Market Pulse – 31st January 2012
Currency market
Rupee rally from 54.30 lost steam ahead of strong resistance at 49.20 for a quick reversal from 49.30 to 49.80. There is nothing to worry at this stage for this correction of 50 paisa after a 5 rupee rally in quick time. Our strategy was not to chase rupee gains into 49.20-48.60 and considered good to buy 1-2M dollars (March 2012 dollars below 50). Given the underlying rupee bull trend, it is not worth paying high premium to acquire forward dollars beyond March 2012. It is possible that rupee would get into short term consolidation at 49-51 with extension limited to 48.50-51.50. Given this expectation, it is good to sell 3M dollars at 51.00-51.50 (April 2012 dollars current at 50.83). For now, let us watch spot rupee at 49.30-50.30 not ruling out extension into 50.50 before reversal for near term consolidation play at 49-50. There is no reason for importers to chase the current “correction” phase and stay aside for spot move into 49.50-49.20 to cover February 2012 dollars (at 49.80-49.50) while exporters to absorb extended weakness above 50 to sell April 2012 dollars at 51.00-51.30.
EUR/USD failed at the first sell window of 1.3225-1.3250 (high of 1.3230) for push back into the immediate support at 1.3100-1.3050 (low of 1.3074) to set up a 150 pip trade. Now, it would need strong momentum to take out 1.3050; followed by 1.2925 to get the dollar strength back into 1.2650. There are no strong factors at this stage to look for extension of EUR/USD strength above 1.3250. It is matter of time before ECB gets into rate cut mode to pursue near zero interest rate regime till 2014 and possibly beyond. The short term outlook of EUR/USD move into 1.2000-1.1850 is valid. For now, let us watch 1.3050-1.3250 with extension limited to 1.30-1.33. Let us continue to play end-to-end of this range by selling at 1.3225-1.3275 with stop above 1.33 and buying at 1.3075-1.3025 with stop below 1.30.
USD/JPY has posted strong reversal from 78.25 (high of 78.28) to take out strong support at 76.50 (low of 76.20) and looks good for further extension into 75.50 before any chances of reversal. Over all, USD/JPY has traded end-to-end of set buy zone at 76.75-76.25 and sell zone of 77.75-78.25. EUR/JPY above 100 will continue to exert downward pressure on USD/JPY; hence it would need weak EUR/USD into 1.2650 to get the USD/JPY focus back into 79-80. The stance now would be to buy dips into 76.00-75.50 (with stop below 75.25) for retest of 78.25 and prepare for further extension into 79-80. We need to have our eyes and ears open on possible BOJ entry above 75.50 while watching EUR/JPY around 100. EUR/JPY move below 100 will provide support to USD/JPY.
Interest rate market
10Y bond rallied into 8.30-8.27% (low of 8.27%) on OMO expectations to release pressure on tight liquidity; thus completing one round of end-to-end move within 8.25-8.40% near term range. The rally from post-policy high of 8.42% into 8.30-8.25% was not a surprise. It is now time for strategic investors to get into 8.10-8.35% range play by absorbing weakness into 8.30-8.40% for gradual push into 8.15-8.10%. The set near term objective at 8.10-8.0% by mid to end March 2012 is valid. For now, let us watch consolidation at 8.20-8.30% and extended weakness into 8.35% is not expected to sustain. Strategic investors can hold on to 10Y bond entered above 8.40% (and add at 8.32-8.35%) for 8.22-8.20% (with trail stop at 8.36%).
1Y OIS rate is in consolidation mode at 8.10-8.15% boxed between high overnight MIBOR at 9.0-9.5% and rate cut expectations by mid March or late April 2012. 5Y rate has been volatile for swift move from set receive zone of 7.35-7.40% into the immediate support zone at 7.25-7.20%. There is no change in view of looking for near term consolidation at 8.05-8.20% (1Y) and 7.10-7.35% (5Y). Let us stay away from the 1Y tenor given the “carry” cost and focus on the 5Y tenor. Let us play end-to-end by unwinding received book (entered at 7.35-7.40%) at 7.15-7.10% and choose to pay the first lot on overshoot into 7.10-7.05%.
FX premium lost steam above 9% (3M) and 6% (12M) and eased into 8.6% and 5.85% respectively. While high short term rates continue to exert upward pressure, the exchange rate play (tracking rupee correction from 49.30 to 49.80) guided this reversal. FX premium is expected to stay in consolidation mode at 8.0-9.0% in 3M and 5.5-6.0% in 12M till trigger of rate cut action; which would then guide extended reversal into 7.5% and 5% respectively by mid March 2012. It is also important to keep forward premium at elevated levels till exchange rate fears are completely out of the way. Rupee fundamentals have turned from negative to neutral but good distance away to turn things into rupee bullish mode. It is prudent to unwind received book at 8.15-8.0% (3M) and 5.65-5.5% (12M). For now, let us look for consolidation at 8.25-9.0% (3M) and 5.65-6.15% (12M) and prefer end-to-end moves tracking rupee consolidation at 49.30-50.30. There is no change in strategy of receiving 3M over 9% and 12M at 6.0-6.15% (with stop above 6.25%). It is also good to pay 12M at 5.65-5.5% as cover to overshoot in money market rates on run into financial year end.
Commodity market
Gold is in consolidation mode at 1710-1740 after taking out strong resistance at 1680 post FED stance to retain zero interest rate regime till 2014 and maintaining adequate system liquidity in its financial system. This stance has brought the short term play into 1700-1800 with immediate objectives at 1760 ahead of 1790. Beyond there, rate cuts from ECB and resultant dollar strength will limit gains beyond 1800 for two-way sideways trading mode at 1700-1800. The strategy now is to buy correction into 1710-1690 with stop below 1680 for 1790-1800.
NYMEX crude is boxed between buy zone of 98.50-97.50 and sell zone of 100.50-101.50. The near/short term bias is for extended gains into 105-115 driven by efforts of major Central Banks to address global economic growth and escalation of tension in the Middle East. The risk-reward is clearly in favour of staying “long” for this move. For now, we watch consolidation at 97.50-100.50 with overshoot limited to 95-103.
Equity market
The recent rally from strong support at 4550 (low of 4531) is losing steam above 5200 (high of 5217). The reversal from there below immediate support at 5150 was swift but managed to hold above next support at 5050 (low of 5076) for close at 5087. The market dynamics have clearly shifted from bearish to neutral. The domestic cues are looking good with RBI shifting to growth supportive monetary stance to keep growth momentum above 7%. This is considered good to keep FII interest in domestic equity market. The domestic investors will shift from debt to equity soon. The current move can be termed as “corrective” as preparation for bull rally. The correction phase should ideally get strong investor support at 5050-5055 while a strong impulse could trigger further extension into 4950-4955 before rally back into 5400-5500. For now, we watch consolidation at 5050-5150 and extended weakness into 4950 not expected to sustain while gains are capped below 5220. Strategic investors are now out on “long” entered at 4550 for trail stop below 5150. Let us stay neutral below 5050 and look for turnaround signals (somewhere between 4955-4875) to stay invested for short/medium term. Strategic investors can now buy first lot at 5055-5045; second one on extended weakness into 4960-4950 and the final lot at 4880-4870 (with stop below 4850) for 5200-5225. It would need sharp reversal in short term money market rates (from over 10% to below 8%) to guide shift of investor appetite from debt into equity. This structural shift in Money Market is not far away; hence to stay invested ahead of the crowd.
Have a great day ahead.............................Moses Harding
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