupee fundamentals continue to stay weak driven by concerns from strong dollar (against major currencies); high commodity prices and reduced exports. USD Index is posting higher lows up from 78.20 into 79.80 and is holding below strong resistance around 81.30-81.45. However, it is matter of time for shifting gears into next objective at 83.25-83.50. Given these market dynamics, it would be in order to expect short term consolidation at 52-54. For now, let us watch 52.20-53.20 with bias into 53.20-53.50 in due course. The strategy for importers is to cover 1-3M payables in two lots on spot gains into 52.50-52.40 and 52.25-52.10 (with stop at 51.95). Exporters who have already covered 1-3M receivables on spot move into 53.50-54.25 can stay aside for now. Given the new rule for cancellation of contracts; it is difficult to suggest unwinding of export contracts on spot gains into 52.50-52.00.

EUR/USD has nicely moved below strong support at 1.2850 and looks set for extension into 1.2500 ahead of short term target at 1.20-1.1850 while 1.2850-1.3000 stays firm. USD/JPY is looking heavy having come off sharply from 78.25 and looks good for test/break of 76.25 for retest of historic low around 75.50. While it is good to trade from “short” side; chasing JPY gains into 76.25-75.50 would be risky. Let us now watch 76.25-77.25 with neutral bias on extension into 75.50-78.25.

FX Swap market has been very volatile since last update with excessive bullish undertone. The rally over 7.5% in 3M and 5.5% in 12M was not a surprise driven by tight money market conditions in the second fortnight of December. The bounce from the set support of 6% in 3M and 4.5% in 12M was strong and swift. Over all, we have chased the move in 12M from 2.0-1.75% to 5.25-5.5%. What next? The shift into rate reversal cycle will get the focus on 3M premium below 6% into 5.0-4.5%; thus bringing in strong interest rate play to the support of the bears. The exchange rate play has turned neutral now tracking rupee consolidation at 52.50-53.50. Given the short term outlook for extended weakness into 54-56; FX premium is on the way down into the short term. For now, we watch consolidation at 6.0-7.0% (3M) and 4.5-5.0% (12M) with bias for test/break of lower end. The strategy is to stay received in 3M (at 6.75-7.0%) and initiate paid book in 12M at 4.5-4.25%.

Bond/OIS market:

The economic dynamics have shifted from moderate growth; high inflation phase into low growth; moderate inflation. The downtrend in inflation is rather sharp and headline WPI inflation is expected to ease into 7.5-7.0% by March 2012. On the other hand, there is tremendous downward pressure on growth momentum and expected to slow down into 7.0-6.5% by March 2012. The outlook for FY13 is not optimistic on GDP growth momentum given the weak external sector. It is time for RBI to shift into rate reversal mode through delivery of 0.5-1.0% cut in CRR and 0.5% in policy rates. RBI has a cushion of 1% through shift of operative policy rate from higher end of LAF corridor (Repo rate) to lower end (Reverse Repo rate). So, would expect CRR cuts to lead the policy reversal cycle. Bond market has already priced in this action. 1Y bond yield is down at 8% (from recent high of 8.65%) and 10Y yield down at 8.20% (from high of 9.0%). The current prices are reflective of shift of operative policy rate to 8% on January monetary policy and then into 7.5% by middle of March. While this expectation is in order; extended move of operative policy rate into 7% is in doubt at this stage. Weak rupee and high commodity prices would provide strong headwinds to downturn in headline inflation below 7%. The supply side issues for rest of FY12 and FY13 stays valid. Given all these factors; investor appetite will be low at 1Y yield below 8% and 10Y yield below 8.20% in the near/short term. For now, let us watch 1Y bond yield at 7.90-8.15% and 10Y bond yield at 8.10-8.35%. The strategy is to play end-to-end with test/break either-way not expected to sustain.

OIS rates have nicely traded end-to-end of 7.65-7.80% in 1Y and 6.85-7.15% in 5Y and now trading around 7.70% and 7.05% respectively. The market has already priced in pipe-line rate/CRR cut actions of RBI. The set short term range of 7.60-7.85% (1Y) and 6.85-7.15% (5Y) has taken into account the short term outlook for movement in operative policy rate into 7.5-7.0%. Let us continue to stay with the set short term range and play end-to-end as test/break either-way is not expected to sustain.

Commodity market:

Since the last update; Gold met its set objective at 1520-1500 (low of 1522) and reversal from there was swift into set resistance at 1620-1630 (high of 1621); thus giving a good 100 points trade. The sharp reversal in Gold despite strong USD Index and improved economic data from the US was a surprise. The immediate term outlook is not clear while we watch consolidation at 1560-1630. Let us stay aside for now and await more cues. Having said these, sustainability of Gold above 1630 is in doubt as short term outlook for Gold is weak for test/break below 1520.

NYMEX crude rallied sharply from the buy zone of 93-90 (low of 92.54) into the sell zone of 100-103 (high of 103.73) and now in consolidation mode at 100-103. The trigger for this sharp up move was from escalation of tensions in the Middle East. The immediate outlook is mixed for consolidation at 98-103 while directional break-out is not clear. Let us stay aside for now but would believe that extended gains over 103-104 should not sustain and would provide good selling opportunity.

NIFTY:

NIFTY has bounced strongly from low of 4531 above the strong support zone of 4650-4700. However, there is strong selling interest at 4800-4850; thus in consolidation mode at 4650-4850. The investor appetite has shifted to Fixed Income while equity market continues to remain in bear phase. The domestic appetite is low driven by weak domestic fundamentals and no support is seen from foreign investors. FIIs will continue to stay away when market dynamics are tossed up between low growth and weak rupee. The near term trend is weak for test/break of 4500 for final pit stop at 4350-4250 from where a strong rebound is preferred. The strategy is to play end-to-end of 4350-4850 with stop on test/break thereof. Strategic investors can stay aside to buy in 3 lots around 4550/4400/4250. The shift of stance of RBI from anti-inflation to pro-growth provides some kind of relief to the bulls while bears continue to hold reins.

Moses Harding