MARKET PULSE - 16 JAN 2012

MARKET PULSE – 16 JANUARY 2012

Currency market

Rupee recovered sharply from low of 51.93 to 51.30 before close of week at 51.54. In the process, traded end-end of March 2012 dollars sell zone at 52.75-53.25 (low of 52.75) and buy zone at 52.25-51.75 (high of 52.10) before close at 52.34. What next? Let us continue to watch two-way consolidation at 51.50-52.20 with overshoot limited to 51.20-52.50. It is not “safe” to stay short dollars at 51.50-51.20 while it is attractive to hedge short term dollar receivables on spot weakness into 51.90-52.20. In the given market dynamics it is good to cover 3M exports around 53 and 12M around 55. On the other hand, it is prudent for importers to hedge 3M dollars payables around 52. This hedging strategy should provide consolidation for spot rupee at 51.20-52.20. In the meanwhile USD Index gained momentum to test/break of 81.50 (high of 81.78) and looks good for extension into 83.50 into the near term. For now, let us watch 51.50-52.00 with immediate bias into 51.85-52.00 which should attract exporters’ interest. The risk of extended weakness into 52.20 is valid at this stage on rally in USD Index above 81.50 into immediate resistance at 83.50.

EUR/USD strength above 1.2850 (high of 1.2878) could not sustain for reversal back into 1.2650 (low of 1.2623) before close of week at 1.2680. Over all, EUR/USD traded to the script for two-way consolidation at 1.2650-1.2850. What next? The expected move from 1.3000-1.3150 into 1.2650-1.2500 is complete now and looks good for extension into 1.2000-1.1850 while 1.2850-1.3000 stays firm. The immediate pit stop is at 1.2550-1.2450. There is nothing interesting in USD/JPY pair; trading in tight consolidation mode at 76.60-77.00. The immediate expectation is for consolidation at 76.50-77.30 with bias for extended weakness into 75.50 which should hold for rally back into 78.25.

The smart rally in FX premium into 8% in 3M and 5.65% in 12M lost steam for close of week at 7.5% and 5.4% respectively. We continue to stay tuned to set short term range of 6.5-8.0% in 3M and 4.75-5.75% in 12M. However, near term outlook is neutral with high short term MM rates exerting upward pressure while exchange rate traction to provide strong headwinds to up move. For now, let us watch consolidation at 7.0-7.75% in 3M and 5.15-5.65% in 12M. The strategy is to stay “received” on test of higher end for gradual move into the lower end.

Bond/OIS market

Despite tight liquidity and supply side concerns, 10Y bond yield closed strong at 8.20% after initial weakness over 8.25% attracted investors’ appetite. The domestic cues are dominated by expectation of trigger of supportive measures from RBI and continuation of OMO operations for extended period of time. The global cues have turned bond supportive tracking downtrend in US Treasury yields and strong dollar. The investor appetite is firmly into “risk-off” mode; thus generating good appetite for Gilts. Now, 10Y bond is expected to be in consolidation mode at 8.15-8.25%; initial bias into 8.15% tracking global cues should attract unwinding of “longs” while pressure in MM rate (call rate into 9.5% and short term rates into over 10%) will push the yield back into 8.25%. Strategy is to play end-to-end of this range with tight stop on break thereof.

OIS rates traded to the script; failed at the “receive zone” of 7.90-8.0% in 1Y (high of 7.93%) and 7.20-7.30% (high of 7.22%) before close of week at 7.86% and 7.11% respectively. Let us continue to watch consolidation at 7.75-7.90% in 1Y and 7.05-7.20% in 5Y with test/break either-way to attract. It is not “safe” to stay received on reversal into 7.75-7.65% (1Y) and 7.0-6.90% (5Y). 

Commodity market

Gold failed ahead of strong resistance at 1670 (high of 1662) before sharp reversal into 1625 for close of week at 1639. Over all, it has played end-to-end of set “inner ring” of 1610-1670. The near term outlook is mixed boxed between gains in USD Index and investors firmly into “risk-off” mode; thus consolidation within 1600-1670 will be in order with test/break either-way to attract. The strategy is to play end-to-end with stop on break thereof.

NYMEX crude traded to the script playing end-to-end of 98.50-103.50 (high of 103 and low of 97.70) before close of week at 99.05. Over all, the set sell zone at 102-103 has held strong despite repeated attempts and now looks good for extension into 93-92. For now, let us watch 95-100 with overshoot limited to 92-102 with immediate bias into lower end.

NIFTY

NIFTY was in bullish mode within 4800-4900 (low of 4804 and high of 4899) before close of week at 4866. The outlook is mixed with global cues exerting downward pressure while domestic cues from shift of monetary policy stance from anti-inflation to pro-growth attracts investors’ appetite. However, near term outlook is weak attracted by high short term rates in MM; thus causing shift of funds from equity to debt. There is good chance of NIFTY losing its steam on run into monetary policy (24^th January) for gradual weakness into 4700-4650 while gains into 4900-4950 will attract selling interest. We shift our focus into 4650-4950 with immediate bias for move into lower end.

Have a great week ahead...................Moses Harding